November 7, 2005
Deloitte Touche Tohmatsu LLP
Dear Mr. Horstmann:
The staff has reviewed your letter of November 4, 2005 concerning the sale of certain partners of Deloitte & Touche LLP, a limited liability partnership incorporated under the laws of England and Wales (“Deloitte & Touche-UK”) and a member firm of Deloitte Touche Tohmatsu (“DTT”) in the United Kingdom, of their controlling interest in Liberata plc (“Liberata”) to investment entities affiliated with General Atlantic LLC (formerly known as General Atlantic Partners, LLC). In your letter, you detail key terms of the relevant transactions and conditions that DTT, including entities that have been considered part of DTT under Rule 2-01(f)(2) of Regulation S-X (“DTT Entities”), will comply with in connection with the completion of these transactions. Your letter concludes that, based on its compliance with those terms and conditions, that Liberata would not be considered an associated entity of Deloitte & Touche-UK or any other DTT Entity under the terms and conditions governing these transactions, and that no DTT Entity would have a “mutuality of interest” or a “direct or material indirect business relationship” with, or a “direct financial interest or material indirect financial interest” in any of its audit clients as a result of the activities of Liberata, its directors, employees or controlling shareholder (which activities include, without limitation, providing services to, entering into business relationships with, and making or receiving investments in or from third parties).
As you are aware, the Sarbanes-Oxley Act of 2002 (the “Act”) expressly prohibits any registered public accounting firm, or any associated person or entity of that firm, from providing certain non-audit services to its audit clients that are “issuers” as defined in the Act. The terms and conditions of the relevant agreements and the representations set forth in your letter, among other things: (1) explicitly limit as of the execution date, December 31, 2003, of the Share Purchase Agreement, and within three years thereafter end, any retained interest in Liberata by Deloitte & Touche-UK and its partners or any other entity included in the definition of the DTT Entities; (2) impose limitations on the use of the DTT Entities’ names by Liberata; (3) require a strict separation of the corporate governance, management, and financial structures and interests between all entities included in the definition of the DTT Entities and Liberata; (4) prohibit any revenue or profit sharing between any entity included in the definition of the DTT Entities and Liberata; (5) prohibit any joint marketing between the DTT Entities and Liberata; and (6) restrict any shared services between the DTT Entities and Liberata.
Assuming that the representations set forth in your letter continue to be accurate, and further assuming that DTT continues to comply with each of the terms and conditions set forth in your letter, the Office of the Chief Accountant (“OCA” or the “staff”) will not recommend an enforcement action asserting that DTT lacks independence as a result of non-audit services provided to DTT’s audit clients by Liberata. Of course, DTT otherwise remains fully subject to the Commission’s independence requirements, as well as the provisions of the Act, with respect to matters not expressly covered by your letter and this response. OCA has taken this position based on the specific facts and circumstances represented in your letter. DTT will consent to any review deemed necessary by the staff or the Public Company Accounting Oversight Board to ascertain compliance. If the divestiture is found not to have satisfied the terms and conditions represented to the staff or if any of the remaining terms or conditions in your letter are not met, the staff’s position will be vitiated, and the staff may recommend an enforcement action. Further, OCA has taken this position based on its evaluation of the relevant policy considerations and does not thereby adopt or endorse the analysis or conclusions set forth in your letter. This response expresses OCA’s position only on these particular facts and circumstances and does not purport to express any legal conclusions on this or any other matter.
Andrew D. Bailey, Jr.
November 4, 2005
Office of the Chief Accountant
Re: Deloitte & Touche LLP, a limited liability partnership registered in England and Wales/Liberata plc
We hereby request that the Staff of the Office of the Chief Accountant (the “Staff”) of the Securities and Exchange Commission (the “SEC” or “Commission”) advise that, based upon and subject to the matters referred to herein, it will not recommend that the Commission take enforcement action against Deloitte Touche Tohmatsu, a Swiss verein, or its member firms, or its or their respective subsidiaries or any other firms conducting audit activities for SEC registrants under the name “Deloitte Touche Tohmatsu,” “Deloitte & Touche,” “Tohmatsu” and other combinations or derivations thereof or otherwise as part of the Deloitte Touche Tohmatsu network of firms or “accounting firms,”1 or any other entity that would be subject to the Commission’s independence rules as defined in Rule 2-01(f)(2) of Regulation S-X (collectively, for the purposes of this letter only, “DTT Entities”), asserting that any DTT Entity is not “independent” based upon the attribution to the DTT Entities of the activities of Liberata plc (“Liberata”), a company incorporated under the laws of England and Wales. Prior to November 2002, the majority of Liberata’s shares were owned by certain partners of Deloitte & Touche LLP, a limited liability partnership incorporated under the laws of England and Wales (“Deloitte & Touche-UK”) and the United Kingdom member firm of Deloitte Touche Tohmatsu. Pursuant to a series of private transactions, the latest of which was consummated on December 31, 2003, investment entities affiliated with General Atlantic LLC (formerly known as General Atlantic Partners, LLC) (collectively, “GAP”), acquired majority ownership of Liberata.2
We believe that the aforementioned transactions, including the conditions proposed herein, serve as a basis for the Staff to grant the relief requested.
