Testimony of BDO Seidman, LLP
Regarding the Proposed Revision of the Commission's
Auditor Independence Requirements

September 20, 2000

Wayne A. Kolins
National Director of Assurance

My name is Wayne Kolins. I am the National Director of Assurance for BDO Seidman. Our business consists overwhelmingly of assurance and tax services and our clients are mainly middle market companies. It is my pleasure to testify on behalf of the firm on this very important matter.

I will focus my remarks on a few of the concerns which will be contained in our comment letter. These include the disproportionately adverse impact of the proposed rules on BDO and other non-Big 5 accounting firms and the provision of tax services by auditors.

Before I explain these concerns, I want to express my firm's support of your efforts to maintain and enhance the focus on the public interest by all participants in the financial reporting process. We also support the Commission's efforts to modernize the investment and employment relationship rules and encourage you to move forward with that aspect of the proposed rules, in concert with the ISB. We recommend, however, that the Commission bifurcate the Rule Proposal and let the ISB adopt a conceptual framework that provides more clear guidance than do the proposed Four Principles.

The Four Principles would adversely affect non-Big 5 firms, and their audit clients, because the clients generally have less in-house expertise and are thus more likely to turn to their outside auditors for advice. However, outside auditors may be unwilling to provide this advice, even on issues such as the application of complex accounting standards, if the provision of such advice would raise questions about whether they are auditing their own work or serving as an employee of or advocate for the client. If non-Big 5 firms cannot provide that type of advice, their clients may do without the advice or turn to other, more costly, consultants, if any are available. In these cases, the company and its shareholders would be adversely affected.

The proposed definition of affiliate of an accounting firm would also have a disproportionately adverse impact on non-Big 5 accounting firms because it is imprecise and appears to capture more relationships than we believe the Commission intends to cover. The proposed definition would identify joint venture partners and entities with which accounting firms are involved in co-branding or other business arrangements as affiliates of the accounting firm. Some accounting firms, like BDO, have strategic alliances with other autonomous accounting firms that are intended to provide the alliance members with access to accounting, tax, audit methodology and training expertise. These alliances enhance audit quality and benefit the shareholders of the alliance firms' clients as well as the firms themselves. It appears, however, that an accounting firm that is a member of an alliance (and, perhaps certain of its partners and employees) would have to be independent of the public clients of the other members of the alliance even if the accounting firm has no control over those other members. Requiring BDO and its alliance members, for example, to monitor the relationships and investments of each other would be extremely complex, expensive and time-consuming, assuming that we could monitor them at all. The alliance members do not control each other and, therefore, we may have significant problems obtaining the necessary information.

Any terminations of strategic alliances necessitated by the adoption of the proposed definition could result in severe contractual penalties along with other costs. This should be considered by the Commission in its cost-benefit analysis of the proposed rules.

As an alternative to the proposed definition, we recommend that the Commission consider using a control test. This would enable accounting firms to comply with the independence rules and still enter into appropriate and necessary strategic relationships.

The Commission has stated its belief that the impact of the proposed rules relating to the provision of non-audit services would result simply in a reshuffling of clients among the consulting practices of accounting firms. We doubt that would be the result. Rather, we believe that the non-Big 5 firms would once again be disproportionately adversely affected. We think that public companies are more likely to turn to well known consulting firms for those services than to a non-Big 5 firm.

On a positive note, we strongly support the exclusion of tax-related services from the list of prohibited non-audit services. The ability to provide these services is especially important because the accounting firm is in the best position to be informed and aware of the relevant, client-specific issues. Smaller companies particularly need to be able to obtain tax-related services from their outside auditors because they often lack the internal expertise to handle sophisticated tax issues.

We are concerned, however, that certain statements in the Release, and the Four Principles themselves, may suggest that certain tax services adversely affect independence. The Release suggests that the Commission's decision to exclude tax services from the list of prohibited services was based only on its evaluation of the traditional preparation of tax returns. The advocacy and auditing your own work principles also cast doubt on the acceptability of certain types of tax services. In contrast to one of the Four Principles, tax ethics standards require service providers to play an advocacy role. However, this duty is counterbalanced in the tax standards by a duty to the tax system itself. These standards and established enforcement mechanisms provide the needed protection for shareholders.

To avoid potential confusion, we recommend that the Commission revise the Rule Proposal to specifically permit the provision of tax-related services. Without this clarification, clients may believe that they must retain a new tax service provider, increasing their costs of necessary services, to the detriment of shareholders, and precluding them from receiving the services from the best informed practitioner.

Now I would like to turn to the recently adopted audit committee rules. These initiatives have great potential to strengthen this critical element of the financial reporting system. We commend the Commission for its leadership role in this process. Because of its enhanced role, the audit committee is in the best position to consider all of the facts relating to possible independence issues, including the existence of appropriate safeguards. The Commission should allow these multi-faceted initiatives to realize their full impact before adopting rules relating to non-audit services. To do otherwise does not give appropriate recognition to the actions of the other participants in the financial reporting process and could be a disincentive to further actions.

Throughout BDO's history we have emphasized integrity, trust, professionalism and independence in our client relationships. These values are an integral part of our culture. Like the Commission, BDO is dedicated to serving the public interest. In that regard, we are committed to working with all of the participants in the financial reporting process to strengthen the ethical fabric of our markets.

Thank you for giving us the opportunity to present our views.