January 13, 2003

Mr. Jonathan G. Katz
United States Securities
And Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re: File No. S7-49-02; Strengthening the Commission's Requirements Regarding Auditor Independence.

Dear Mr. Katz:

The Staff of the Securities and Exchange Commission ("Commission" or "SEC") are to be commended in preparing a comprehensive rule proposal on auditor's independence in the time period allotted. The Staff have once again done a very professional job in addressing a number of significant concerns to investors.

The following comments are based on my experience as an audit partner and leader of a business unit in an international accounting firm, as a former Chief Financial Officer and business executive in industry, as a former chief accountant to the Commission and now as an active audit committee and board member and accounting professor.

The confidence of the public in the auditing profession and the quality of it's audits sunk to the lowest it has ever been during 2002.1 One after another major financial reporting fraud including Enron, WorldCom, Adelphia, Xerox and Qwest have led to a crisis of confidence in the numbers reported to investors. In turn, investors have lost confidence in the accounting profession and auditing firms that are hired to provide an independent third party examination of the numbers and ensure their accuracy.2 Without a doubt, this has had an impact on the prices of stocks being traded on the U.S capital markets.

Congress and the President responded to this crisis by enacting and signing the Sarbanes-Oxley Act of 2002. The Act includes reasonable legislation that if properly implemented through rules and regulations, will contribute to reestablishing the public's confidence in the independence of auditors. This in turn should aid in convincing investors they can once again trust the financial disclosures they receive and in turn, make reasonably informed and prudent investment decisions. Accordingly, it is important that the Commission implement the Sarbanes legislation both in accordance with its written words and its intent. In doing so the Commission will be fulfilling its long acknowledged role as the advocate for investors.

General Comments

I have the following general comments with respect to the rules as proposed. These comments are discussed in further detail in response to the detail questions of the Commission.

The rule proposal contains numerous questions which give rise to a concern the Commission is considering "watering down" the rules as proposed. This would be an extremely unfortunate outcome of the rule making process, given the events of the last year that have had a serious impact on the public's perception of auditors. Events such as Enron, WorldCom, Xerox and others, and SEC enforcement actions against Ernst & Young, KPMG Peat Marwick and PricewaterhouseCoopers have led to questions about the ability of the auditing firms to maintain their independence. The recent report of the Conference Board Commission on Public Trust and Private Industry buttress this concern by recommending a further prohibition on non-audit services than the SEC has proposed. In light of what has occurred in the capital markets in recent years, the losses investors have suffered, and the tremendous damage done to the credibility of the accounting profession, it would be bad public policy and not in the interest of investor protection for the rules to be weakened. Accordingly exemptions, such as for foreign auditors and small businesses or audit firms, or for particular non-audit services should not be adopted.

The final rules should not exempt foreign issuers and their auditors from its provisions. One can only ask the question of the Commission, why would an auditor providing a non-audit service such as appraisal or human resource consulting be deemed not to be independent for a U.S. based company for whom it performs that service, but independent for a foreign company? If an exemption is granted to foreign companies or for foreign auditors, the auditor would be deemed not independent for providing a prohibited service to Coca-Cola in the United States but independent with respect to a material subsidiary or affiliate based outside the U.S for whom the same service was provided by an affiliate of the U.S. firm. Such an approach fails to adequately protect investors and quite frankly fails the test of common sense.

By July of 2001, foreign filers with the Commission numbered 1314 companies or a little over one out of ten actively traded companies. In addition, the foreign operations of Fortune 500 companies, which are audited by foreign affiliates of U.S accounting firms, often comprise a significant portion, if not over half, of their financial results and assets. Investors will, and should, question the credibility of financial reports, if the audits of such a large portion of the public companies are exempted from the auditor independence rules of the Commission. Should the Commission take such a step, it should require clear and transparent disclosure to investors of the portion of the balance sheet, cash flows from operations and revenues that have been audited by an accounting firm that would not be in compliance with the SEC independence rules absent the exemption.

The Commission Staff have also identified a lack of compliance with the auditor independence regulations in the past by the foreign operations and affiliates of the major auditing firms. For example, in April of 2001, over two years after the staff had requested the CEO's of the auditing firms take action; all of the firms were requested to meet with the Commission staff to explain the status of their implementation of quality control standards ensuring compliance overseas. One firm, which the Commission has subsequently taken an enforcement action against, refused to meet with the Commissin staff on this important issue. Yet the staff found that some of the firms had not even taken the most fundamental and basic steps to ensure compliance such as distributing a list of public clients to their partners on a global basis. As a result, the staff identified numerous compliance violations including with respect to bookkeeping and other services.

The proposed rules will contribute to and enhance the independence of auditors by appropriately removing the various exceptions that exist to prohibitions on services such as bookkeeping, legal services, appraisal and human resource consulting and internal audit outsourcing. However, the Commission should consider the recommendations recently set forth in the attached Report of the Conference Board Commission on Public Trust and Private Enterprise, in particular with respect to the scope of tax services that should and should not be permitted. In addition the final rules should not include the language "where it is reasonably likely that these services..." The Commission does not have an ability to enforce such a provision in a manner that will adequately protect the investing public. The past track record of the auditing firms has not been good in complying with such ambiguous provisions, let alone auditor independence rules that are black and white. In addition, an auditor opines on the financial statements taken as a whole, not just the particular transactions that are audited. Accordingly, such language will result in the auditor opining on work he or she has performed.

The proposed rules cite the basic principals that should guide audit committees and auditors in assessing whether non-audit services should be permitted. However, the four basic principals that currently exist in the Preliminary Note to Regulation S-X, Reg. § 210.2-01, should be made enforceable by moving them to the actual text of the regulation and out of the Preliminary Note. The legislative history in the form of the Senate Committee Report states the list of prohibited services in the Sarbanes-Oxley Act of 2002 is based on these simple principles. In addition, one additional principle that is part of the auditing profession's code of conduct, that an auditor's independence would be deemed impaired if he or she subordinate their judgment to another party, should be codified in the principles of the Commission.

The proposed non-audit fee disclosures may in fact contribute less, rather than to greater transparency for investors unless clarified and revised. As proposed the disclosures mirror previous disclosures required by the AICPA, the Public Oversight Board and the SEC Practice Section ("SECPS"). As the SEC staff learned during the auditor independence rulemaking effort in 2000, those disclosures resulted in misleading information for investors, the public and the SEC. Instead the Commission should revise the proposal to specify that attest or assurance services, including accounting, assurance and attest services other than for an audit or review of the financial statements or the comfort letters or statutory audits for insurance companies as set forth Section 202 of the Sarbanes-Oxley Act, should not be included in the caption "Audit fees." Rather they should be reported in a separate caption "Other Accounting and Attest Fees."

