September 25, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Dear Mr. Katz:
As a Member in a 26-year-old local CPA firm, I submit these comments on behalf of our 40 employees.
We wish to take this opportunity to offer our opinion regarding the proposed Securities Exchange Commission (SEC) regulation "Revision of the Commission's Auditor Independence Requirements; Proposed Rule, 65 Fed. 43, 148 (2000)," (the proposal). This opinion is offered prior to the close of the proposal comment period, which expires September 25, 2000.
Our opinion is offered with a willingness to assist and to communicate our concerns to you regarding the proposal. We firmly believe the proposal, as currently written, is unwarranted, not supported by facts, or requested by the financial and business community we both serve. Non-audit services offered by audit firms simply have not compromised auditor independence or audit failure. We offer and believe the following support our position concerning the proposal.
- Audit firms have an excellent history, awareness and attitude of maintaining, observing and adhering to the Independence Rules. Audit firms are well aware of the Independence Rules in regard to non-audit services offered by audit firms. The Independence Rules are the first and most understood rules of audit firms. The Independence Rules for audit firms are the first rules within the Code of Ethics and the first functional area referenced in the Quality Control Standards as promulgated by the AICPA. There cannot be any misunderstanding concerning the importance of the Independence Rules by audit firms or the public.
- We cannot see a problem concerning audit firms violating the Independence Rules as they relate to non-audit services. We are curious what facts and circumstances were used by the Commission to determine that the "Scope of Services" offered by audit firms has resulted in substandard engagements through financial and auditing standards violations, since even the SEC admits that there is no empirical evidence that non-audit services have compromised audit quality or auditor independence, or even 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. We do not believe there is factual support for the need for such a dramatic change relevant to the "Scope of Services" offered by audit firms.
- In the last 10 annual reports to Congress, the SEC has not mentioned any concerns regarding the "Scope of Services" offered by audit firms. Where has this concern originated?
- It appears to us that the SEC has ignored the conclusions of the SEC's Panel of Audit Effectiveness of the Public Oversight Board. This SEC appointed panel concluded, "both the profession and the quality of audits are fundamentally sound." The Panel did not find any evidence that the provision of non-audit services negatively impacted audit quality. In fact, quite the opposite - the Panel instead noted that "in numerous instances non-audit services contributed to a more effective audit."
- The proposal greatly restricts the ability of the public to benefit from the knowledge possessed by audit firms. The financial and business community will be forced to undertake procedures which are highly inefficient and costly in both time and expense to procure needed non-audit services from those that simply do not have the knowledge and understanding possessed by an audit firm. Public companies' freedom of choice in selecting outside professional services will be restricted. The SEC will be forcing public companies to constantly choose whether to hire a firm solely as its auditor or solely as a provider of these other services, when the audit firm may be the best provider for both.
- In that same regard, the proposal's broad restriction on non-audit services will in itself, undermine auditor independence by making audit firms too reliant and dependent on audit fees. This dependence by audit firms on audit fees would not serve the public interest.
- Although the proposal does clearly state that it "would not effect tax-related services" provided by audit firms to audit clients and references only compliance services provided by audit firms to audit clients, it would prohibit an audit firm from acting as an advocate for an audit client, providing expert service in administrative proceedings, and logically prohibit audit firms from representing audit clients before the Internal Revenue Service.
- The proposal would create a negative effect on the ability of audit firms to recruit and retain the best talent. Professionals would not be interested in or challenged to work with firms in which 25% - 40% of the current market would not open to them to practice. This prohibition concerning the ability of professionals to perform either audit or non-audit services within a firm would limit the attractiveness of firms. Simply put, the best will elect to enter a profession in which their ability to perform would not be limited.
- The proposal prohibits audit firms from entering into almost any joint venture or partnership with any entity which may offer non-audit services to the audit firm's audit client. In addition, this proposal also prohibits an audit firm from participating in beneficial economic activities and business relationships. These independent, legal and sound relationships would be prohibited because the entities participating would be treated as "affiliates of the audit firm."
- The proposal will place new independence requirements between audit firm members within regional alliances, associations and cooperative agreements with respect to the audit clients of each other.
- The impact to all audit firms, regardless of having SEC audit clients or not, will be dramatic. Other regulators will use the proposal, if adopted, as a model. This "model" may be used by state boards of accountancy, other federal regulators, (i.e., banking and ERISA areas of audit practice) and other regulators.
We believe the significance of this impact requires the SEC to reconsider the timing of the proposal because:
- The 75-day comment period is entirely too short to permit meaningful and timely public input. This short comment period does not permit collecting and analyzing the huge amount of data required, nor does it provide enough time to formulate meaningful and viable alternatives for regulating the "Scope of Services" offered by audit firms.
- Three years ago the SEC set up the Independence Standards Board (ISB). We believe the work of the ISB is being pre-empted by this proposal. The ISB, as originally charged by the SEC, was to develop new concepts and framework regarding auditor independence and related implementation.
- Recently, the ISB, NYSE, NASD, American Stock Exchange and the SEC have adopted new disclosure and audit committee requirements. This proposal and its timetable have not given enough time for those requirements to mature and work.
- The proposal's timetable has been presented in the last days of the current Presidential administration. The lateness within this administration, and the limit on public input, will not provide opportunity for input from Congress and the new administration.
In addition, we must question the authority of the SEC in regard to this "Scope of Services" rule. The authority cited by the SEC in the proposal pertains to the filing of public companies' financial statements that have been audited by independent audit firms. This authority does not provide for making rules that govern and regulate the audit profession itself. The proposed rules clearly concern the "appearance of independence." The proposal neglects to address any issues, facts or circumstances concerning the additional requirement concerning independence "fact." Since inception, the independence rules have been defined by an auditor's independence in regard to "appearance and fact." We question whether the SEC has statutory authority to impose restrictions because of possible "perceptions" about lack of independence.
In as much as this proposal is a fundamental change to one of the most basic and observed rules of the audit profession, we urge the Commission to defer its adoption to afford more time for input from the CPA profession, public entities, and other interested parties. And, as previously stated, we will be pleased to work with the Commission in this matter.
Thank you for your consideration.
DELLINGER & DEESE, PLLC
Tony C. Thompson, CPA