September 25, 2000
Chairman Arthur Leavitt
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Dear Chairman Leavitt:
We are writing in response to the United States Securities and Exchange Commission (SEC), Revision of the Commission's Auditor Independence Requirements: Proposed Rule, 65 Federal Register 43, 148 (2000). This proposal reflects substantial revisions to Rule 2-01 of Regulation S-X, the Commission's only formal rule with respect to auditor independence.
Our firm is a regional firm located in Nevada, with seven offices located in Reno, Carson City, Las Vegas, Elko, Yerington, Fallon and Winnemucca. Although our SEC practice is a small part of our practice we feel this new proposal could potentially have a far-reaching affect on firms that do not have SEC clients. The proposed SEC rule could be viewed as the new model for state legislators and state boards of accountancy, as well as other regulators.
This proposal has a significant impact on our profession whereas it will dramatically curtail the ability of accounting firms to provide services other than audit and tax services to SEC clients. This proposal would severely restrict accounting firms in providing non-audit services to audit clients. Accounting firms would be prohibited from providing bookkeeping or other services related to the audit client's accounting records or financial statements; financial information systems design and implementation; appraisal or valuation services, fairness opinions or contribution in kind reports; actuarial services; internal audit outsourcing; management functions; human resources; broker-dealer, investment advisor or investment banking services; legal services; and expert services.
In addition the proposed rule contains a new disclosure requirement for public companies to disclose in its annual proxy statement any services received from an independent public or certified accountant, unless the amount of such services was less than the lesser of $50,000 or 10% of the audit fee. This possible new disclosure requirement plus the mandate that audit committees approve any such relationships with their auditors may result in clients hiring other firms to do non-audit services.
It appears the SEC has based its decision to move forward with the rule prohibiting non-audit services without facts or evidence. The SEC has admitted that there is no empirical evidence that non-audit services have compromised audit quality or auditor independence, nor ever caused audit failure. The SEC repeatedly states in their release that non-audit services `may" or "could" affect auditor independence, but never states that such services "do" affect or "have" affected auditor independence. The Panel on Audit Effectiveness of the Public Oversight Board, which was formed at the request of the SEC, concluded that "both the profession and the quality of audits are fundamentally sound". The panel found no evidence that non-audit services hurt audit quality. We feel that our ability to provide non-audit services results in a benefit to the client, due to our overall knowledge and expertise of the client.
In addition this proposal limits the clients from choosing the best provider of accounting services by limiting their choice. The SEC would be forcing public companies to constantly choose whether to hire a firm solely as its auditor or solely as a provider of other services. This proposal may result in a public company dismissing an audit firm who has done outstanding work in order to obtain services from the auditor's non-audit colleagues.
The proposal would not effect tax related services, however it would result in banning us from acting as an advocate in administrative proceedings, which could potentially result in prohibiting CPA's from representing audit clients before the IRS.
This rule could potentially affect the recruiting and retention of the best professionals in our field. These professionals may not want to be associated with a firm where a large part of the market is off limits due to this proposal. They may be drawn towards industries with broader career opportunities, which could have an impact on the quality of our audits.
The SEC rules should pertain to public companies filings of financial statements that have been audited by independent accountants and their rules should not regulate or govern the accounting profession. It appears this proposed rule is based primarily on alleged concerns relating to the "appearance of independence" but not independence in fact. The SEC should not have statutory authority to impose restrictions because of possible perceptions about independence.
These restrictions on non-audit services will likely restrict the services offered by accounting firms and could potentially restructure our profession which has been successful in providing reliable, independent data for the past century. This intervention of a government agency to tell some businesses what services they may offer and to tell other businesses whom they can buy services from is an economic intervention without any empirical evidence. Therefore, we strongly believe that this proposal should be stopped.
Thank you for your consideration in this matter.
James Johnson, CEO
Kafoury, Armstrong & Co.
Cc: Nevada Congressional Delegates