Robert G. Beard
6326 Vernon Woods Drive
Atlanta, GA 30328
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC, 20549-0609
RE: File No. S7-49-02
Dear Mr. Katz:
Thank you for allowing comment on the proposed amendments required for compliance with the Sarbanes-Oxley Act of 2002. By way of background, I served in public accounting for seven years from 1982-1989. During this period, there was extensive growth in non-audit services provided by my firm to the point that by the time I was a manager, it would be safe to say that over 30% of my billable hours were spent on non-audit projects. I believe the requirements of the act, and the Commission's proposed amendments, are essential for auditors to get back to the business of auditing. There are, however, some services that an auditor can provide to his or her clients that are valuable based on the experience and technical training of an auditor. The providing of these services can be continued without impairing auditor independence or violating the intent as I understand it of Sarbanes-Oxley.
On that note, I have extracted individual requests from comment from the draft amendments and have given my thoughts appropriately. Thank you again for allowing public input on this critical issue.
Should the proposed rules apply equally to large firms/companies as small firms/companies? Would the proposed rules impose a cost on smaller issuers that is disproportionate to the benefits that would be achieved? Why or why not? Should there be an exemption to this requirement for smaller businesses?
Response: There should be no exemption for small firms/companies. The risk of perceived or real lack of independence is greater with smaller concerns in that it is more likely that the audit firm would be engaged to perform day-to-day services (e.g., bookkeeping) and lack the independence necessary to audit a public company. A company should be held to a high standard of internally managing its financial affairs to be a publicly-traded company regardless of size.
Are there other non-audit services that are incompatible with Rule 2-01(b) or that raise independence concerns? If so, what are they, and why do they raise independence concerns?
Response: Clearly, the auditing firm should not be able to prepare or render professional opinions or reviews of financial forecasts or budgets of public companies. Being involved in any way in financial forecasts would seem to violate the basic principles of the act. The auditor's objectivity would be questioned if he were auditing financial statements where the firm had previously prepared or opined on forecasts on the same financial period. There could be a grace period for the auditing firm for forecasts that were prepared prior to the Act's implementation date, but in those cases, the auditing firm should have to disclose what services it had provided for any financial forecasting to the registrant.
Should an auditor be permitted to provide bookkeeping services to an audit client if it is not reasonably likely that the results of those services will be subject to audit procedures during the audit of the client's financial statements? Why or why not?
Response: No. It seems that if the auditor provided such services, the audit scope could be impaired in that the auditor would have to limit his or her work on the bookkeeping that the firm prepared just to avoid the "exemption." The bottom line is this exemption could set such a reverse trap on audit scope. Also, I do not think such blurring of the lines by introducing such an exemption is warranted.
Is an auditor's independence impaired when the auditor helps select or test computer software and hardware systems that generate financial data used in or underlying the financial statements? Why or why not?
Response: Not likely. An overriding criterion for the selecting of the computer system would be the accuracy of financial data. The auditor's general knowledge of financial internal control systems would be of assistance in providing a system that produces a strong internal control environment. To avoid client advocacy issues, it might be most appropriate to not allow the auditor to be involved in costing or assisting in negotiations for purchasing computer hardware or software. Rather, the auditor's services should be limited to testing or recommending aspects of the system which enhance the financial control environment.
Does providing valuation or appraisal services that are unrelated to the financial statements, such as for certain regulatory purposes, impair an accountant's independence?
Does providing valuation or appraisal services for tax purposes impair an accountant's independence?
Response: Yes to the first point. I believe such services places the auditor in the position of client advocacy.
I do believe that an exemption could be warranted for providing valuation services for assisting in income tax matters whereby the valuation is not relied upon for financial reporting other than the determination of income tax liability.
We solicit comment on whether an exception should be provided for small businesses. If so, what criteria should we consider in providing such an exception?
Response: No. See my comments above regarding the small company exemption.