The proposed "cooling off period" should be lengthened to two years and expanded in terms of whom in the audit firm it would apply to. The language in the proposal defining when the cooling off period begins and ends is confusing and should be clarified.

While rotation of the audit firm rather than the audit partners would contribute more to an auditor's independence, the proposal is consistent with the Sarbanes-Oxley Act. However, the Commission should once again consider the recommendations of the Conference Board Commission with respect to auditor rotation including recommendations for audit committees.

Final rules should not exempt small companies or their auditors from the requirement for rotation of audit engagement personnel. A recent study determined that 51 percent of the restatements by company's during the period from 1997 to 2001 involved public companies with under $100 million in revenues. Smaller accounting firms audit a greater percentage of these companies. In addition, research of SEC enforcement actions for the period 1987-97 commissioned by the Committee of Sponsoring Organizations (COSO) found that "Most of the auditors explicitly named in an AAER (46 of 56) were non-Big Eight/Six auditors."3 Quite frankly, small firms who do not have sufficient partners to meet the rotation requirements are not likely to have the resources to remain current on accounting, financial reporting, auditing and SEC developments.4 In addition, this has been the group of auditors that overwhelmingly had the highest percentage of qualified peer review reports indicating a deficiency in quality controls. Accordingly, it would be inappropriate and not in the interest of investor protection to exempt such auditing firms and their auditors from the requirements of Sarbanes-Oxley. Again, if such an exemption is granted there should be disclosure to investors of this in the report of the auditor.

As a member of an audit committee, I believe the audit committee should be required to approve all audit services as required by the Sarbanes-Oxley Act unless the specific exception in the legislation is met. Any final rules should not include the provision to get around the intent of the Act through the use of pre-approval policies and procedures as set forth in the proposal. It was the clear intent of Congress not to provide other exceptions to the pre-approval requirements of the statute and any rule to the contrary would be inconsistent with the legislation and good public policy, and subject to legal challenge. The Commission should also ensure it retains intact the guidance it has provided audit committees that is currently in the Financial Reporting Releases ("FRR's) of the Commission.

The proposal with respect to the impact of compensation on an auditor's independence is a long overdue rule. I wholeheartedly support this proposal having been a partner in one of the firms and a business unit leader who was involved with the determination of partner's compensation.

The required discussions between the auditor and the audit committee should be expanded. All such communications should be required on a timely basis during the audit or interim reviews and should be completed before filings are submitted to the public records of the Commission and to investors.

I have reviewed the cost benefit analysis and calculations included in the proposal. I believe the analysis by the Commission and its staff with respect to the costs to be incurred is reasonable. I believe the costs will be minimal compared to the expected benefits provided to investors and the capital markets from higher quality and more independent audits,. In addition, the proposal provides the added benefit of increased accuracy in financial reports and enhanced oversight of the financial reporting and auditing process by audit committees. Based on my experience in one of the auditing firms, I expect that any cost impact to an auditing firm from being dislocated from providing a non-audit service to a company it audits, will be greatly offset by opportunities it gains from providing such services to companies audited by other auditing firms. However, I do believe this may have a competitive advantage for smaller auditing firms in that they may be able to provide services such as internal audit out sourcing that they would otherwise have been locked out from due to the nature of auditor/company relationships and the high cost of entry into auditing public companies.

The rule proposal does not address the issue of "loss leader" audit fees. The Commission should adopt as part of any final rules, a rule similar to that adopted by the Texas State Board. That rule specifies that if an auditor charges an audit fee that is less than the cost of the services the auditor will provide, then the auditor will be deemed to not be independent.

A more in-depth discussion of the above points is included in the responses to the following questions raised by the Commission in its release.

Specific Questions and Responses:

A. Conflicts of Interest Resulting from Employment Relationships

I left my former firm Coopers & Lybrand and went directly to work for a company I had served as an audit partner on. Given my experience with that transition and the interaction a CFO, corporate controller, director of financial reporting or leader of the internal audit has with their audit firm, I believe a two year rotation period is warranted. Too often in during my experience as an audit partner, I watched as people who had left the firm in the previous year tried to unduly influence the outcome of the audit. I believe a two-year cooling-off period would help alleviate this conflict.

The current definition of engagement team is clear. The definition also appropriately identifies those who should be subject to this rule with one exception. I would expand it to include any senior executive of a firm including the chief executive officer of a firm and any of his direct reports, such as a vice chairman.

The current language in the rule can be simplified significantly. I would recommend the rule be revised to say:

"(B) A former partner, principal, shareholder, or professional employee of an accounting firm is in a financial reporting oversight role at an audit client unless the individual:

(1) was not a member of the audit engagement team during the audit and professional engagement period for the two most recent fiscal years of the client."

This would ensure the individual did not participate in the two most recent audits of the financial statements. It also relies on the existing definition of audit engagement team and audit and professional engagement period in the existing rules, which are reasonably clear. I would not modify these.

I would rely as noted above on the existing rule and definitions.

I support the current proposal.

The definition of reporting oversight role is drawn from the existing definition of accounting role or financial reporting oversight. However, the proposal modifies the existing rule by deleting the vice president of marketing while maintaining the remaining officers in the rule. As revenue recognition is the single largest problem associated with restatements, accounting firms do consult on supply chain management, and auditing revenues involves an understanding of order management and supply chain which are under the control of the vice president of marketing, I would strongly urge the Commission to include the Vice President of Marketing within the definition of the financial reporting oversight role. This was the reason it is in the current definition and the reason still has validity today. I would also note this change in the existing rules was not noted in the proposing release.

All audits of companies should be independent. I would oppose any effort to develop a two-class system of independence for audits. The benefits to investors in small companies of having trust in the numbers are significant. Adopting rules that would lessen the independence requirements for audits of small companies would also add a significant cost to the capital those companies attract, as the numbers would become subject to uncertainty. Certainly, the Commission's past enforcement releases clearly note the problems with financial statements of smaller companies.5

Another draw back to creating a two-class system is that auditing firms today, other than the Big four already are often faced with investment banking firms who refuse to take a company public if it has and auditor other than a Big Four firm. Wall Street already perceives a difference in quality between the four major international accounting firms and the rest of the profession. As a result, creating a second-class system will only add to this perception of Wall Street and make it that more difficult for non-Big Four firms to audit public companies.

The rule as proposed is appropriate.

No exceptions should be granted.

