Mauldin & Jenkins, LLC
January 10, 2003
Jonathan G. Katz, Secretary
Re: File No. S7-49-02
Strengthening the Commission's Requirements Regarding Auditor Independence
We appreciate the opportunity to comment on the proposed rules referenced above and to provide information about the impact that these rules will have on our practice, as well as the perceived impact on certain of our clients.
Our firm consists of three offices and twenty-three members ("partners") and we provide various services to many different industries, including three primary industries. The financial institution industry is one of the primary industries that we provide services, and represents a significant portion of our Firm's revenues. Our SEC practice is confined to our financial institution practice and consists of twenty-six reporting companies. Included in the twenty-six reporting companies are only six registrants that are listed on an exchange. The remaining twenty registrants are small business issuers. Our financial institution practice is confined to two offices and we currently have six partners who have the requisite experience to fulfill the role as audit partners on SEC engagements.
We implemented in 2000 a procedure requiring certain audits to be concurring reviewed by an out-of-office partner. This procedure was implemented in order to have the concurring review performed by a partner not closely involved with the audit. In our environment, we consult routinely with other partners in the local office on many matters throughout the audit year, which is consistent with our philosophy of a team approach. Each of the two offices has a tax partner that is involved in various capacities, primarily compliance, and function as a team member.
The proposed rules requiring a registered public accounting firm to rotate the lead and concurring review partner after 5 years of service does not create significant difficulties due to the existing 7-year audit partner rotation, that has been a requirement for many years. However, the proposed rule to require the rotation of all partners who perform audit services for the registrant will most likely create significant difficulties considering our current environment and culture. For small firms, partners other than the lead and concurring review partner, function in a capacity similar to partners in the national office of large firms, which have been excluded from the proposed partner rotation rules.
In order for small firms to comply with the proposed rules, we will be forced to limit the firm's resources to our clients to preserve the separation of audit services provided by partners. The success of many small firms is due to the access to multiple partners and managers continuously throughout their fiscal year. This attitude towards serving clients is an attribute that enables small firms to be competitive with the larger firms that have multiple partners at their disposal.
The intent of the rotation requirements is to ensure that a "fresh look" of a registrant's financial statements is available for investors. A "fresh look" can and should be accomplished by the concurring review. Therefore, the responsibility lies in the review process to approach all engagements with a sense of independence and integrity. The rotation of all partners providing audit services will not necessarily provide the "fresh look" in small firms that operate using a team approach. Therefore, we would suggest that the rotation of all partners providing audit services and a five-year cooling off period would not accomplish the objectives of the proposed rules. Additionally, we believe that the quality of service to some clients will be negatively impacted due to the proposed rules.
A viable alternative would be that the engagement (audit partner) be required to rotate after 5 years of prior service with a 2-year cooling off period. The concurring review partner could be required to rotate after 3 years of prior service with a 2-year cooling off period. And finally, there should be no other required rotation of partners that may be involved in the audit process and, time as an audit manager should not be taken into account in the determination of five years of service.
The transition of the proposed rules or any similar rules will create significant changes within small firms and will impact the registrants if the rules are required to be fully implemented upon final approval. One solution would be to continue in 2003 with the seven year required rotation and permit the transition period to be at the discretion of the firms, with implementation for all audits ending December 31, 2004. This would allow small firms to properly prepare and stagger necessary rotations.
We respectfully submit these comments and ask that the Commission carefully consider the impact on the small firms and small business issuers.