Mr. Jonathan G. Katz
File No. S7-49-02
Dear Mr. Katz:
On December 2nd, 2002, the SEC issued File No. S7-49-02, dealing with "Strengthening the Commission's Requirements Regarding Auditor Independence" (hereafter the "Proposed Rules"). SAP AG as a foreign private issuer recognizes the enormous importance of safeguarding the auditors' independence from management influence, as this very independence insures -not only in the long run - investor confidence in the stock market, one of the main purposes of the Act. On the other hand, we would like to draw your attention to several aspects of the Proposed Rules, which we think would seriously affect private issuers, and especially, foreign ones, as the auditors' clients.
1. One-Year Cooling Off Period
The proposed rules would deem an accounting firm as not independent with respect to an audit client if a former partner, principal, shareholder, or professional employee of the accounting firm is in a "financial reporting oversight role" at that client, unless the individual had not been a member of the audit engagement team for that client's financial statements during the one year period preceding the initiation of the audit. Financial reporting oversight role is defined as a role in which a person is in a position to or does exercise influence over the contents of the financial statements or anyone who prepares them, such as when the person is a member of the board of directors or similar management or governing body, chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, or any equivalent position (see Proposed Rules 2-01(f)(3)(B)).
In our understanding, the Proposed Rules with this interpretation do not only "clarify" (see Proposed Rules, I, page 3, last bullet point), but also considerably enlarge the category of individuals, which would be covered by the conflicts of interest rules. Whereas Sect. 206 of the Act mentions specific members of management and "any person serving in an equivalent position for the issuer", the Proposed Rules introduced "the financial reporting oversight role", which may extend the covered category of individuals even beyond the various explicitly mentioned positions in the Proposed Rules.
While we appreciate the SEC's efforts to ensure auditor independence, SAP is concerned about the expansion of covered individuals. Being a foreign private issuer SAP needs to employ accounting professionals who are experts in both, German GAAP and US GAAP. Furthermore such professionals need to have a unique understanding of the software industry and related audit questions to be able to cope with the specific accounting rules that exist for our industry. The Proposed Rules would reduce the very low number of appropriate candidates available outside the US even further and may therewith harm the ability of foreign private issuers to employ the expertise required to fulfil the reporting requirements resulting from a dual stock market listing. Therefore, we would like to ask the SEC for a reconsideration of this issue.
2. Rotation of Partners on the Audit Committee
Similar concerns exist about the proposed rotation of partners. Under the Proposed Rules no partner would be allowed to serve on an audit engagement team for more than five years (see Proposed Rules 2-01 (c)(6)). Sect. 203 of the Act - which we fully support - in contrast requires such rotation only of the audit partner and the reviewing partner.
Very often certain partners of an audit firm specialize in a certain subject (e.g. derivatives, revenue recognition). Their involvement in the audit of clients is limited to the audit of this specific subject. A rotation requirement for such partners could harm the expertise available for the audit and therewith the quality of the audit. If audit firms try to prevent such effects by employing a higher number of such experts (if available) this would most likely lead to higher audit fees. Furthermore issuers would be required to build up internal expertise more intensively which would also lead to higher cost.
Additionally, SAP as a German issuer falls under German law, which provides (in Sect. 319 of the German Commercial Code) for an extensive list of conditions that an audit firm has to fulfil in order to be eligible as such, amongst others, audit partner rotation. Therefore we believe that the original Sect. 203 of the Act is a sufficient tool to ensure auditor independence without imposing too much burden on both auditor firm and auditor client.
3. Services Outside the Scope of the Practice of Auditors - Tax Services
Section 201 of the Sarbanes-Oxley Act identifies specific categories of non-audit services that are prohibited for accounting firms to provide for their audit clients. A registered public accounting firm may, however, engage in any non-audit service, including tax services, that is not described in any of paragraphs (1) through (9) of subsection (g) for an audit client, but only if the activity is approved in advance by the audit committee of the issuer. The SEC stated (in the Proposed Rules, II B., page 7), that the scope of the prohibited services of auditors should be judged against three basic principles, one of them being that an auditor cannot audit his or her work.
On the surface, this seems more than logic and obvious. However, in practice this would lead to the conclusion that an auditor may never do any tax service for an audit client, since such service inevitably leads to the auditor influencing the tax outcome and therefore, the client's financial reporting. This becomes especially obvious if one takes a look at the German fiscal law, which sets forth that the financial accounting obligatory for fiscal purposes has to be deducted from the financial reporting according to German GAAP. However, drawing the conclusion that the auditor may never do tax services for his/her audit client, would hurt both client and auditor. Therefore, we do hope that the SEC will see the inevitable interdependence of tax services and auditing without drawing the conclusion that if an auditor works on the one, he or she may not work on the other.
We hope that our comments are helpful in some way. In the case you wish to discuss abovementioned issues further, or if you have any other concerns or questions, please do not hesitate to contact Dr. Christoph Hütten (firstname.lastname@example.org) or Michael Junge (email@example.com) at any time.