B. Services Outside the Scope of the Practice of Auditors

An auditor may be have his or her independence impaired if the fees from a single company they audit, regardless of the nature of the services being provided, are a significant portion of an accounting firm's revenues. The SEC staff did have to address this issue in the early 1990's. Any company that contributed more than five to ten percent of a firm's fees would probably in all likelihood, have a significant impact on the economics of the firm, and potentially impair the firm's independence with respect to the audit of that client, absent some form of mandatory audit firm rotation.

Consistent with the report of the Commission of the Conference Board, it would be preferable to prohibit auditors from providing non-audit services to companies they audit, other than tax compliance services that do not involve advocacy for the company being audited. This is similar to the same approach recommended by some members of the Panel on Audit Effectiveness. As a result, I would urge the Commission to further evaluate and consider the findings and recommendations of these. However, based on the Sarbanes-Oxley Act of 2002, the Commission has complied with the Act in terms of the services prohibited, provided further exceptions are not granted and certain modifications as noted below are addressed.

They are stated with sufficient clarity. However as previously noted, the general independence principles currently included in the preamble note should be moved and included in the text of the rule consistent with the intent of Congress as noted in the Senate Committee Report.

The code of conduct for the profession includes an additional principle not included in the SEC's proposal. It states:

"Regardless of service or capacity, members should protect the integrity of their work, maintain objectivity, and avoid any subordination of their judgment."

Accordingly, the Commission should include as a basic principle that an auditor's independence would be deemed to be impaired if he or she subordinates their judgment to that of another party.

1. Bookkeeping or Other Services Related to the Audit Client's Accounting Records or Financial Statements of the Audit Client

I believe the current definition should be revised to eliminate any reference to "where it is reasonably likely." The Commission has absolutely no way to enforce such a provision in a timely manner so as to adequately protect investors. And as the Commission noted in its adopting release in 2000, a threats and safeguards approach that relies on the profession to arrive at the proper conclusions is not adequate.

All bookkeeping services are inconsistent with the notion of an independent audit and should be prohibited. The definition as proposed will only contribute to the "stretching of the rubber band" that has been ongoing by the auditing firms in the past. As the SEC staff became aware of the numerous violations of compliance with bookkeeping violations in 2000 and 2001, it is unusual the Staff would propose a definition that will once again open the gate to such violations. Accountants today clearly understand what is and what is not bookkeeping. Also the text of the financial reporting releases provides additional clarification. The text of the Financial Reporting Releases should be modified to be consistent with the proposed rules.

With the change noted above the definition would be satisfactory as proposed. Some would suggest that the definition note when preparation of financial statements would or would not impact an auditor's independence. Since I believe all such instances create a lack of appearance of independence I would avoid trying to address this issue in the definition.

An auditor should not be permitted to provide these services as is further noted above. The auditor issues an opinion on the financial statements taken as a whole. Those financial statements would include transactions an auditor has done the accounting for pursuant to the rule as proposed. As a result, the auditor would be opining on his or her own work. As Congress has noted, this is inconsistent with an auditor being independent both in appearance and in fact.

No. It is not clearly defined and as such, will lead to confusing implementation problems and further independence violations the Commission will then have to address.


2. Financial Information Systems Design and Implementation

Most importantly, there are plenty of vendors and suppliers who provide these services. There is no need for an auditor to provide these services and as a result, bring about uncertainty regarding an auditor's independence.

An auditor's independence can be impaired by the performance of these services. For example, if an auditor provides assistance in testing the software and/or hardware systems, and later on it is determined the test was incorrectly designed or performed and as a result a flaw in the system and inaccurate numbers are being accumulated, the auditor will be placed in the conflict of having to say they failed to perform their services satisfactory or telling the stockholders the numbers are not accurate.

In addition, the SEC has recently had a case I believe against a Big four accounting firm where they were involved with a system implementation and it contributed to inaccurate financial statements and an impairment of the auditor's independence. I have also seen examples of this conflict in practice.

Finally, a decision on what hardware of software systems to buy is an important business and management decision. The greater involvement the auditor has with these types of decisions the greater the likelihood the independence of the audit will be compromised due to the auditor becoming involved in the business.

The magnitude of the engagement does not affect the significance as much as does the type of systems and types of information processed by the systems. Accordingly, the magnitude of the consulting engagement to the audit fees should not be used as a surrogate for "significant." As an auditor opines on the financial statements taken as a whole, exceptions should not be adopted that will result in the auditor opining on the results of the non-audit services the auditor provides.

3. Appraisal or Valuation Services, Fairness Opinions, or Contribution-in-Kind Reports

Trying to make small cuts like this is likely one of the reasons the Conference Board Commission concluded to further limit non-audit services. Granting exceptions to the basic principle in the past has only led to further deterioration of the auditor's independence in practice. Valuations done for regulatory purposes may have an impact on the financial statements if they impact the regulatory proceeding and that outcome affects the financial statements. Accordingly, if any exception is granted it should be done by adding the words to the prohibition "including appraisal services that may affect the financial results, conditions or cash flow of the company."

The Commission should eliminate in the final rule the words ""where it is reasonably likely" for the reasons previously cited.

Yes, if they may impact the financial results or condition of the company. For example, a valuation of assets for income tax purposes will impact the calculation of income tax deductions that ultimately impact the income taxes payable subject to the audit.

The accounting profession has been asking for the last ten to fifteen years for the ability to do valuations in Europe and other jurisdictions. When the SEC staff has been presented with these situations, the Staff has always reached a satisfactory outcome for the investing public without granting exceptions that can impair the independence of the auditor.6 Often the SEC staff has learned that the foreign jurisdiction did not in fact, require the exception the accounting firm was requesting. As a result, I would urge the Commission to continue to permit the Staff of the Office of the Chief Accountant ("OCA) to address this issue as it has very successfully in the past.

No. As noted above, despite auditors saying that such services were required by local law to be provided, the Staff has found that it is often not the case. However, if this exception is granted it is transparently and abundantly clear based on the manner in which the firms have acted in the past that they will take unfair advantage of any such exception. Investors and the Commission would be much better served if it granted OCA the ability to continue its past practice.

Yes as noted above.

4. Actuarial Services

As a partner at Coopers & Lybrand, I often had the opportunity to observe the types of actuarial services our firm would provide to a company we were auditing. Coopers & Lybrand was one of the world's largest actuarial firms at the time. Yet during the entire time I was with the firm, all the services we provided ranging from designing, implementing and managing pension programs, developing executive programs, providing actuarial valuations for pension plans that would directly impact the financial statements and disclosures therein, to providing actuarial determinations for insurance companies were inconsistent with the firm being independent in appearance and fact. The Sarbanes-Oxley Act appropriately recognizes this and I would encourage the Commission not to provide exceptions to the general rule.

