The Coalition Against Corruption
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January 13, 2003
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549-0609
Strengthening the Commission's Requirements Regarding Auditor Independence
(Release No. 33-8154
Commission File No. S7-49-02)
Dear Mr. Katz:
Transparency International-USA (TI-USA) is pleased to comment on the SEC's proposed amendments to the auditor independence rules that would require certain disclosures and reports by auditors and set conditions under which auditing firms would not be considered independent for purposes of performing audits of public company financial statements. We understand that these proposals are intended to implement the Sarbanes-Oxley Act of 2002 ("the Act").
TI-USA supports the efforts of the SEC to enhance the independence of auditors and thereby increase public confidence in the audit process. We agree with the proposed revisions to regulations relating to non-audit services, to identify nine prohibited services that would impair an accounting firm's independence. We concur with the requirement that an issuer's audit committee pre-approve audit and non-audit services provided to the issuer by the auditor. We also agree with the requirement to disclose information related to audit and non-audit services provided by the auditor, including fees paid by issuers for audits, tax preparation and all other fees for the current and previous year.
TI-USA supports the rotation after five years, of the lead (or coordinating) partner and the partner responsible for review, as required by the Act. However, the extent of the expansion of rotation to additional partners involved in the engagement and the exemptions, as proposed by the SEC, may benefit from further consideration.
We agree with the SEC's proposal to prevent an accounting firm from auditing an audit client's financial statements if certain members of management of that client had been members of the accounting firm's audit engagement team (for that client) within the one-year period preceding the commencement of audit procedures.
We also support the proposal that an accountant would not be independent from an audit client if any partner, principal or shareholder of the accounting firm who is a member of the engagement team received compensation based directly on any service provided or sold to that client other than audit, review and attest services.
We support the Commission's objectives and would like to provide some comments and suggested improvements for the Commission to consider. We believe certain enhancements, discussed in detail below, would improve the effectiveness of the proposals and reduce the potential disruption.
Audit Partner Rotation - Scope of Applicability
The SEC has proposed to prohibit partners on the audit engagement team from providing audit services to the issuer for more than five consecutive years and from returning to audit services for the same issuer within five years. The Sarbanes-Oxley Act ("the Act"), Section 203 specifies that:
"It shall be unlawful for a registered public accounting firm to provide audit services to an issuer if the lead (or coordinating) audit partner (having primary responsibility for the audit), or the audit partner responsible for reviewing the audit, has performed audit services for that issuer in each of the 5 previous fiscal years of that issuer."
The SEC's proposed rule goes beyond the Act and the legislative intent by requiring rotation of not just the lead and review partners, but other partners involved in the engagement as well. We believe this expansion of the scope of applicability of audit partner rotation and the exemptions merit further clarification. While it is clear that there is a benefit of a fresh look by rotating the lead audit partner and review partner, the benefit of rotating other partners must be weighed against the loss of experience and knowledge about the company's operation and the industry.
Transition of Audit Partner Rotation
The proposed rules will create many logistical implementation problems for registrants and their audit firms, including the need to relocate audit partners, on a short and long-term basis. This may divert their focus from performing quality audits. In order to more effectively implement the proposed rotation rules, we recommend the requirement be phased in over two years. In this way, firms will have more time to determine their rotation needs and arrive at effective solutions.
We also believe that the rules implementing the five-year term should take account of the fact that, as the release itself notes, "new partners would need to learn the company's accounting and financial reporting procedures, controls and personnel." This is especially important on large or complicated engagements, where the learning curve is steep.
We would be pleased to discuss the contents of our statement further at your convenience.
Very truly yours
Fritz Heimann, Chairman
Thomas L. Milan, Director