9100 Babcock Boulevard Pittsburgh, PA 15237
Phone: (412) 367-6640 Fax: (412) 367-6994
September 5, 2000
Mr. Jonathan G. Katz, Secretary
Securities & Exchange Commission
450 Fifth Street, NW
Washington, DC 20459
Summary of Intended Testimony in Connection with Request to Testify
Comment File No. S7-13-00
Dear Mr. Katz:
I am a recently retired audit partner from one of the "big 5" CP A firms having had 35+ years of experience in auditing and accounting.
As noted in my original request to testify (received by you on August 24, 2000), I believe from
reading available material and transcripts of testimony from the July 26, 2000 hearing before the commission, that there are a couple of areas not addressed which should be considered before
action by the commission-and-at least one area which will have an unintended and negative impact on individuals coming from auditing firms that needs to be considered by the commission.
Enclosed are three copies of a summary of my intended testimony with respect to the matter under consideration.
As noted in my previous letter, I request to testify at the September 20, 2000 meeting in
Washington, DC, (preferably in the AM, but can do later in the day). My comments will take less than 10 minutes.
Please respond to the above address.
Very truly yours,
Joseph F. Long
Securities and Exchange Commission
Outline of proposed comments at public hearings regarding auditor independence rule
Joseph F. Long
Some considerations when addressing auditor independence and audit firm consulting businesses from someone fresh from the audit trenches.
- Much said about big consulting fees impairing auditor independence-but-what about the real world impact of big audit fees impairing auditor independence.
- Unpopular accounting answers to big fee clients.
- Stretching of permitted accounting rules to the limit-big fee audit clients.
The real (and subtle) impact of requiring audit personnel to sell consulting services to
- The need to sell consulting by audit personnel-part of personal goals required by employer firm; the need to meet these goals; the risk of not meeting the goals.
- Is independence additionally burdened by the need to have a friendly client
relationship in order to sell consulting? ..
- Are independence issues even higher risk in situations where the client pushes accounting practices to the limits, yet the auditor ~ sell consulting.
- A possible unintended impact of SEC proposal on people leaving public accounting
Audit firm position that ownership of related consulting firm stock by a retired partner who is on the board of directors of an audit client would cause independence to be impaired.
Consulting firm stock received by retired partner in part to settle pension liabilities
(partner had no choice of other investments)-partner otherwise "cashed out" of former firm-partner only permitted to sell stock over five year period or would sell all immediately.
- What happens if other (long retired) partners or (spouses) buy consulting firm stock on open market while on board of directors of audit client-also a problem? How would the firm ever control?
- What happens if any individual (not just a retired partner) on the board of director~ of an audit client buys consulting firm stock? Does it really matter where the individual retired from, or only that they hold stock in the consulting firm?
- Registrants deprived of ability/need for "financially literate" board members who understand SAB#99 materiality issues, etc. further strengthens reporting processes for securities market.
- Registrants may opt to terminate otherwise good audit relationships to get desirable board members.
- Retired (and loyal) former partners may quietly hope for auditor change to occur.
- Retired partner deprived of meaningful contribution to good clients; helping reporting processes for securities market, and ability to earn significant post-retirement income.
- Are rabbi trusts or "put" agreements with respect to consulting firm stock a better solution? In addition, retired partner could recuse self from matters involving awarding consulting assignments to prior firm.
- No one wins-several worthy entities/people lose-area really needs addressed as part of the evaluation of independence issues arising from audit firm's involvement in consulting. Audit firms may be reluctant to make an issue on this matter with SEC. The group of people and audit clients impacted will grow over time.