The words "where it is reasonably likely" should be deleted. It should also add the words "and disclosures therein" after the words "...amounts recorded in the financial statements..."

5. Internal Audit Outsourcing

The definition should also include the words "source data" by adding those words after "...to the internal accounting controls..."

No such exception should be granted. Smaller institutions can often hire another accounting firm to provide such services. This will increase competition among firms and accordingly, provide other accounting firms, including smaller accounting firms to provide these types of services. And in many cases, I found the other vendor of those services were willing to price them at or below the price of the existing accounting firm.

In states that I have practiced as a Certified Public Accountant, including Nebraska, Utah and Colorado, companies in even smaller towns have the ability to obtain such services from another accounting firm located within a reasonable distance. Accordingly, the integrity of the numbers should not be sacrificed just so that the auditor can provide services that can be obtained from another party.

In addition, there is a cost to becoming a public company. That includes the cost of preparing and having independent audits of financial statements and disclosures with credible information. Accordingly, companies that go public recognize this is part of the cost of attracting capital and attracting capital at the lowest possible cost.

The auditor' independence would be impaired unless those individual projects do not impact in any way the financial statements or disclosures therein. If the individual projects could in any way impact the financial statements taken as a whole, then they should not be permitted.

No. As the Commission noted in its 2000 adopting release, a threats and safeguards approach is insufficient to adequately protect investors. The events of the last year have also further proven this. As a former audit partner, I do not believe any of the proposals I have heard for safeguards, such as having different people perform the internal audit work and the independent audit will work. Quite frankly, Chinese walls in my former firm were much like those between analyst's and investment bankers, nonexistent.

It is also important to note that the SEC staff has found in enforcement actions, situations where an auditor who was supposedly doing only internal audit work was in fact, after further investigation by the SEC staff, found to be playing a very important and critical role on the audit. In that situation, the accounting firm did not bring that matter to the attention of the audit committee or the SEC in a timely manner.

The auditor's independence would be impaired unless it could be demonstrated such services do not involve the auditor getting involved in the business and the results of the auditor's work do not impact the financial results, financial condition or cash flows of the business. Often the work of internal audit in the area of operations involves being an active participant in the business. As a result, I often believe the auditor's involvement will negatively impact their independence.

A "clean prohibition" on internal audit services would be the best approach. It will have a significant positive effect on competition, and provide smaller accounting firms greater opportunity to provide services they would otherwise have a difficult time selling due to barriers to entry.

6. Management Functions.

Unequivocally, based on my past experience, these services result in the auditor auditing his or her own work and should be prohibited.

Any final rule would be best written if it recognized the way an audit is performed. In an audit performed in accordance with generally accepted auditing standards ("GAAS"), the auditor is required to assess internal controls, but not to test them. If the auditor decides to rely on the internal controls, he or she must test them to be sure they are functioning effectively. When an auditor either assess or tests controls, the auditor may identify control weaknesses that should be brought to the attention of the audit committee and properly addressed by the company. It is a proper role, arising from an independent audit for an auditor to identify areas for improvements in controls and what those improvements should be. However, actually designing or implementing these controls is inconsistent with the auditor performing an independent assessment of those controls and being considered independent by investors.

In my years of experience, I have not become aware of any.

7. Human Resources

I have observed where audit firms assist management in determining what its compensation should be and issuing a report and findings. The management team then takes this report and goes to the board with it. While the auditor does not deal directly with the board, their report is supplied to the board. I believe such services do in fact impair the independence of the auditor.

In addition, some auditor's prepare the tax returns for the senior executives and assist them with financial and tax planning services. I believe such services do impair the auditor's independence. The Conference Board Commission had a discussion of this topic and reached the same conclusion.

Yes. Quite often these people are promoted within the company to executive or managerial positions.

Yes as noted above. The auditor is to serve the company and its investing stockholders. However, an auditor who is acting as a consultant to a company's executives is required to put their interests first. The auditor cannot serve both of these "masters" at the same time and to do so would impair his or her independence.

8. Broker-Dealer, Investment Adviser Or Investment Banking Services

I believe the scope of the proposal is good but could be improved ay inserting the words "or financial' between the words "...Broker-dealer, investment..." and "...advisor, or..."

Yes. An analyst often writes reports, both positive and negative, that can have a significant impact on all, or selected companies within the sector.

Yes due to issues that have arisen in the past with the practices of the accounting firms. Even within my former firm we would have strong differences of opinions on this issue. In addition, as was noted in the Baymark case, the accounting firms cannot always be relied upon to seek the advice of the Division of Market Regulation on this issue. I believe OCA working closely with the Division of Market Regulation could best define the appropriate rules.

9. Legal Services

No. The role of an independent third party is totally inconsistent with the role of an attorney who acts as an advocate for his or her client.

There should be no exceptions granted based on jurisdictional boundaries. There should be no exceptions granted to foreign firms.

Prior to 2001, in it's FRR's, the Commission had a long stated position that legal services were inconsistent with the notion of independence. Yet a Big five accounting firm acquired a legal practice without first getting Commission approval. Only after such an acquisition did the firm come to the SEC Staff for approval. Even then, the Staff had discussions and without any formal approval of the Commission or its Chief Accountant, the firms expanded into this service line.

I have also discussed this issue with the Chairman of a Securities Regulator in Europe. He informed me such services are prohibited in his country as well. However, the auditing firms had gotten around the rules by setting up an affiliate of the auditing firm, once again without getting regulatory approval. He opposed the efforts of the auditing firms to "engineer around the rules" in such a fashion.

As a result of legal services involving advocacy for a client, and the above noted exceptions, I believe it is inappropriate to grant any exceptions for foreign jurisdictions. It would also be inappropriate for the Commission to loosen its definition of an affiliate of an auditing firm.

There should be no exceptions granted for legal services provided in foreign jurisdictions as noted above. Such a provision was adopted in the final auditor independence rules in 2001 only due to political pressure placed on the agency. Absent such pressure, as chief accountant to the SEC I would not have recommended the Commission adopt such an exception.

If in a foreign country, only a law firm can provide tax services, then a firm other than the audit firm should provide those services. That will ensure the auditor's independence and integrity in the numbers. There is no sound reason another firm should not be permitted to provide such services while there is a very good reason to ensure the auditor remains independent. While some argue there are efficiencies in having one service provider, I have often seen as a CFO and audit partner that there may be greater efficiencies with another set of eyes looking at the issues and serving the company.

