File No. S7-49-02From: Roland G. Ley [rgley@attbi.com] Sent: Thursday, January 09, 2003 2:04 PM To: rule-comments@sec.gov Subject: File No. S7-49-02 Gentlemen: I am a retired audit partner from one of the former big six accounting firms. I spent 35 years in public accounting in Chicago, 23 years as an audit partner, three years as Regional Director of Auditing and 5 years as Chicago Office Director of Auditing. I was the partner in charge of both large and small, public and private clients, including multinational companies. Since then I have been a Director and Chair of the Audit Committee for a Chicago non-public Bank that operates on the same basis as if it were public. GENERAL I have a slight overriding bias against most, but not all of the new and proposed new rules concerning Auditor Independence. It appears to me that most of these rules miss the mark because they obviously were written in part by people who have not "worked in the trenches". The main problem with auditor independence is that the auditor's have and must have under the current method of operations too close a relationship with management, both senior and middle level. This stems from the fact that audit committees, necessarily, rely too much on management input regarding fees, auditor performance and hiring of auditors. Even all of the proposed new rules will not make the auditors really independent of management. Some of the new rules help in this regard, but still fall short of their intended objective. As a result, the rule makers have resorted to a broad brush approach of prohibiting or limiting virtually everything that so much as appears to the layman as potentially having to do with auditor independence. Most of the independence issues would disappear if 1) auditors were prohibited from discussing audit(not non audit) fees with management and vice versa, 2) auditors were prohibited from socializing off the job with management and accepting and giving meals, entertainment, gifts, etc.and 3) audit committees were required to have the necessary staff resources, probably via similarly independent internal auditors, or other staff if internal audit is out sourced, to evaluate auditor fees and performance (the new requirements for audit committee members credentials help). Obviously the size and complexity of the audit engagement will dictate the amount and type of resources needed. All of the following detailed comments should be understood in the context of the above general comments. DETAILED COMMENTS II. A. ...Employment Relationships The problem here is that because the Independence Standards Board did not even consider severing the auditor/management relationship as described above in my General Comments, Section 206 of the Sarbanes-Oxley Act (the Act) contains this one year prohibition. Accordingly, unless an exception is made for situations that comply with my General Comments, I would say that- a.. A one-year cooling off period is probably long enough to cure the "appearance" of independence. The length of time is not really the issue. b.. The term "audit engagement team" is generally sufficient, but should be qualified to include only the audit engagement team of the headquarters operation. There is no need to include the audit engagement teams for divisions and subsidiaries (especially overseas), unless they overlap. The same is true for reviewers or others serving the client. c.. The term "commencement of the audit" is a bit vague because many audits are virtually on-going. It probably should be from the date the auditors are approved/hired for the audit year in question . d.. Review procedures should not be relevant. e.. Limit the requirements to issuers under Section 205. f.. You are confusing "appropriate officers" of the issuer with "national office personnel" of the auditor. The issuers listed personnel are adequate. g.. The size of the issuer should not be a factor. Actually the perceived problem is greater for smaller clients, because the power of the issuers personnel is much more concentrated. h.. No opinion on the investment company complex. i.. Yes, there should be exceptions. See above. B. Services Outside the Scope of the Practice of Auditors a.. The problem with bookkeeping is that many small and medium sized companies do not have the resources(properly trained personnel) to prepare sometimes complex financial statements, including footnotes, on a timely basis. When they do so the auditors often have to make such extensive editing that it is difficult to say who actually prepared the statements. I recognize that this is a weakness in internal controls, but I would say that it is really a costly fix for small and medium issuers. b.. The same problem exists with respect to certain complex calculations like accrued income taxes. Many times the issuers do not have qualified personnel to make these calculations. c.. Other than the above situations, I doubt there are any public companies that have their bookkeeping, as it is understood by laymen, done by their auditors. d.. Statutory Financial Statements usually do not form the basis of US GAAP financial statements. Most multi national companies have their own worldwide standard internal reporting forms that they use to prepare US GAAP financial statements. e.. Most non auditors simply cannot understand why designing financial information systems have little bearing on the most important audit procedures. Designing financial systems usually is Information Technology or computer work. Although auditors are required to review and test internal accounting controls, this is usually very routine, although sometimes technical, work. Rarely do audit adjustments evolve from that work. The important audit procedures are those performed on judgements and estimates. That is why the auditors independence is not impaired when he or other members of his firm, not even on the audit engagement team, design and implement these systems. This is a phony issue conceived by people who simply don't understand auditing. f.. Internal audit outsourcing is another completely misunderstood issue. Our audit committee has the internal auditor reporting to me, the chairman, in an effort to make the internal auditor independent. The internal audit function should not be part of management or considered part of the management's internal control system. Therefore, it is irrelevant whether we use our external auditor to do internal auditing or someone else. Actually our internal auditor perform many of his audits as the request of the external auditors to limit their work. This is another phony issue. C.Partner Rotation a.. This rule is counter productive. The best audit comes from those where the partner in charge has an intimate knowledge of the client's operations, business and affairs. Sometimes these are very complex and require years of experience to master. Requiring rotation more often than seven years(and even that is questionable) is the wrong way to go. If the recommendations under General Comments were adopted this would be a none issue. In addition to that, consider the difficulties and disruptions to families caused by moving partners around the country because of small office and specialized industries. D. Audit Committee Administration of the Engagement a.. This is one of the most difficult issues to deal with on a practical level. Keeping in mind my General Comments, it is critical that the audit committee have the necessary resources to do its job. In addition, every effort must be made to severe the relationships between management and the auditors. This is the most difficult cultural change of all. Once this principle is established, the other issues fall into place. E.Compensation a.. Under all the new rules this becomes a virtual non issue. I don't think the Commission or anyone else should care how the auditors are compensated. That will take care of itself. You should not try to micro manage the audit firms. If they are too stupid to see what their priorities are then they won't survive. G.Communications with Audit Committees a.. No comments. These seem to be good for everyone. In general I am very impressed with the scope and thoroughness of this proposal. I do not have the time nor resources to comment on everything. I would be happy to discuss my comments with anyone from the Commission. Sincerely, Roland G. Ley 14710 W. Trading Post Drive Sun City West, AZ 85375 623-546-5512 rgley@attbi.com 623-546-5512