Subject: File No. S7-16-98 Comments

Date:    8/19/98 9:26 AM
     
     
August 13, 1998
     
     
Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC  20549-6009
     
     
COMMENT LETTER TO FILE REFERENCE S7-16-98
     
     
I have read  your proposed amendment to Rule 102(e) of the Commission's 
Rules of Practice, attempting to clarify the Commission's standard for 
determining when accountants engage in "improper professional conduct" 
under Rule 102(e) (1) (ii).  I concur with your comments on the 
importance of the rule and the important role played by accountants in 
the Commission's system of securities regulation and reporting processes 
under the federal securities laws.  The rule was originally adopted to 
"ensure that those professionals, on whom the commission relies heavily 
in the performance of its statutory duties, perform their tasks 
diligently and with a reasonable degree of competence."  The March 1998 
Checkosky decision by the United States Court of Appeals for the D. C. 
Circuit  held that the Commission had not clearly articulated the 
"improper professional conduct" standard or the rationale for that 
standard.
     
I fully concur with your proposal that disciplinary action under Rule 
102(e) is appropriate against a professional who commits an intentional 
or knowing violation of the professional standards and regulations. 
This is reckless conduct, in violation of our professional Code of 
Ethics and should be subject to sanction.
     
However, the proposed amendment is worded such that continuing diverse 
interpretations could be made of the Rule by the Commission which could 
lead to an expansion of regulatory authority beyond what was intended by 
law.  The definition of negligent conduct in section B (1) is so broad 
that it would include a single act of simple negligence.  This 
definition oversteps the authority of the State Boards of Public 
Accountancy and the Professional Organizations to discipline their 
members.
     
As Commissioner Johnson aptly noted, "A professional often must make 
difficult decisions, navigating through complex statutory and regulatory 
requirements, and in the case of accountants, complying with GAAS and 
applying GAAP.  These determinations require the application of 
independent professional judgment."  Accountants apply the requirements 
to the facts and circumstances of many unique and complicated 
transactions and disclosures.  The general public benefits from the 
exercise of the accountants best independent judgment.  The proposed 
amendment allows the Commission, with the benefit of hindsight, to 
disagree with any one of the multitude of judgments made by the 
accountant in the preparation of financial statements.  The adoption of 
the proposed rule could lead to sanction of accountants simply on the 
basis of disagreement of professional judgment under the "known or 
should have been known" standard in the release.  Accountants could very 
well be limited in exercising judgment freely in the interpretation and 
application of the professional standards, to the detriment of public 
financial reporting.  
     
Further, the amendment allows for sanctions against accountants for 
single acts of simple negligence.  A single act is not a predictor of an 
established behavior pattern, and cannot be a threat to the Commission's 
processes.
     
The proposed rule could also lead to enforcement proceedings against 
individuals when no material misstatement of financial disclosure 
exists.  The proposed rule requires only the presence of "substantial 
risk" of misstatement, not actual misstatement.  I fully object to an 
enforcement proceeding against anyone where no true violation exists.
     
For these reasons, I believe that the proposed Rule 102(e) negligence 
standard is not in the best interest of public financial reporting and 
disclosure.  It would limit the role of the accountant in presenting 
fairly the results of operations and financial position of the 
registrant.  But most importantly, it would subject accountants to 
retroactive sanctions based solely on honest disagreements with 
Commission.
     
Instead, I would encourage you to adopt a standard that would only 
sanction accountants in the event of a knowing deliberate violation of 
professional standards or regulations, or a pattern of misconduct that 
could be shown to place the Commissions processes or financial reporting 
systems at risk.
     
Sincerely,
     
Frank H. Brod, CPA
2704 Walden Woods Court
Midland, Michigan  48640