There should not be a exception based on a percentage of the audit fee. Such limitations have led to widespread abuses, as the SEC Staff observed with a similar approach to foreign bookkeeping services in 2000 and 2001. There should be no exception granted based on a foreign jurisdiction. The Commission has made no case for why such an approach contributes more to investor protection through enhanced independence of the auditor. Unless the Commission could set forth support for taking such an approach, it should be avoided, as the costs are much greater than the minimal benefit any accounting firm would derive.

I would also encourage the Commission to review its enforcement cases, as legal services provided by an auditor have been an issue in a recent case.

10. Expert Services

An auditor should not be prohibited from being a fact witness. However, the auditor should be prohibited from providing legal expert services where he or she acts as an advocate for the company or its management.

The auditor should be permitted to testify but only in a capacity as a fact witness.

In general yes. I would encourage the Commission and staff to consider the guidance in the Conference Board Commission report as it relates to tax services. I would also encourage the Commission to add language along the lines of:

"(x) Expert Services unrelated to the audit. Providing expert opinions for an audit client in connection with legal, administrative, or regulatory proceedings or acting as an advocate for an audit client in such proceedings, except for:

(i) An auditor may act as a fact witness with respect to its audit work, or

(ii) An auditor may perform tax services, including preparation of the company's foreign, federal state and local tax returns, provided those tax services do not constitute rendering a tax opinion to or on behalf of, or becoming an advocate for or promoting the interests of the audit client."7

As an audit committee member I believe so. Advocacy involves promoting one's interests to an outside party whereas assistance does not.

11. Tax Services

Providing tax opinions, including tax opinions for tax shelters, clearly will impair an auditor's independence. I have seen a situation where an auditor has been placed in a compromising position when his firm issued a tax opinion on a tax shelter and he felt it was an inappropriate position to take when it came to auditing the income tax accrual. However, if the auditor takes a contrary position on the tax accrual, then the firm's interests have been placed at risk. Recent actions the government has taken against several of the major accounting firms in this country for their roles in abusive tax shelter arrangements only further highlight the concerns this issue raises.

I would advise the Commission adopt an approach similar to that set forth in the report of the Conference Board Commission. This is consistent with the modified language for the rule noted above.

I believe the language provided above is sufficient.

C. Partner Rotation

No. I believe this would add tremendous costs to companies, into the hundreds of millions of dollars that would ultimately be borne by investors. I believe these costs can be avoided by maintaining the independence of the independent auditor, and ensuring they follow the type of forensic auditing procedures recommended in the report of the Panel on Audit Effectiveness. I believe the recommendations of the Panel on Audit Effectiveness represents a much more effective and efficient approach then requiring the hiring of a forensic auditor.

As a former CFO, I believe the hiring of a forensic auditor would add significant costs to a company due to the significant additional time required to get yet another auditor up to speed each time the forensic auditor came in. If the principal independent auditor performed the forensic auditing procedures, then those costs could be avoided. I would estimate that such cost could run into well over 1000 hours for personnel of a company with approximately $1 billion in revenues. This would ultimately depend of course on the scope of the procedures to be performed.

Partners have been required to be rotated on audit engagements for over twenty years. The original rules adopted by the AICPA required partner rotation every five years and then this was later changed to seven years.

Yes. This would also include perhaps firms other than accounting firms.

The SEC should not adopt the inefficient approach to auditor rotation by forcing public companies to engage separate forensic auditors. Forensic audits at companies such as Sunbeam, Cendant and other such situations have run into millions, and tens of millions of dollars. Quite frankly, this is not a sound approach.

Rather the SEC or the new Public Companies Accounting Oversight Board should set the types of forensic auditing procedures that should be performed during the course of the annual independent audit. The Panel on Audit Effectiveness made numerous recommendations with respect to forensic auditing procedures. These recommendations should be adopted promptly as noted in a letter from three former SEC chief accountants to the PCAOB on December 31, 2002. That letter which the Commissioners have also been copied on, states that the auditor independence provisions in the Sarbanes-Oxley legislation should not be weakened.

No. The proposed approach is not efficient. It in essence makes a misleading assumption that the existing auditor is not capable of performing a quality audit including adequate forensic auditing procedures. This is incorrect and a misleading message for the Commission to be sending to investors.

See the above discussion of costs. There are no benefits as the current approach proposed, with rotation of the auditors on the engagement, provides a greater benefit to investors at a lower cost.

The Commission should require the rule be applied to all audits or reviews of financial statements filed with the Commission.

The audit partners, including the engagement, concurring or review partner, any client relationship partner, manager and lead senior staff should all be rotated. Audit partner hours on a typical audit of a public company constitute 5 percent of the total hours, manager hours approximate 15 percent and staff time constitute the remaining 80 percent. As the manager and senior staff person leading the fieldwork can have a significant impact on the decisions made during the audit, they should also be rotated.

The "home office" for an audit of a company typically sends out directions for the audit to those offices where a significant portion of the audit, including audits of significant subsidiaries are also audited. Yet the partner and manager and senior staff at those locations will also have to make critical decisions at times. However, they report their results to the home office where final decisions are made, based on information provided to them from assisting offices.

In recent years, audits of significant subsidiaries, have failed to detect incorrect numbers. A number of the SEC enforcement actions have involved significant subsidiaries. Accordingly, I support the SEC's proposal to rotate audit partners on the audits of significant subsidiaries.

It should apply to all partners on the audit engagement team unless the partner's work is limited to an audit of a subsidiary whose results are not material to the financial condition, results of operations or cash flows of the consolidated financial statements.


Yes provided no more than 15 percent of the national office partner's hours for a year have been spent on consulting for a single audit client. If a consulting partner puts in more than 15 percent of his or her hours consulting on a single client, then I believe they should be rotated.

No. I believe the definition of the audit engagement team in the existing Regulation 2.01 would include these partners. However, I believe the definition in Regulation 2.01 is appropriate. I would revise the language in the proposed rule on partner rotation.

The current definition of an audit engagement team states it includes "...all persons who consult with others on the audit engagement team during the audit..." This would include a national office partner. Since the proposed rule states: "...partner, principal, or shareholder on the audit engagement team..." it would include the national office partner.

Yes but only if their work is not used in or impact the financial statements.

Yes as noted above.

Yes. I would provide a two-year transition period from the date the Act was signed by the President of the United States.

No. My experience with the audits of foreign subsidiaries and foreign companies, while an audit partner, indicated the audits of these operations or companies are even more problematic than those in the United States. In general, there are insufficient enforcement mechanisms or regulators in foreign jurisdictions to ensure auditors are complying with the existing auditing standards and independence rules. Even in the United Kingdom they have been extremely slow to implement reforms agreed to by the government and accounting profession in 1999. In meetings I have previously held with regulators around the globe, including the European Commission ("EC"), they have often expressed concerns over audit quality and independence. The EC staff have stated to me that they have no statutory power to take action against an auditor when they fail to comply with the rules in a country or those of the profession regarding auditor independence. Accordingly, I believe it is inappropriate to grant an exception to auditor rotation based on the domicile of the auditor.

