Trice Geary & Myers LLC
January 13, 2003
Mr. Jonathan G. Katz, Secretary
Re: File No. S7-49-02 "Strengthening the Commission's Requirements Regarding Auditor Independence"
Commenting specifically on proposed partner rotation.
The current requirements of the AICPA's SEC Practice Section ("SECPS") calls for the engagement partner to rotate off a SEC audit engagement after seven years and to remain off the engagement for two years. This requirement only applies to firms with less than five SEC audit clients and less than ten partners. Section 203 of the Sarbanes/Oxley Act of 2002 requires that a lead partner and concurring partner that have performed audit services in each of the five previous years be rotated off the engagement completely regardless of the number of SEC clients or partners in the accounting firm. It is our understanding that the SEC is attempting to make the "time-out" period five years. Our firm is currently exempted from the SECPS partner rotation requirements.
Imposing a time-out period of five years on firms our size (25 employees, including 3 audit partners and 1 tax partner) without a protracted phase-in period will effective cause us to terminate the SEC practice phase of our business. Our SEC clients, which are all in the heavy regulated banking industry would be forced to seek other auditing firms that not only audit community banks, but also qualify to practice under the new Sarbanes/Oxley Act provisions. Besides the "Big Four" and maybe two or three large regional firms in our area, we am not aware of many other accounting firms that would presently qualify to practice before the banking regulators and the SEC if these new partner rotation provisions are enacted. When you decrease the competition in the market place in a relatively short period of time, accounting and auditing fees will undoubtedly increase, possibly dramatically, and small SEC registrants will incur unexpected increased costs.
While we believe partner rotation of clients is an important component of the Act, implementing a five year time-out period for accounting firms our size with small SEC clients (less than $300 million in total assets) seems a bit imposing. We would not be opposed to a one year time out period effective in 2003, or even a two year time-out period if a lengthy transition was allowed (2-3 years). To require a five year time-out period effective in 2003 would effectively eliminate our firm from the SEC practice in 2003 and leave our regulated (banking) clients quickly searching for a new auditing firm with community banking experience.
We believe that the proposed rules on partner rotation impose a unfair burden on smaller accounting firms and on smaller SEC registrants, especially in light of the fact that many of the highly publicized cases involving accounting scandals involved large SEC companies with complexities well beyond the scope of what many small accounting firms and their clients deal with.
While we stated earlier that we believe in some type of partner rotation, the SEC may want to consider the following or a combination of the following when it comes to smaller accounting firms and SEC registrants:
There has been some discussions regarding the engagement of forensic auditors to evaluate the work the financial statement auditors. We believe that the engagement of forensic auditors is a positive development but only in certain situations. We believe these situations should be reserved for developments that surface during the SEC's review of Forms 10-Q and 10-K or other communications involving suspicious activities. Suspicious activities should result in the immediate engagement of forensic auditors no matter the size of the SEC registrant. If the SEC is considering random forensic audits we believe there should be an exemption relating to size thresholds for smaller SEC registrants and/or an exemption for regulated industries who already undergo audits from regulators (sometimes Federal and state auditors) and their outside auditing firms. Having smaller SEC registrants incur the time and expense of another audit without the hint of suspicious activity could be overwhelming for many accounting and reporting departments.
It was only our intent to comment on the partner rotation requirements of the Act. Comments from the SEC should be addressed to the following contact person.