Michael D. Larrowe, CPA
Post Office Box 760
Galax, VA 24333

September 25, 2000

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549-0609

Reference file No. S7-13-00

Dear Mr. Katz:

This correspondence is to offer comment relative to the SEC's proposed rule dealing with auditor independence that would substantially alter Rule 2-01 of Regulation S-X.

We are concerned that the broad limitations on scope of services discussed in the proposed rule would have an unnecessary adverse impact on our clients, the users of their financial information and on our Firm. While we have concerns related to a number of the proposals, summarized below, we are especially concerned about the proposed prohibition on the independent auditor assisting a client with their internal audit function (outsourced internal audit).

One of the cornerstones on any examination is the independence of the persons conducting the examination. Properly structured external examinations (including outsourced internal audit engagements) provide greater assurance of an independent perspective than any internal examination can offer. From a structural perspective, external auditors are clearly more independent of management and fellow employee peer pressure than any client employee could possibly be. The client employee is 100% reliant on that job for employment whereas the client represents only a portion of any external firm's total revenue.

Another issue we believe strongly favors external accounting firms participation in such engagements relates to expertise and supervision. Many smaller companies have promoted someone from within the organization to perform the company's internal audits. As a group, they are understandably less prepared to execute and evaluate internal auditing procedures than the typical audit firm staff professional that is usually better educated (in that discipline) and has more relevant experience. Additionally because smaller companies' upper management are frequently involved directly in a number of areas, the potential for management override of the internal audit function is much greater when conducted by internal personnel.

We do not understand how an external firm's performance of external independent audit services and assisting (under existing rules and guidelines) with the execution of internal audit procedures could impair the effectiveness or reliability of either function. While both processes require independence from management, they do not logically require independence from each other. We believe that because of the increased knowledge of a regulated company an external firm would gain in assisting with the internal audit effort, the oversight interests of the public is improved not lessened.

We believe the following points are also applicable to the scope of services proposal, and as a result, the proposed rule should not go forward.

We appreciate your consideration of our comments and urge you not to support the scope of services rule.


Michael D. Larrowe, CPA