No. A significant portion (even perhaps the vast majority) of the SEC's enforcement actions, as previously noted, has been against small accounting firms. This does not support granting such an exception. Also the AICPA argued for such an exception when the Sarbanes-Oxley legislation was being drafted and it was not granted. A similar request was made during the Senate-House Conference on the Bill. Again it was not included in the legislation. As the Senate Committee Report states: "While the bill does not require issuers to rotate their accounting firms, the Committee recognizes the strong benefits that accrue for the issuer and its shareholders when a new accountant `with fresh and skeptical eyes' evaluates the issuer periodically." Now in light of the events of the past few years, is not the time for the Commission to grant such an exception.

One mitigating factor for all audits is that, in general, an audit of a company with less than approximately $1 billion in revenues will often only have one audit partner and one concurring partner. Thus for the audits of companies typically performed by smaller accounting firms there will be only two partners who need to rotate. My concern would be that if the firm is so small they do not have sufficient resources to rotate partners, then they may not have sufficient resources to remain proficient and current on technical accounting, auditing and financial reporting matters.

A case in point was when the Nasdaq required thousands of small companies to register with the SEC during approximately 1998-1999. Small accounting firms audited many of these companies. Yet all too often, the financial statements did not comply with GAAP notwithstanding a clean opinion from the accounting firm. Eventually the SEC staff was forced to develop a form letter informing the auditor of basic GAAP and asking that the financial statements be revised. As a result of this problem, the SEC staff was unable to review the filings of other companies, and it also impacted the SEC's ability to review filings of initial public offerings in a timely fashion.

No. Based on the number of enforcement actions and misstated financial statements that have been audited by small accounting firms, as well as large ones, the benefits to rotation greatly exceed any additional cost. Keep in mind; the total audit fees for the S&P 500 in 2001 were approximately $1.2 billion. The losses to investors when financial statements have had to be restated during the past six years has run into the hundreds of billions of dollars. That also does not include the cost to society of inefficiently operated companies resulting from improper financial reporting or the costs to society when some of these companies have failed and employees laid off who have had to be paid severance and other unemployment benefits. It is long past time to recognize that the cost to auditing firms is greatly outweighed by the benefits to investors and the markets.

The five-year time out period is appropriate based on my experience. The profession has used and abused a two-year period. Too often I have seen a partner taken off as the lead partner, then serve as a "relationship partner" for two years and then go back on the client immediately. This was done because of the close relationship the partner had with the management team of the audit client. As a result of this practice, I strongly urge the Commission to adopt the five-year period, as proposed.

The Commission cannot write a rule for every possible situation. I would not recommend the Commission attempt to address this question. If it chooses to do so, I would only reduce the five year period if the auditor serves for only one or two years. In that case the "time out' period should not be reduced to less than three years.

I support the rule as proposed.

No. However, I would require the lead engagement partner and the relationship partner to rotate at the same time. Leaving the client relationship partner assigned to the audit team while rotating the lead engagement partner will result in a meaningless exercise. Careful consideration should also be given to including the concurring partner in this rotation at the same time.

D. Audit Committee Administration of the Engagement

No. As an audit committee member and former audit partner, I firmly believe such exceptions should not be granted. I want to know the types of services being agreed to and want to be a side party to the discussions. As the Sarbanes-Oxley legislation clearly notes, the auditor works for the company and audit committee, not the management team. Proposing the auditor can agree to services with the management team without the approval of the audit committee defeats the purpose and intent of the legislation.

No. As noted above the audit committee should remain actively engaged in approving such services. There will be some engagements; albeit my experience has been they will be few in number that repeat on an annual basis. The preparation of tax returns is an example of such a service. However, since the number of such engagements is small, I strongly prefer the audit committee vote on them rather than approving them through the use of policies and procedures. Such an approach would only further the "lack-a-daisical" approach some audit committees have taken. The Commission should not engage in encouraging such behavior.

The Sarbanes-Oxley Act makes no provision for the pre-approval of non-audit services using a policies and procedures approach. Accordingly, it would appear such an approach would be inconsistent with the Act, if not subject to challenge.

No. I believe the guidance in the legislation is sufficient when coupled with the guidance the Commission has already provided in the FRR's. The Commission should retain the guidance for audit committees in the FRR's which comes directly from the recommendations of the Panel on Audit Effectiveness.

The audit committee should consider factors such as the scope of the work proposed by the auditor, the experience and expertise of the auditor's assigned to the audit, the ability of the audit firm to staff the engagement adequately and complete the audit in a timely fashion, whether the auditor complies with all of the applicable auditor independence rules, and any inspection reports that have been issued by the PCAOB. The auditor should be required to communicate to the audit committee both at the commencement of the audit and at its conclusions that the auditor is independent. That conclusion should be based on the SEC rules and not whether an auditor believes he or she is independent.

The communications with the audit committee the profession has set forth in Statement on Auditing Standard No. 61 are extremely useful both from the perspective of the auditor and the audit committee. I would urge the Commission to consider mandating that those communications be made in writing.

One of the required communications is with respect to material weaknesses in internal controls. Yet in recent years, investors have not been informed of such deficiencies on a timely basis. In the case of Rite-Aid, there has been a disagreement reported, long after the audited financial statements were filed with the Commission, between the auditors and audit committee. There is a question in this case, as well as others, as to whether the communications regarding a weakness in internal controls has been reported to investors and the audit committee in a timely manner.

If a company does not have satisfactory controls to ensure it can prepare its financial statements in compliance with GAAP, then that matter needs to be reported on a more timely basis to investors. Accordingly, I would recommend any material weaknesses in internal controls have to be reported to by the auditor to the audit committee within five business days of the auditor's determination that such a condition exists, and that the company has to file a Form 8-K with the Commission within two business days of such notification to the audit committee.

In addition, Warren Buffet has previously written the Commission urging it to adopt a rule requiring a communication between the auditor and audit committee on three questions. Those three questions include:

  1. Are there any numbers in the financial statement the auditor would change if he or she were preparing the financial statements themselves?
  2. Are there any controls the auditor would change or implement if he or she were in charge of financial management?
  3. Are there any disclosures the auditor believes should be made, that have not been, given the knowledge the auditor has of the company?

I believe the Commission should adopt the recommendations of Mr. Buffet in terms of mandating such a communication be made by and between the auditor and audit committee.

