September 25, 2000
Via U.S. Mail and Electronic Filing
Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W., Mailstop 6-9
Washington, D.C. 20549
Re: Revision of the Commission's Auditor Independence Requirements, Release Nos. 33-7870; 34-42994; 35-27193; IC-24549; IA-1884; File No. S7-13-00
Dear Mr. Katz:
The Investment Counsel Association of America appreciates the opportunity to respond to the Commission's request for comments regarding its proposed revisions to the auditor independence requirements.1 We applaud the Commission's focus on the principle of auditor independence and we support the goals of the Commission's proposals.
As the Commission notes in its release, the accounting profession has been entrusted with the privilege and responsibility to audit the financial statements of publicly held companies.2 Millions of individuals and entities - and investment advisers acting on their behalf - invest in the securities markets in reliance on financial statements issued by public companies. The attest function of the independent auditor provides investors and their advisers with the assurance that issuers' financial statements have been audited by an objective professional of competence and integrity in accordance with generally accepted accounting principles. Thus, the actual and perceived independence of auditors is critical to investor confidence in the capital markets.
We are concerned that consolidation of accounting firms as well as a movement in the profession beyond traditional accounting services may result in a public perception that auditors of financial statements may be subject to potential conflicts of interest. Accounting firms are now marketing themselves as multi-disciplinary service providers with numerous product lines and consulting services. According to the Commission, auditing services that used to be the bread and butter of accounting firms provide only 30% of total revenues at such firms today, while management consulting services have skyrocketed. This dramatic trend has led to concern that the independence of auditors that report to management for whom they provide lucrative consulting services may be compromised. It is fair to question whether an auditor is able to review financial statements with a skeptical, inquiring eye - and firmly challenge management - in an environment of significant non-audit relationships. Even assuming auditors can remain truly independent in these circumstances, what is the public perception of the relationship? As Chairman Levitt recently stated:
[A]uditors who also provide consulting services for their audit clients must now serve two masters: a public obligation to shareholders, and a professional duty to management. And when the two come into conflict, the independent audit - dwarfed by the more lucrative consulting businesses - may too often be compromised.3
Many in the accounting profession have countered that there is no evidence of abuse, that providing other services to auditing clients permits a better knowledge and understanding of the client, and that providing multiple services is more cost-effective to clients (some of whom are our members). We understand the relevance of these considerations, and we urge the accounting profession to work constructively with the Commission to achieve reforms that balance all of these considerations. A resolution in the public interest would only bolster the profession's reputation of integrity and trust.
We also take this opportunity to support strongly the Commission's proposal to reduce the number of audit firm employees and their family members whose investments in audit clients are attributed to the auditor. Current requirements unnecessarily limit investment and employment opportunities available to audit firm personnel and their families even where no potential conflict exists. Some of our members have reported that their employees are subject to unreasonable restrictions based on family relationships with employees of audit firms and that some employees have been forced to leave their jobs due to these restrictions. We commend the Commission for proposing to tailor its restrictions to those who actually work on or are closely connected with the audit, and request the Commission to consider further appropriate flexibility in these rules.
Thank you for considering our comments on this important issue. Please do not hesitate to contact the undersigned if we may provide any additional information.
Sincerely,
KAREN L. BARR
General Counsel
1 The ICAA is a national not-for-profit association that consists exclusively of federally registered investment adviser firms. Founded in 1937, our current membership is comprised of more than 270 firms that collectively manage over $2.5 trillion in assets for a wide variety of institutional and individual clients.
2 To satisfy this public trust, "the auditor must approach each audit with professional skepticism and must have a willingness and freedom to decide issues in an unbiased and objective manner, even when the auditor's decisions may be against the interests of management of an audit client." Release at p. 5.
3 A Profession at the Crossroads, Speech by SEC Chairman Arthur Levitt, before the National Association of State Boards of Accountancy (Sept. 18, 2000).