Would it impair the auditor's independence if the auditor performs only operational audits that are unrelated to the internal controls, financial systems, or financial statements?
Response: No. Consistent with my other remarks, I believe that the knowledge base of auditors in evaluating internal control systems is beneficial to the client and does not necessarily impair independence or create "client advocacy."
Do services related to assessing or recommending improvements to internal accounting controls and risk management controls result in the auditor auditing his or her own work? Would such services impair an auditor's independence when the auditor is required to issue an attestation report on the effectiveness of the control systems that he or she has assessed or evaluated for effectiveness?
Response: No. See immediately preceding response.
Would an auditor's independence be impaired if the auditor acted as a securities analyst covering the sector or industry of an audit client?
Response: Yes. Much of the analysis of a particular company's future stock performance is based on the growth prospects of the registrant's industry; therefore, industry securities analysis does impair independence relating to a registrant in that industry.
Should an auditor be permitted to serve as a non-testifying expert for an audit client in connection with a proceeding?
Response: Yes to the firm, no to members of the engagement team. I believe that if an auditor is going to perform expert litigation support services, the individuals performing such services should not be members of the engagement team. Accountants do possess certain skills which are beneficial to litigation support, and as long as the individuals performing such services are not part of the audit engagement team, client advocacy issues can be avoided.
We request comment on whether providing tax opinions, including tax opinions for tax shelters, to an audit client or an affiliate of an audit client under the circumstances described above would impair, or would appear to reasonable investors to impair, an auditor's independence.
Response: No-if the individuals providing such opinions are not members of the audit engagement team. For this purpose, I would exclude tax partners (who work on the tax return and whose input to the audit of the financial statements is limited to the income tax provision) from the definition of members of the audit engagement team.
Should the Commission adopt rules requiring that issuers engage forensic auditors periodically to evaluate the work of the financial statement auditors? If so, how often should the forensic auditors be engaged? What should be the scope of the forensic auditors' work? Would doing so obviate the need to require partner rotation for the audit firm? Alternatively, could the company obtain the necessary expertise by engaging other outside consultants? If so, what type of consultants should it engage?
Response: No. I believe this requirement would engage the Commission in the business of legislating the internal controls of the registrant and goes beyond the intended purpose of Sarbanes-Oxley. Such a decision should be left to management or the audit committee, depending on the corporate governance provisions of the registrant.
Should the rotation requirements apply to all partners on the audit engagement team? If not, which partners should be subject to the requirements?
Response: Yes, except for tax partners. Again, I would not include tax partners as described above as members of the audit team.
Is the exclusion of certain "national office partner" personnel from the rotation requirements appropriate?
Response: Yes. National office partners provide valuable technical expertise to the engagement. They are not participants in the day-to-day judgments of the audit team. I would, however, require that if a national office partner recommends a certain accounting treatment inconsistent with the auditing firm's recommendations to other clients, that the audit committee be apprised of such a decision and that the registrant be required to disclose alternative accounting treatments and the rationale for adopting the selected treatment. This would help prevent internal opinion-shopping within the auditing firm.
Should the Commission create other exceptions (beyond the de minimis exception) that would allow an audit committee to adopt a policy that contracts that are recurring (e.g., due diligence engagements in connection with a series of insignificant acquisitions) and less than a stated dollar amount (such as $25,000) or less than a stated percentage of annual revenues (such as 1% or 5%) could be entered into by management and would be reviewed by the audit committee at its next periodic meeting?
Should managers, supervisors or staff accountants who are members of the audit engagement team also be covered by this proposal?
Response: Yes. This is a very practical solution to such situations.
RE: Communications with the Audit Committee: Should the auditor be required to provide the communication in writing?
Response: Yes. A written record would alleviate any future conflicts of what was communicated to the audit committee. I would think that the profession would adopt a standard of communication incorporating Sarbanes-Oxley requirements.
Robert G. Beard