In light of the percentage of public companies that are foreign filers, no such exceptions should be granted. The Commission is creating an un-level playing field for American companies as it continues to grant exceptions for foreign companies. In the case of this rule proposal, what is good for investors in American domiciled companies will also be good for the auditors of those companies domiciled elsewhere. To do otherwise will continue to disadvantage a class of investors and the American companies they invest in.

Not that I am aware of.

See comments noted above.

The guidance included in the FRR's and taken from the report of the Panel on Audit Effectiveness are helpful. We have incorporated that guidance into the audit committee charter for an audit committee I sit on.

The rule as proposed appears satisfactory.

Yes. I participate in a number of mutual funds and I believe the determination should be based on the total revenues paid by each entity. Some fund complexes are extremely large, such as Fidelity and computing it based on the aggregate revenues is not consistent with the legislation and the fact a separate audited statement is rendered for each fund.

In addition, some funds such as Fidelity have two or more auditors. Applying the test on an aggregate basis should not include any revenues other than those paid to that specific auditor, by any entity in the investment fund complex.

See the earlier response to this question above.

If an audit committee includes only independent members, then it would be sufficient to have the audit committee perform both duties. If for some reason that is not the case, then it should be both.

E. Compensation

Having previously been involved with this process, I believe the proposal will have a very positive effect of rewarding partners based on success in meeting those criteria critical to the success of a quality audit rather than being salesmen of non-audit services. This in turn will result in higher quality audits, fewer audit failures, and eventually lower litigation costs for the auditing firms.

In the past, in my former firm, the audit partners prepared an annual package that set forth the hours, billings and profit margins for each audit client. This was further broken down into the service and product lines such as audit, other accounting services, tax services, consulting, etc. As a member of management in the firm, I also received a report that showed for each client similar breakdowns for each type of service. Service lines such as Financial Advisory Services, Human Resource consulting, etc. were broken out. The driving force behind setting a partners salary (i.e. the number of units assigned) was breadth of services provided to his or her client and their profitability. In addition there was a bonus pool in the firm. Partners receiving more favorable evaluations, often based on their ability to generate additional revenues from additional services, were the partners most likely to receive bonuses.

This obviously had an impact on the behavior of partners. A partner was compensated on the sales numbers rather than the quality of the audit. Sometimes the numbers were large enough they would also affect our decisions on tough issues we confronted on companies we audited. As a result, I strongly support the proposal by the Commission.

I would recommend one wording change to the rule as proposed. Where the rule states; "...team earns or receives compensation..." I would add the words ", or awards of ownership units or is otherwise evaluated" so that it reads, "...team earns or receives compensation or awards of ownership units or is otherwise evaluated..."

Simply put - no. The proposal is appropriate in its approach.

Yes. As noted earlier, the manager and staff often put in 95 percent of the audit hours. As a senior running the fieldwork for an audit, I remember being compensated with bonuses for selling non-audit services. This creates the wrong culture and incentive and reward system within a firm.

The proposed period is appropriate given the existing definition of the audit engagement period.

Yes with the above proposed changes. I would define compensation to include the draws the partners receive as well as bonuses and additional awards of units in the partnership or corporation. 

In relation to the benefit of having integrity in the numbers, I do not believe so.

No. I would encourage the Commission not to accept an alternative test.

F. Definitions

2. Accounting Role


3. Financial Reporting Oversight Role

See the comment previously noted above.

4. Audit Committee

The definition is satisfactory.

See the earlier comment on who the rules should apply to.


G. Communication with Audit Committees

Consistent with the "three-legged stool" approach in the report of the Blue Ribbon Panel On Improving the Effectiveness of Audit Committees, I believe the communication should be to both.

1. Critical Accounting Policies and Practices

The auditor should be required to communicate any significant assumptions used in the application of the critical accounting policies when it is more than remote they are subject to change and that change could materially affect the financial statements.

The communication should occur prior to the filing of the financial statements with the Commission.

Yes. As we have seen in recent cases such as Rite-Aid, U.S. Technologies Inc., U Haul, etc., there have been too many cases where it appears there is a question as to whether the communication was made or was made in a timely manner. Requiring this communication in writing will help address this serious issue that can also have a very negative impact on investors.

Yes. It appears some investment companies may have been aggressive or used abusive accounting practices in valuing their portfolios. For example, taking block discounts that might be inappropriate. As a result, the investment companies should be subject to this rule as well.

2. Alternative Accounting Treatments


Yes. See the above comments regarding material weaknesses in internal controls, significant assumptions, and the three Warren Buffet questions.

Yes given the comment noted above regarding alternatives used for pricing assets in the portfolio.

4. Timing of Communications

It is a best practice if the communications occur throughout the audit. However, the communications must occur before the audit report is filed with the Commission. An exception to this is that the auditor should communicate both at the beginning of the audit, as well as at the conclusion, that the auditor is independent of the company.



No. The requirements of Statement on Auditing Standards No. 61 are broader than the proposed communications in the rule. As a result, it would be an improvement in the rule if the requirements of SAS No. 61 were incorporated therein.

Yes. For the reasons previously cited.



See the previous comments noted above.


Yes. Investment companies do sue to a greater extent, mark to market accounting in their financial statements. However, as pointed out in the audit guide for investment companies, significant accounting issues may arise and accordingly, it is appropriate to require these communications.

See the comment and response noted earlier on this question.

H. Expanded Disclosure

Yes. The proxy is provided to the stockholder when they vote on the auditor and members of the board.

I would be consistent with the application of the rule and not have it incorporated by reference.

The fees should be expanded to four categories and include "Audit Fees," "Other Accounting and Attest Services," "Tax Services," and "Other."

The categories should be redefined as previously noted. Investors should be able to determine the economics to the auditing firm from the "public function" service of auditing or reviewing the financial statements. The investor should then be able to compare the economics of those fees with the economics of fees from other services. This is the reason the Commission previously adopted categories that were different and that would provide investors with the impact of the public function on the audit firm.

However, under the proposal, investors will no longer have this information. Instead, presumably at the request of the accounting profession, the proposal includes in audit fees other attest or assurance services. As the staff has seen from past experience with numbers the profession has provided to the SECPS, this has resulted in loading billings for attest and assurance services into the audit category so as to make it look larger in comparison to the other categories.

The rule proposal should also eliminate the term "reasonable related." Either a fee is or is not related to the audit. This terminology will only allow further allow gaming of the disclosures.

Since the audit report covers three years of financial statements and three years of data would provide investors with a better trend line, I believe the final rule should be expanded to cover three years.

A general description of what is in other. Any adopting release should also note if it would be acceptable to provide greater detail for the "Other" caption.


