Subject: S7-13-00
Author: Jim & Joyce Donald at Internet
Date: 09/13/2000 2:14 PM

After thirty years as a commercial banker, I've developed an appreciation for the sorts of "errors", both of commission and of omission that can evolve when money and conflict of interest come together. Additionally, as one who is heavily invested in the stock market, I am compelled to rely entirely on the quality and forthrightness of the financial reporting as filed with the SEC. For both of these reasons, I am much interested in this issue.

In instances when an accounting firm producing "audited" financials also maintains a lucrative non audit relationship with any business entity, there is a genuine, not merely apparent or potential, conflict of interest. The only result can be pressure (perhaps only perceived and/or self-imposed) to generate financial statements which, while represented as gospel, may be subtly evasive of issues thought potentially disturbing to investors.

That is wrong. Even more wrong, is for the investing public to be denied any real opportunity to readily discern when this may be happening.

Having said that however, the task of the audit firm extends beyond the generation of audited statements to the creation of a Management Letter detailing findings and making recommendations for any recommended changes.

Follow up discussions based on that Management Letter between the auditing firm and the subject firm, and the providing of assistance in the implementation of recommendations, are matters that can blur the line between audit, and non audit related support.

In any case, my bet is that the best way to attack this problem is by defining where the aforementioned line exists, and then by requiring that publicly held companies report, as a standard element of the required financial disclosures to the SEC and to stockholders, either affirming that they engage in no such conflicting relationships, or, alternatively, the financial details of any additional dealings of a non audit nature with the auditing firm.

Having to offer such a negative disclosure, I would think, should have the same effect on investors as does the warning label on cigarette packs have to rational people who might otherwise contemplate smoking.

Perhaps, in view of that, publicly traded companies would do what they must to avoid having to make such disclosures. That is, they would do what they should do. They would split the audit function, and the non audit related functions between two different and unrelated accounting firms.

In the final analysis, however, there will always be conflict of interest in the audit function. Firms that do audits are businesses too. Businesses that very much want to be invited back again next year to do the next audit. You can't be a commercial banker for very many years and not discern that fact.

Perhaps all that can be done is to make the conflict of interest issue substantially less blatant. There is great value in that, however, and I want to thank you for pursuing that objective.

Sincerely,

James F. Donald