September 18, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Reference File No.: S7-13-00
Dear Mr. Katz:
On June 27, 2000, the United States Securities and Exchange Commission approved the issuance of a major new rule proposal that would force a restructuring of the accounting profession and radically alter independence requirements for accounting firms that audit SEC registrants.
The purpose of this letter is to express my opinions of why the passage of that proposed rule would seriously damage the overall accounting profession. The following points highlight my concerns:
- The SEC has based its decision to move forward with this rule prohibiting non-audit services without facts or evidence. Even the SEC admits that there is no empirical evidence that non-audit services have compromised audit quality or auditor independence, nor ever caused an audit failure. None of the studies or reports cited by the SEC concluded that the scope of services impaired audit effectiveness, or that an exclusionary ban was necessary or appropriate. The SEC's proposed rule is a solution in search of a problem.
- Most dangerous for the accounting procession is the likely prospect that the proposed rule would set a precedent for other regulators. Even accounting firms that do not audit SEC registrants could be impacted by these new rules. The proposed SEC rule would be viewed as the new model by state boards of accountancy, as well as federal (e.g., banking and ERISA) and other regulators. These new proposed SEC rules could influence the regulatory approach to auditor independence outside the United States as well.
- The SEC claims its proposed rule "would not affect tax-related services" to audit clients. However, it would ban acting as an advocate for an audit client, or providing expert services in administrative proceedings, thus (except in preparing returns) potentially prohibiting CPAs from representing audit clients before the IRS.
- Accounting firms effectively would be precluded from entering into almost any joint venture or partnership, since the accounting firm's independence could be impaired as a result of the activities of other parties in which it may have only an Immaterial investment, or with which it may be associated in only limited respects, but does not control.
- The SEC's proposal to restrict the services offered by accounting firms represent a fundamental restructuring of a profession that has successfully given investors the reliable, independent data they need for the past century. A decision by a government agency to tell some business organizations what services they may offer and to tell other businesses from who they can buy services is an extraordinary economic intervention without any empirical or other basis. We think most Americans would find this a curious public policy position for their government to take.
For the above reasons and many more, I urge you to actively work to prevent the passage of this ridiculous rule.
Thank you for your consideration of this urgent request for fair and intelligent legislation.