Pennsylvania Institute of Certified Public Accountants
1650 Arch Street
17th Floor
Philadelphia, PA
(215) 496-9272

January 13, 2003

Mr. 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:

The Pennsylvania Institute of CPAs (PICPA), representing approximately 20,000 CPAs, appreciates the opportunity to comment on the proposed rule entitled "Strengthening the Commission's Requirements Regarding Auditor Independence." This response represents the consensus of the PICPA's 65 SEC Practice Section members.

The topic of most concern to us is partner rotation. It is our opinion that the proposed rules requiring partner rotation and the five-year "time out" period as currently proposed is not feasible and cannot be implemented by smaller CPA firms. We feel strongly that an exemption is appropriate and necessary for small firms. We recommend that an exemption be adopted for firms with less than 100 SEC clients. We make this recommendation for a variety of reasons:

Defacto Mandatory Firm Rotation

The impact of the partner rotation requirement, as proposed, is not equitable to small firms. The proposed rules would effectively impose firm rotation on firms with a limited number of SEC qualified partners. The Sarbanes-Oxley Act does not mandate firm rotation; it refers this matter to the Comptroller General of the United States (General Accounting Office) for further study. Many small firms would be forced to cease providing services to SEC clients because they would be unable to comply with the partner rotation requirement. We do not believe firm rotation is in the best interest of the CPA firms, the clients, or the public, nor was it the intention of the Sarbanes-Oxley Act. Forcing these small firms into partner rotation or firm rotation would be a waste of valuable experience and knowledge, without a measurable benefit to the client or the public. It is also important to note that a large majority of audit failures occur in the first two years of an audit engagement.

Excessive "Time Out" Period

For any firm that would be required to rotate partners, the five-year "time out" period is too long. Such an extensive time period is not necessary to achieve the desired fresh view. The two-year time-out period as currently required by the AICPA SEC Practice Section is sufficient and much more appropriate. We concur with the proposed release that it is very important that the rotation be staggered in order to provide the necessary continuity for the audit.

Economic Effect

The inequity of the proposed partner rotation could have a significant economic impact not only on the small firms forced to cease providing audit services for SEC clients and their employees, but also on the smaller SEC registrants these firms currently serve. These small SEC-reporting companies will most likely be forced to pay substantially higher audit fees as a result of having to choose from a smaller pool of qualified firms. They may have difficulty finding a new audit firm to engage. There are approximately 760 CPA firms, which includes a significant number of small firms, providing audit services for about 15,000 SEC-reporting companies. Our statistics indicate that the seven largest CPA firms audit 77% of these companies. The remaining firms service an average of 4 to 5 SEC clients each. These firms provide quality audit services to their SEC clients, and have received unqualified peer review reports. The proposed rules should not punish these reputable firms.


In conclusion, we believe it is vital that the new rules recognize that there are differences between large and small CPA firms. The Sarbanes-Oxley Act already distinguishes between firms with more than 100 SEC clients and those with less. The AICPA's SEC Practice Section has exempted firms with fewer than five SEC clients and ten partners from partner rotation for some time. We strongly believe it would be in the best interest of the public, the smaller SEC-reporting companies, and the public investors, to have an exemption from partner rotation for CPA firms with less than 100 SEC clients.

An exhibit is attached to this letter indicating the impact partner rotation will have on three Pennsylvania CPA firms. We believe their circumstances are representative of small firms nationwide.

We appreciate your consideration of our comments. We are available to discuss any of these comments with the commission or its technical staff at your convenience.


R. Jeffrey Galli, CPA
PICPA President



Cogan Sklar LLP
Bala Cynwyd, Pennsylvania

Cogan Sklar LLP is a local firm located in the Philadelphia area with nine partners, 25 professional staff, and eight administrative personnel. Three of the firm's partners have the qualifications to be the engagement audit partner or concurring review partner for an SEC audit engagement. Approximately 45% of the firm's fees are generated from accounting and auditing services. The firm currently provides audit services for four SEC-reporting companies. The firm is exempt from the seven-year partner rotation requirement of the AICPA's SEC Practice Section.

J.H. Williams & Co., LLP
Kingston and Berwick, Pennsylvania

J.H. Williams & Co., LLP is located in Northeastern Pennsylvania and consists of five partners; ten professional staff made up of managers, seniors and staff accountants; and five support personnel. The firm is a member of both the SEC and Private Companies Practice Sections of the AICPA's Division for CPA Firms. The firm has two SEC clients, both of whom are financial institutions, and the firm has audited these two banks for more than twenty years. The combined fees from both banks total $150,000 and represent approximately 10% of the firm's fees.

All partners and almost all staff personnel materially participate on both of these audit engagements. Implementation of the SEC's proposed rules on partner rotation would result in the firm's disqualification as auditors for SEC-reporting companies. The economic environment of the firm's geographic location is such that replacing $150,000 of fees would be a very difficult task. In the short term, sound business judgment would require the firm to lay off several of the professional staff and at least one support staff in order to make up for the loss in fees. The firm would also drop its affiliation with the SEC Practice Section of the AICPA's Division for CPA Firms and would be forced to implement other significant cost cutting measures in an attempt to make the firm whole.

McGrail, Merkel, Quinn & Associates
Scranton, Pennsylvania

McGrail, Merkel, Quinn & Associates is a local firm located in Northeastern Pennsylvania with four partners, ten professional staff, and six administrative personnel. Two of the partners have the qualifications to perform an SEC audit engagement. The firm currently has one SEC audit client, a financial holding company. The firm is exempt from the current seven year partner rotation requirements under the AICPA's SEC Practice Section.

The two partners trained in SEC matters materially participate on the SEC engagement for quality control purposes. The firm's two remaining partners operate in other industries and, due to the specialized nature of the work, cannot effectively take over the management of the SEC-reporting company without a great deal of training and additional experience. In addition, due to the fact that the two SEC trained partners materially participate on the SEC engagement, the firm engages an outside firm to perform the concurring partner review on the engagement. Implementation of the SEC's proposed rules on partner rotation would result in the disqualification of McGrail, Merkel, Quinn & Associates as auditor of the firm's current SEC client, as well as the firm currently performing the concurring review.