August 20, 1998
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-6009
Re: File No. S7-16-98, Proposed Amendment To Rule 102(e) of the Commission's Rules of Practice
Dear Mr. Katz:
KPMG Peat Marwick LLP ("KPMG") hereby responds to the Commission's request for public comment on a proposed amendment to Rule 102(e) of the Commission's Rules of Practice. Release No. 33-7546 (June 12, 1998)(hereinafter "Proposed Rule"). KPMG is a national accounting and consulting firm with over 1,800 partners and 16,000 client service personnel, which includes over 5,100 CPAs.
INTRODUCTION AND SUMMARY
KPMG welcomes the Commission's efforts to create greater certainty and consistency in the application of Rule 102(e) to accountants who practice before the Commission. Indeed, we believe the need to eliminate the current uncertainty and ambiguity with respect to application of Rule 102(e) is critical. The Commission's ability to suspend an accountant from practice before the agency literally gives the Commission the power to deprive public accountants of their entire livelihood. Such enormous power plainly should be wielded only where the Commission provides practitioners with clear notice of the standards to which they are being held.
In an effort to clarify the standards, on May 7, 1998, the American Institute of Certified Public Accountants ("AICPA") petitioned the Commission to initiate rulemaking proceedings to amend Rule 102(e) by defining "improper professional conduct" as conduct demonstrating that a professional is substantially unfit to practice before the Commission. Under the AICPA's proposed definition, a professional's substantial unfitness to practice before the Commission would be established by a demonstration that the professional (i) knowingly violated applicable professional standards, (ii) consciously and deliberately disregarded applicable professional standards, or (iii) engaged in a course or pattern of conduct showing repeated failure to conform to applicable professional standards, but only where it is established that such conduct poses a threat to the integrity of the Commission's processes or the financial reporting system. A single act of negligence, such as an error in judgment, would not meet this standard.
Although the Commission's Proposed Rule contains several provisions similar to those proposed by the AICPA, the Commission's proposal differs in at least one critical respect: it contains language that could be interpreted to permit the Commission to sanction as "improper professional conduct" isolated acts of negligence by an accountant. As described in greater detail below, KPMG believes that the negligence standard proposed by the Commission is unlawful and contrary to the public interest for several reasons.
First, the Commission lacks authority to sanction professionals for single acts of simple negligence. The federal securities laws neither expressly nor implicitly authorize such sanctions and the regulation of negligent conduct goes well beyond the purposes of Rule 102(e).
Second, the Commission's proposed negligence standard is arbitrary and capricious. The Proposed Rule would, without justification, hold the accounting profession to a more stringent standard of care than the standards applicable to other professionals who practice before the Commission and directors and officers of registrants charged with violations of the securities laws. Moreover, the proposed negligence standard suffers from the same vagueness defect for which the courts have previously condemned the current version of Rule 102(e).
Third, even assuming the Commission had the authority to do so, application of a negligence standard under Rule 102(e) conflicts with sound public policy. In carrying out their responsibilities, accountants must make innumerable judgment calls, navigating through complex statutory and regulatory requirements, as well as professional standards. In order to assure that accountants exercise their best independent judgments, the Commission's Rules of Practice must not only be clear, but should also reflect the complicated and difficult nature of the professional judgments accountants make during the course of their work. KPMG believes that the proposed negligence standard conflicts with the public interest in fostering the exercise of independent accounting judgment, free from fear that any individual judgment could be second-guessed -- with the benefit of 20/20 hindsight -- by the Commission as part of a Rule 102(e) proceeding.
I. THE COMMISSION LACKS AUTHORITY TO SANCTION ISOLATED ACTS OF NEGLIGENCE.
The Commission's proposal to include negligent actions within its definition of "improper professional conduct" is unlawful because Congress has not authorized the Commission to sanction accountants for mere negligent conduct. Indeed, nothing in either the Securities Exchange Act of 1934 or the Securities Act of 1933 "expressly authorizes the Commission to discipline accountants." Checkosky v. S.E.C., 23 F.3d 452, 468 (D.C. Cir. 1994)(Randolph, J.)("Checkosky I"). Although the Commission has authority, under its general rulemaking power, to promulgate rules that protect the integrity of its processes, the proposed negligence standard for Rule 102(e) goes well beyond that limited purpose. Instead, a negligence standard penalizes accountants for past conduct and, in effect, may operate to retroactively set substantive rules of conduct for professionals, a function that is outside the Commission's authority. In addition, a negligence standard conflicts with many of the substantive statutory provisions that the Commission administers requiring scienter before liability is imposed.
The stated purpose of Rule 102(e) is limited: it is to protect the integrity of the Commission's processes. As the Commission itself has repeatedly recognized, Rule 102(e)'s proper function is as a "remedial tool" to ensure that accountants practicing before the Commission do not "pose a future threat to the Commission's processes." Rule 102(e) has never been intended as a mechanism for the punishment of past conduct. See ABA, Report of the Task Force on Rule 102(e) Proceedings: Rule 102(e) Sanctions Against Accountants, 52 Bus. Law. 965, 971-73 & n.22. Instead, it is intended for use as a part of a prospective inquiry to assess whether a "professional's prior activities demonstrate he or she poses a current threat to [the Commission's processes]." Id.