No unless there is a change in, or adoption of a new critical accounting policy or assumption related thereto. In that case the disclosure should be made in the next quarterly filing. 

The fees should be for both for the registrant and in the aggregate.


I. Transition Period




III. General Request for Comment

I believe the proposals will contribute in reducing the pressures on audit partners and increase auditors independence, when combined with other provisions in Sarbanes-Oxley such as the prohibition on improper influence on audits. I have previously noted some of these pressures.

D. Request for Comments

As noted above, we request comments on all aspects of this cost-benefit analysis, including the identification of any additional costs or benefits. We encourage commenters to identify and supply relevant data concerning the costs or benefits of the proposed amendments. We request comments, including supporting data, on the magnitude of the costs and benefits mentioned in this section.

I do not believe this rule as proposed will result in the need for any further compensation being paid to me as a member of an audit committee. I believe the communications it requires between and auditor and an audit committee should already be occurring provided the audit committee is fulfilling its fiduciary roles and the auditor is fulfilling its responsibilities to the company and its auditors.

The cost of officer/director liability insurance has already increased, prior to any rule being proposed or adopted. Such increases in costs are the result of insurance companies having to pay out additional settlements as a result of among other things, improper financial reporting and poor corporate governance. This proposal should improve the independence of auditors, thereby leading to higher quality audits, as well as improved corporate governance on the part of audit committees. As a result, there will likely be fewer incidences of improper financial reporting once this proposal, and the other provisions of Sarbanes-Oxley are implemented. As a result, in future years, as the caseload of improper reporting works its way out of the courts, there should be a reduction in losses for insurance companies. This in turn should have an impact of reducing or at least resulting in lower premiums in the future than if this proposed rule was not adopted.

In general, the costs used in the cost benefit analysis, including the cost rates and estimates do not appear unreasonable.

See comment above.

I do not believe so. There are typically a number of vendors who provide the type of services being prohibited. As a result, a company can engage in a competitive bidding process. Also, it is not uncommon another vendor is willing to charge less for a service than an existing vendor to "get a leg in the door." As a result, there may be some competitive, service performance and pricing advantages to using a vendor other than the existing auditor.

As the Big Four firms and the auditing profession have publicly stated, they have already ceased providing many of the prohibited services to companies they audit. In addition, some of the firms have already spun off that division of their firm that previously provided these services. For example, KPMG Peat Marwick and PricewaterhouseCoopers have already disposed of their valuation services. I suspect there will be further disposal of such divisions regardless of this rule proposal. The market in general, I believe is starting to already shift away from having auditors provide the broad non-audit service offerings they have in the past.

I believe issuers, in some limited, but not all cases, will have to replace an existing vendor. Accordingly, the issuer will have to incur costs and time to search for another vendor. However, I believe that in some (and perhaps a majority) of these situations, an issuer may be able to reduce costs through competitive bidding. Accordingly, I do not believe the net cost to an issuer will be significant.

Audit fees have been too low for too long and have negatively impacted the scope of work performed. As a result, audit fees for issuers will hopefully raise to a level sufficient to compensate auditors a reasonable profit margin for the public function there are fulfilling in conducting an independent audit.

However, as has been seen during the change in auditors this past year on former Arthur Andersen clients, in far too many cases the accounting firms have continued to lower their fees to gain the audit client. Accordingly, it is too early to determine the most likely outcome on audit fees from the adoption of this proposal.

No. In my years in an accounting firm, the economies of scope argument never were supportable. Seldom is the work done on non-audit services used in any fashion during the audit. Likewise, quite often there was little communication between the consultants and auditors.


VI. Consideration of Impact on the Economy, Burden on Competition, and Promotion of Efficiency, Competition, and Capital Formation

See my previous comments noted above.

See my previous comments noted above.


The rule proposal is a comprehensive effort that in some cases appropriately goes beyond the requirements of the Sarbanes-Oxley Act. However, many questions are raised which give a reader pause for concern that the Commission will weaken the final rules. That should not occur. Nor should there be granting of exceptions to the basic services that are prohibited or for foreign or smaller audit firms. Audit committees should have to pre-approve audit services as provided in the Act. An exemption based on policies and procedures is inconsistent with the stated words and intent of the Act. Finally, the disclosure requirements should be revised to ensure the transparency of the existing disclosures is not lost.

Please do not hesitate to contact me if you have any questions regarding the above comments.

Very Truly

/s/ Lynn E. Turner

Attachment: Report of the Conference Board Commission on Public Trust and Private Industry


1 See The Wirthlin Report Institutional Confidence in the Crosshairs. July-August 2002, Vol. 12, No. 4.

2 Financial Statement Restatements - Trends, Market Impacts, Regulatory Responses, and Remaining Challenges. United States General Accounting Office (GAO-03-138), October 2002. This report identifies 919 financial statement restatements announced by 845 companies from January 1, 1997 to June 30, 2002. It also states on page 4 that "From January 1997 through June 2002, about 10 percent of all listed companies announced at least one restatement." A Study of Restatement Matters For the Five Years Ended December 31, 2001 published by the Huron Consulting Group states "...the number of restated financial statements filed by public companies has grown from approximately 120 in 1997 to 270 in the year 2001."

3 Fraudulent Financial Reporting: 1987-97 An Analysis of U.S. Public Companies. Page 3. Committee of Sponsoring Organizations of the Treadway Commission, 1999.

4 The Public Accounting Report's Top 100 list, as of August 31, 2002, listing America's 100 largest public accounting firms notes that the Big Four audit 10,633 SEC clients, the top 54 firms audit 12,107 SEC clients and the top 100 audit 12,470 SEC clients. 26 of these firms do not audit an SEC client according to this report. This is not unexpected, as it requires a significant amount of resources to maintain the level of technical competence necessary to audit publicly traded companies. The principle costs include training of staff on current GAAP, GAAS and SEC requirements. In addition, many firms that audit public companies maintain a national office as a part of a quality control system to ensure proper audits. It may very well be cost prohibitive to incur the necessary costs to provide a quality audit for a public company unless the auditing firm can attract a core group of clients that pay fees sufficient to recover these costs and generate a reasonable profit margin. As a result, over one-quarter of the largest public companies do not audit an SEC client. Such economies of scale also exist in other industries such as in the pharmaceutical industry where consolidation has occurred to gain economies of scale and remain competitive.

5 See for example the release of the Commission in September 1999 highlighting the first financial fraud sweep by the Agency. Most of the companies cited in the release are smaller, rather than larger companies.

6 See footnote 38 to the proposing release for an example of this.

7 See the text of the SEC's June 2000 proposing release on auditor's independence with respect to expert services and tax services. The Commission may also consider the AICPA's