Johnson & Johnson
January 10, 2003
Mr. Jonathan G. Katz, Secretary
Re: File Number S7-49-02
Dear Mr. Katz:
We at Johnson & Johnson appreciate the opportunity to comment on the Commission's Proposed Rule: Strengthening the Commission's Requirements Regarding Auditor Independence. We support the recommendations which are intended to enhance auditor independence and reduce the opportunity for conflict of interests.
We have the following comments on several specific elements of the rule that we respectfully submit to the Commission for your consideration:
Section 201 - Internal Audit Outsourcing
We support the recommendation to not use the external auditor to perform the internal audit function. However, we do believe there is merit in considering a de minimus use of the external auditor under certain circumstances such as when there are travel restrictions to specific countries due to security concerns. In these instances, the local office of the external auditor - working closely with the company's internal audit management - could be engaged to perform the internal control review using the internal audit department's programs. This arrangement still allows for clear separation of duties and ensures internal control coverage in these regions.
While an argument can be made that another international audit firm could be engaged for these projects, we believe having it performed by personnel with knowledge of our company enhances the quality of the work. We have developed this view based on the fact that these projects are generally small and geographically disbursed. Therefore, the lack of critical mass keeps the other audit firm from developing the institutional knowledge about our company which, we believe, adds value.
We encourage the Commission to consider adopting a de minimus usage provision for internal audit outsourcing to be capped at five percent (5%) of total internal audit services.
Section 203 - Audit Partner Rotation
The Sarbanes-Oxley Act requires the rotation of the lead and reviewing partners of the external audit firm to rotate every five years. We support this rule as originally proposed.
Expanding the requirement to include other partners in multiple geographic regions could however, in our opinion, negatively impact the overall quality of the audit. Due to the size of certain of these regional offices and the limited number of individuals familiar with US GAAP, frequent rotations could compromise external auditor effectiveness. In addition, it is our experience that the key accounting and auditing decisions are made by the lead partner, not the partners servicing our various subsidiaries.
We encourage the Commission to limit the audit partner rotation requirement to the lead and reviewing partners. As an alternative to rotating all partners, we suggest that the Audit Committee be charged with periodically reviewing the tenure of the other audit partners and deciding as to the appropriateness of their tenure.
The impact on companies of many of the proposed rules will be significant. A reasonable transition period for the cessation of certain prohibited services and audit partner rotation would allow for an orderly transfer of responsibilities. In addition, when another company is acquired, there may be "acquired violations" of these rules, which need to be remedied.
We encourage the Commission to adopt a one-year transition period for compliance with the prohibited services and audit partner rotation rules. In addition, we suggest that a company be subject to a one-year compliance transition period for any acquired companies which are in violation of the prohibited services rules.
Once again, thank you for the opportunity to express our views on these critical issues regarding auditor independence.
If you have any questions on our comments or would like to discuss further, please do not hesitate to contact me.