August 19, 1998
Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 5th Street, NW
Washington, DC 20549-6009
RE: File No. S7-16-98
Dear Mr. Katz:
I am writing on behalf of the Public Company Practice Committee of the Colorado Society of CPAs. The Committee consists of nine CPA's in public practice and seven CPA's from industry. These individuals represent firms and companies that are primarily small to mid-size. Each member of the Committee has extensive experience in dealing with SEC reporting companies from a wide variety of perspectives, including partners and managers in public accounting firms; several financial executives and an audit committee member for public companies; an attorney who specializes in securities law; a continuing education provider devoted to SEC topics; and a member of the Colorado State Board of Accountancy. Our members represent a good cross section of CPAs practicing in the public and private arenas in the United States. To a very significant extent, our livelihoods depend on maintaining the integrity of the SECs financial reporting processes. Accordingly, our members share the common interest of promoting policies and procedures that ultimately serve to protect the investing public from untrustworthy or grossly incompetent practitioners.
The Committee met on August 12th and we discussed the Proposed Amendment to define "Improper Professional Conduct" as set forth in Rule 102(e) of the SECs Rules of Practice. After considerable discussion, our members expressed strong opposition to the proposed amendment.
We also reviewed the AICPAs Position on the Proposed Amendment and we hereby express our unanimous support of the AICPAs comments. Specifically, the Committee would like to emphasize the following points related to the Proposed Amendment:
¬ We do not believe a single act of simple negligence should ever constitute "improper professional conduct" for purposes of Rule 102(e). Rule 102(e) sanctions against accountants for a single instance of simple negligence could eliminate many of the more skilled practitioners rather than weeding out the truly reckless, knowing and repetitious violators. A lower, broader standard based on the single instance doctrine would contribute to a view of arbitrariness on the part of the SEC in administering enforcement actions and sanctions, the opposite effect of what the SEC is trying to accomplish. In addition, such a standard could promote the choice of "easy" and not necessarily the most egregious cases by enforcement regulators and, thereby, misdirect and waste the SECs limited resources. When a single act of simple negligence is involved we believe the responsibility for the discipline of accountants should continue to rest primarily with state boards of accountancy and professional organizations.
¬ Accountants should not be subject to a more stringent standard of care than other professionals who practice before the Commission. Likewise, auditors should not be subject to discipline under a far broader standard than management, which has the primary responsibility for financial reporting.
¬ Accountants who are officers and directors of SEC Registrants should not be subject to a lower threshold of discipline than the requirements imposed by Congress for other officers and directors who violate the securities laws. The participation of certified public accountants in management and on the Boards of Directors of public companies has the unequivocal impact of improving the Commissions processes and the financial reporting system. If these individuals are subjected to unjustifiable disciplinary standards, the Commissions proposed rule would discourage participation by the individuals who are most valuable to the processes that the Commission is trying to improve.
¬ In order to institute an enforcement proceeding against a professional, the proposed rule only requires the presence of a "substantial risk" that a document might be materially misstated, even though a misstatement has not occurred. Our members expressed serious concerns with this standard considering that the underlying purpose for Rule 102(e) proceedings is protection of the integrity of the Commissions processes, rather than to engage in the substantive regulation of accountants who practice before the Commission.
The Colorado Society of CPAs Public Company Practice Committee appreciates the Commissions efforts to create greater certainty and consistency regarding the application of Rule 102(e). We appreciate the opportunity to comment on this important matter and would welcome the opportunity to discuss any issue mentioned in our response. Please do not hesitate to contact us.
Very truly yours,
James A. Doran
Public Company Practice Committee