January 14, 2003
Mr. Jonathan G. Katz, Secretary
Re: File No. S7-49-02
Dear Mr. Secretary:
I am writing on behalf of the U.S. accounting firms of BKR International, one of the world's leading associations of independent accounting and business advisory firms, to protest the proposals concerning the above-referenced file.
We believe that the partner rotation provisions of the Sarbanes-Oxley Act discriminate against the small and medium sized public accounting firms that audit Securities and Exchange Commission registrants. For the most part, these firms do not provide significant consulting and other non-auditing services to their clients, and are rarely involved in significant financial statement restatements. While they may assist their smaller public clients with the preparation of their financial statements, these firms have always conducted their practices within the general independence parameters now established by Sarbanes-Oxley and with a high level of integrity and commitment to the reliance placed on their work by the United States capital markets.
If there is no exemption from the proposed partner rotation rules for smaller firms, a large number of these firms will be forced to abandon their SEC practice. This forced reduction in the number of firms that will be able to serve SEC registrants will result in a restraint of trade, causing smaller registrants to move to larger firms that will be relatively unaffected by the provision, a move that will undoubtedly increase their audit fees. Registrants who believe their smaller firm auditors have served them with a high level of competence and integrity will be forced to consider hiring those firms whose indiscretions have been so widely publicized.
This scenario does not seem to fit the goals and objectives of Sarbanes-Oxley.
In some smaller states, there are a limited number of firms who are technically capable of serving SEC registrants. If the partner rotation rules are enacted as they are proposed, these practitioners will be forced to resign their SEC engagements not because of wrongdoing or incompetence but simply because of their small size. This forced divestiture does not further the business interests of and is demoralizing to local economies, is costly to the smaller SEC registrants and severely limits the number of firms "SEC eligible" to provide these services.
Smaller firms typically serve smaller SEC registrants. Due to the size of these engagements, normally there are only two partners on the engagement - the lead partner and the concurring partner. Typically these partners have already served on these engagements for more than five years. Under these circumstances, if partner rotation is mandated there will be no senior level of continuity of knowledge on these engagements. The idea of substituting a forensic audit for required partner rotation appears to ignore the fact that all registered firms would have their peer review conducted by the Public Company Accounting Oversight Board under the auspices of the SEC. What would be gained, other than additional costs to the registrant, from adding yet another level of bureaucracy to this already intricate process?
Those who practice in smaller firms have always understood the necessity of more stringent auditor independence rules. Their communities tend to be smaller where they are highly visible. They realize that every time they sign an audit report - SEC or otherwise - if their work is found to be substandard or they are found to not be independent, their personal and professional reputations will be severely damaged. This is a strong incentive to maintain a high quality and independent practice.
For all of the above reasons, we strongly suggest that smaller firms be exempted from rotation of the audit partner as they were under the SECPS rules based on number of clients, if their peer reviews and the SEC reviews of their filings are satisfactory. We urge the Commission to adopt this recommendation.
Audit Professionals Accepting Employment with SEC Registrant Audit Clients
We would also like to comment on one of the other proposals relating to audit professionals accepting employment with SEC registrant audit clients. The concept of a mandatory cooling off period was discussed at length and ultimately rejected by the Independence Standards Board (ISB) since it concluded that the cost of such a rule would exceed its benefits. It seems unreasonable to require the registrant to change auditors because they hire a highly qualified individual from their audit firm to assist in their financial reporting.
We offer the following reasons as outlined by the Board to reject the concept of a mandatory cooling off period: companies, particularly smaller companies who may be at a disadvantage in recruiting competent personnel, benefit from the ability to hire staff at all levels from their audit team; the attraction of future employment opportunities draws talented and ambitious recruits to the profession; and talented individuals join public accounting firms because of the broad experience they expect to gain at the firm and the contacts they expect to make in industry.
The board acknowledged that a mandatory cooling off period might force a client to choose between its audit professional and its audit firm; recognized that the replacement of an audit firm carries costs to firms, clients and investors; and stated its belief that audits are strengthened by institutional continuity and rotation of auditors carries a cost to investors because of the increased risk that first year audits pose. We assume a document can be drafted focusing on partners accepting positions with SEC registrant clients, although it seems unreasonable for the audit firm to be required to resign an engagement because a member of their staff accepts a position with a client. We would urge you to reconsider the controls embodied in ISB Statement Number 3 and not mandate a mandatory cooling off period as proposed.
In conclusion, the proposed rules that we have highlighted above will restrict the ability of many companies to exercise free choice in a market economy in selecting their auditors. We recognize there are independence problems that the SEC is rightfully suggesting, but urge the adoption of new requirements that will be equitable for small and medium sized public accounting firms auditing Securities and Exchange Commission registrants.