The federal securities laws require that financial statements filed with the Commission by public companies, investment companies, broker-dealers, public utilities, investment advisers and others be certified (audited) by independent public accountants.3 The Commission has adopted Rule 2-01 of Regulation S-X regarding the independence of accountants. The general standard set forth in Rule 2-01(b) provides that:
The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant’s engagement.4
Rule 2-01(b) further provides that:
In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission.
The preliminary note to Rule 2-01 states that, in considering the standard set forth in Rule 2-01(b), the Commission looks to, among other criteria, whether the relationship of the provision of service “creates a mutual or conflicting interest between the accountant and the audit client.”5 Rule 2-01(c) applies the standards set forth in Rule 2-01(b) to particular circumstances that are considered to impair an accountant’s independence.6 For example, Rule 2-01(c)(1) provides that an accountant will not be considered independent if “the accountant has a direct financial interest or a material indirect financial interest in the accountant’s audit client . . . .” In addition, Rule 2-01(c)(3) provides that:
An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as the audit client’s officers, directors or substantial stockholders.
For purposes of Rule 2-01, “accounting firm” means “an organization * * * that is engaged in the practice of public accounting * * * and all of that organization’s departments, divisions, parents, subsidiaries, and associated entities, including those located outside the United States.” 17 C.F.R. § 210.2-01(f)(2) (emphasis added). Although not expressly defined by rule, the Commission has stated that it intends the phrase “associated entity” to:
reflect our staff’s current practice of addressing these questions in light of all relevant facts and circumstances, looking to the factors identified in our staff’s previous guidance on this subject. While the rules we adopt do not provide accounting firms with the certainty of our proposed rule, we are convinced that a more flexible approach is warranted as the types and nature of accounting firms’ business arrangements continue to develop.
Revision of the Commission’s Auditor Independence Requirements, 65 Fed. Reg. 76008, 76059 (Dec. 5, 2000) (footnote omitted). As part of this guidance, the Commission also cited numerous prior no-action letters that had been issued to address the separation of consulting businesses from accounting firms.7 In the prior no-action letters, the Staff has examined whether the businesses are associated entities by considering such factors as whether (1) the accounting firm has any ownership interest in the consulting firm; (2) there are restrictions on the use of the accounting firm’s name by the consulting firm; (3) the firms’ corporate governance structures are separate; (4) there is any revenue sharing between the firms; (5) there are any joint marketing agreements between the firms; and (6) there will be any on-going shared services between the firms.
On July 30, 2002, the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act” or the “Act”) became law. Title II of the Sarbanes-Oxley Act, entitled “Auditor Independence,” required the Commission to issue, by January 26, 2003, final rules to prohibit certain non-audit services, strengthen conflict-of-interest standards, strengthen auditor partner rotation and second partner review requirements, and clarify and enhance the relationship between independent auditors and corporate audit committees. However, Congress left the definitions in Rule 2-01 of “accounting firm” and “associated entity” untouched. Similarly, in the SEC’s final rulemaking to incorporate Title II of the Act into its rules and regulations, the Commission also did not amend or modify its definitions of “accounting firm” or “associated entity.”8 Consequently, Rule 2-01 continues to direct firms to refer to the Staff’s practice of addressing these questions in light of all relevant facts and circumstances, looking to the factors identified in the Staff’s prior guidance on this subject.
The SEC’s interpretations of Rule 2-01 are also collected in Section 600 of the Commission’s Codification of Financial Reporting Policies (the “Codification”), entitled “Matters Relating to Independent Accountants.”9 Section 602.02.e of the Codification addresses business relationships, such as joint ventures, limited partnership agreements and investments, that may impair an auditor’s independence. That section provides, in part, that:
Direct and material indirect business relationships * * * with a client * * * will adversely affect the accountant’s independence with respect to that client. Such a mutuality of identity of interests with the client would cause the accountant to lose the appearance of objectivity and impartiality in the performance of his audit because the advancement of his interest would, to some extent, be dependent upon the client.
