Mohler, Nixon & Williams
January 8, 2003
Mr. Jonathan G. Katz, Secretary
RE: File No. S7-49-02
Dear Mr. Katz:
Mohler, Nixon & Williams is a local CPA firm located in Campbell, California. Our practice includes auditing a small number of 401(k) plans (approximately 15) that are sponsored by publicly traded companies and include the sponsor's common stock as one of the investment options. Accordingly, these plans are required to file a Form 11-K annually. We also audit a significant number of 401(k) plans where the sponsor is a public company, but where no Form 11-K filing is required. We do not perform any other audit services at this time that involve filing documents with the Securities and Exchange Commission (SEC), therefore our comments are specific to this narrow range of audit services. We would encourage the SEC to address, as part of their final regulations, more specific guidelines related to how the Sarbanes - Oxley Act (the Act) affects auditors of benefit plans where the principal auditor of the sponsor does not audit the benefit plan.
It is our understanding that under the Act, benefit plans that are required to file a Form 11-K are considered "issuers" as that term is used in the Act. It is also our understanding that under the Securities and Exchange Commission letter ruling, Certification of Disclosure in Companies' Quarterly and Annual Reports, footnote #47, the management of the sponsor of these benefit plans is not required to provide any certification in the Form 11-K, nor is the auditor of the plan required to provide certification related to the internal controls of the plan. Therefore, we do not believe the audit work we perform for benefit plans of public companies was intended to be included under the Act. However, at this time, we are uncertain whether our firm will be required to register under the Act and recommend that the final regulations address this situation.
Whether our firm must register under the Act or not, we would like to comment on the SEC's proposed rules related to non audit services to audit clients, conflicts of interest resulting from employment relationships, audit committee involvement and the proposed rules on partner compensation for non audit services.
Non Audit Services to Audit Clients
The proposed rules are not clear regarding whether non audit services provided to a sponsor of a benefit plan would be prohibited for an auditor who is not the principal auditor of the sponsor but audits only the benefit plan of the sponsor. We believe that the final rules should be clarified to only require the prohibition of non audit services to the benefit plan, not the sponsor of the benefit plan. We do not believe that the independence of the benefit plan auditor would be impaired by providing the listed non audit services to the plan sponsor.
Conflicts of Interest Resulting from Employment Relationships
We do not believe that independence would be impaired by a sponsor of a benefit plan hiring an employee of the accounting firm to work for the sponsor, unless the individual was hired in a capacity that has some administrative responsibility for the benefit plan. We believe that an exemption should be provided from the general proposed rules to take this situation into consideration.
Audit Committee Involvement
The thrust of the rules related to audit committee involvement seems to be primarily focused on the principal auditor of the sponsor and the sponsor's financial statements. We believe that the final rules should provide an exemption for the audits of sponsor benefit plans since they do not appear to be the primary focus or intention of the Act.
In a local practice such as ours, the referral of non-audit services between the audit and tax partners is vital to our ability to grow our practice and provide our clients with the range of services they expect from their CPA firm. Because we do not perform any audit services relating to the public company's (plan sponsor's) financial statements, it is not clear to us how compensating an audit partner (who audits the 401(k) plan) for referring non audit services to the sponsor would violate the basic principles of the Act. As the auditor of the 401(k) plan, we would not be involved in auditing our own work, functioning as part of management of the sponsor or the 401(k) plan, being an advocate in any manner that would impact our independence on the 401(k) audit or promoting the company's stock. As the 401(k) plan is an entity separate from the company and has the ability to compensate the auditor for audit services apart from the plan sponsor, it would appear to us that an audit partner being compensated for referring tax-related non audit services under our situation does not conflict with the intent of the Act. We believe that the final rules should clarify this and provide an exemption in this situation.
Please contact Gregory S. Finley, managing partner, at (408) 369-2400 if you have any questions or comments.