The DTT Entities desire to obtain assurance that, following the transactions described below, Liberata will not be considered an associated entity of Deloitte & Touche-UK or any other DTT Entity, such that to the extent that Liberata, or any director, employee, or controlling shareholder of Liberata provides services for, enters into business relationships with, or invests in or accepts investments from, audit clients of any DTT Entity, the independence of any of the DTT Entities will not be deemed impaired pursuant to Rule 2-0110 or rules that are promulgated thereunder or any other provisions of the Commission’s independence rules.
Deloitte Touche Tohmatsu believes that, under the conditions detailed in this letter, Liberata would not be considered an associated entity of Deloitte & Touche-UK or any other DTT Entity under the terms and conditions governing this Transaction (as defined below), and that no DTT Entity would have a “mutuality of interest” or a “direct or material indirect business relationship” with, or a “direct financial interest or material indirect financial interest” in any of its audit clients as a result of the activities of Liberata, its directors, employees or controlling shareholder (which activities include, without limitation, providing services to, entering into business relationships with, and making or receiving investments in or from third parties). This conclusion is based on the representations and conditions detailed in this letter, which, among other things: (1) explicitly limit as of the execution date of the Agreement (as defined below), and within three years thereafter end, any retained interest in Liberata by Deloitte & Touche-UK and its partners or any other entity included in the definition of the DTT Entities; (2) impose limitations on the use of the DTT Entities’ names by Liberata; (3) require a strict separation of the corporate governance, management, and financial structures and interests between all entities included in the definition of the DTT Entities and Liberata; (4) prohibit any revenue or profit sharing between any entity included in the definition of the DTT Entities and Liberata; (5) prohibit any joint marketing between the DTT Entities and Liberata; and (6) restrict any shared services between the DTT Entities and Liberata.
In 1993, Deloitte & Touche-UK acquired Liberata, which was then known as CSL Group Holdings plc (“CSL”). In September 2000, Deloitte & Touche-UK sold its shares in Liberata primarily to certain individual Deloitte & Touche-UK partners (the “Deloitte & Touche-UK Partners”), who continued to own the majority of Liberata’s shares through November, 2002.11 In November 2002, the Deloitte & Touche-UK Partners sold the majority of their interest in Liberata to GAP, in a private transaction for cash consideration. Pursuant to the terms of a Share Purchase Agreement, dated December 31, 2003 (the “Agreement”), GAP acquired additional Liberata shares in a subsequent, private cash transaction. Upon completion of these transactions, the retained equity interest of Deloitte & Touche-UK and the Deloitte & Touche-UK Partners was reduced to less than 20%.12 Liberata does not own any equity interest in Deloitte & Touche-UK or any other entity included in the definition of the DTT Entities.
The above described sale of Liberata capital stock and Agreement, together with the Conditions to No-Action Confirmation listed below, are referred to collectively as the “Transaction.”
Other key terms of the Transaction are:
Conditions to No-Action Confirmation
Deloitte Touche Tohmatsu requests that, subject to compliance with the following conditions and representations, the Staff not recommend enforcement action to the Commission based upon the attribution to any of the DTT Entities of the activities of Liberata since the completion of the Transaction:
In connection with its request herein, each of Deloitte Touche Tohmatsu and Liberata, insofar as each item below relates to it, hereby confirms to the Staff that:
Based upon the representations contained herein and in the materials provided herewith, and subject to continued compliance with the foregoing conditions, we hereby request that the Staff advise that the Office of the Chief Accountant will not assert or recommend enforcement action that asserts that any DTT Entity’s independence has been impaired to the extent Liberata or any of its directors or employees provides services for, enters into business relationships with, or invests in or accepts investments from, any audit clients of any of the DTT Entities. We fully understand that if the Staff takes a no-action position, that position will be based on the representations and undertakings set forth in this letter and continued compliance with the material terms of the related executory contracts. We further understand that failure to comply with any of these conditions would invalidate the relief granted by the Staff in response to this request as of the date the Staff’s relief was communicated to Deloitte Touche Tohmatsu.
Certain matters described above have not yet been publicly announced. Accordingly, pursuant to 17 C.F.R. § 200.81(b), we hereby request confidential treatment of the contents of our communications with the Staff with respect to all issues relating to this letter (the “Confidential Material”) until a date 120 days after release of your response to us, or such earlier date as the Staff is advised by us that all of the information contained in the Confidential Material has been made public. However, when the Staff determines to grant the no-action relief requested herein, we understand and agree that the letter itself and the text of your response to the letter may be made public immediately. In addition to this request for confidential treatment, we will request, under separate cover, confidential treatment for the transaction documentation and the other materials furnished to you in connection with this letter pursuant to the provisions of 17 C.F.R. § 200.83.
* * *
If for any reason you do not concur with the views expressed in this letter, we respectfully request an opportunity to discuss this matter with the Staff prior to any written response to our letter. If you have any questions or need any additional information concerning the foregoing, please do not hesitate to contact Scott Bayless of Deloitte & Touche LLP, a Delaware limited liability partnership and an affiliate of the United States member firm of Deloitte Touche Tohmatsu, at 202-879-5315 or David Hardison of Fried, Frank, Harris, Shriver & Jacobson LLP at 202-639-7029, who have been requested to facilitate answering any questions you may have.
Deloitte Touche Tohmatsu
By : Charles A. Horstmann
Copy to : W. Scott Bayless – Deloitte & Touche LLP, a Delaware limited liability partnership
David Hardison – Fried, Frank, Harris, Shriver & Jacobson LLP
1 For purposes of this letter, we use the term “accounting firm” as defined pursuant to Rule 2-01(f)(2) of Regulation S-X.
2 GAP is a global investment firm that is unaffiliated with and wholly independent of the DTT Entities. GAP also is not an audit client of any DTT Entity.
3 See, e.g., 15 U.S.C. §§ 77aa(25), (26), 15 U.S.C. §§ 78l, 78q, and 78m, 15 U.S.C. §§ 79e(b), 79j, 79n, 15 U.S.C. §§ 80a-8, 80a-29, 15 U.S.C. §§ 80b-3(c)(1).
4 17 C.F.R. § 2.10-2.01(b) (2004). Under Rule 2-01, the term “accountant” includes “any accounting firm with which the certified public accountant or public accountant is affiliated.” Id. at § 210.2-01(f).
5 Id. at § 2.10.2-01 (para. 2 of Preliminary Note).
6 See id.
7 Id. at 76059, n. 491 (citing various no-action letters).
8 See 68 Fed. Reg. 6006 (Feb. 5, 2003).
9 See Codification of Financial Reporting Policies, Section 600 (“Matters Relating to Independent Accountants”), reprinted in 7 Fed. Sec. L. Rep. (CCH) ¶ 73,251 et seq.
10 Rule 2-01(f)(6) of Regulation S-X.
11 The shares are held in trust on behalf of the individual Deloitte & Touche-UK Partners by Deloitte & Touche Holdings Ltd. (“Holdings”), a subsidiary of Deloitte & Touche-UK.
12 The calculation of the percentage of Liberata common shares held by Deloitte & Touche-UK and/or the Deloitte & Touche-UK Partners at any particular time is based on the percentage of outstanding Liberata common shares owned by Deloitte & Touche-UK and the Deloitte & Touche-UK Partners, and pension funds for active partners or principals of any DTT Entity at that time, and any DTT Entity. For purposes of this letter, equity owned by retired Deloitte & Touche-UK Partners with no continuing role or financial interest in Deloitte & Touche-UK (other than through a self-directed or fully-funded retirement plan) will not be deemed held by Deloitte & Touche-UK or the Deloitte & Touche-UK Partners.
13 Certain of Liberata’s contracts are with U.K. government bodies and were awarded following a formal procurement process in which all parties interested in performing the services under the respective contract were invited to bid. In addition, one feature of the market in which Liberata operates has been that a government body that is a prospective client may require a “performance guarantee” to be granted by the parent organization, if any, of the party supplying the services under the contract. Three such guarantees, which were issued by Deloitte & Touche-UK between 1997 and 1999 at the commencement of contracts between Liberata and two clients that are U.K. government bodies and prior to the Transaction described herein, remain outstanding. The contract to which one such guarantee relates is scheduled to expire in 2007, and the contracts to which the other guarantees relate are scheduled to expire in 2008. Deloitte & Touche-UK would only be called upon to perform under these guarantees in the unusual circumstance that Liberata failed to fulfill its obligations under the relevant contract. In that event, as a practical matter, Deloitte & Touche-UK could incur the responsibility to pay the costs associated with transitioning the services provided by Liberata to another vendor. The guarantees do not serve either as a general guarantee of Liberata’s obligations to its clients or as a source of ongoing credit or financial support to Liberata. Deloitte & Touche-UK has never been called upon to perform under these guarantees since their inception, nor is it expected that they will be triggered in the future. These residual obligations, which are not significant to Deloitte & Touche-UK or Liberata, will remain in effect on a temporary basis following the issuance of the Staff’s no-action letter, as they will expire in accordance with their original terms.