This limited purpose of Rule 102(e) is also evident from the plain text of the Rule itself, which provides that the Commission may sanction a person who is found:
(i) Not to possess the requisite qualifications to represent others; or
(ii) To be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or
(iii) To have willfully violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations thereunder.
The proper meaning of the term "improper professional conduct" is best understood and necessarily limited by the meaning of the other terms in the Rule. The term "improper" must be construed consistently with the references in subsections (i) and (iii) to a lack of the "requisite qualifications" and to "willful violat[ions]." Those terms necessarily apply only to a person who is unfit to practice and who possesses scienter and bad faith, and who thereby poses a future threat to the integrity of the Commission's processes. Accordingly, the meaning of the term "improper" must also be limited in scope to actors who possess scienter. Likewise, subsection (ii) contains provisions permitting sanctions against persons "lacking in character or integrity" or who are "unethical" -- again all terms clearly applicable only to persons who are unfit to practice and would threaten the Commission's processes. The term "improper professional conduct" must be read in light of and consistent with those terms. See In re Potts, 1997 WL 690519, SEC File No. 3-7998 (Sept. 24, 1997) (Wallman, dissenting)(part (ii) "uses three terms that clearly include some sense that the person is a bad actor; it would be odd to interpret the fourth," improper professional conduct, "to embody a different standard"), aff'd, Potts v. SEC, ___ F.3d ___, 1998 WL 436864 (8th Cir. Aug. 4, 1998). Because Rule 102(e) is replete with terms that allow sanctions only for a lack of "character" or "integrity," for "unethical" conduct, and for "willful violat[ions]" of the law, the term "improper" must be limited in scope to conduct by a bad actor that imposes a future threat to the Commission's processes.
Although the Rule's text and the Commission's own statements reveal its limited purposes, those limits are also compelled by the limits Congress placed on the Commission's statutory authority. Congress has granted the Commission no express authority to regulate accountants, Checkosky I, 23 F.3d at 468 (Randolph, J.), but merely general rulemaking power, e.g., 15 U.S.C. § 78w(a)(1), which permits the Commission to promulgate only those rules that are "necessary or appropriate" to implement the provisions of the laws it administers. Id. Although some courts of appeals have cited the Commission's general rulemaking authority as a basis for the Commission to promulgate Rule 102(e), Rule 102(e) is only "necessary or appropriate" where it is intended to "preserve the integrity of [the Commission's] own processes" and to "determine whether a person's professional qualifications, including his character and integrity, are such that he is fit to appear and practice before the Commission." The Commission may not reach mere negligent behavior under its statutory authority, because "[i]f a person commits a merely negligent act, it will not necessarily raise any threat to these processes." Potts, 1997 WL 690519 at *16 (Wallman dissenting) ("Merely negligent actions by a professional years ago do not present any realistic threat to the Commission's future processes today.").
It follows from the Commission's implied and limited statutory authority to sanction accountants that the Commission is not authorized to apply the rule in a manner going beyond its remedial purposes and to utilize the Rule to punish accountants for past acts. Indeed, the 1934 Act grants to federal district courts exclusive jurisdiction over such violations. 15 U.S.C. § 78aa; see Touche Ross, 609 F.2d at 579; Checkosky I, 23 F.3d at 456 (Silberman, J.). Accordingly, the Commission would "usurp the jurisdiction of the federal courts" if it used Rule 102(e) "as an additional weapon in its enforcement arsenal." See Touche Ross 609 F.2d at 579; Checkosky I, 23 F.3d at 456 (recognizing that Commission cannot use Rule 102(e) "to augment its enforcement arsenal"). Moreover, if used to punish accountants for their past misconduct, Rule 102(e) also would effectively set professional standards for accountants, a function that has been traditionally regulated by states and professional organizations such as the AICPA. Nothing in the law permits the Commission to invade these traditional areas of state concern. In sum, the Commission's limited statutory authority over accountants prevents it from disciplining them, except to the extent necessary to ensure that accountants prospectively do not pose a threat to the integrity of the Commission's processes.
The proposed negligence standard exceeds the Commission's authority by "extend[ing] beyond th[e] realm of protective discipline into general regulatory authority over a professional's work." See Checkosky I, 23 F.3d at 579 (Silberman, J.). Although a professional's prior activities may be relevant to assessing whether the professional's continued practice poses a future threat to the Commission's processes, the Commission's negligence standard -- particularly insofar as it applies to single and isolated acts of simple negligence -- does not properly focus on a prospective inquiry into future harm. An isolated negligent act that has usually occurred years earlier generally would not, without more, indicate that an accountant poses a current threat to the Commission's processes -- the stated purpose of Rule 102(e). The imposition of sanctions in such a case can only serve to punish the professional for his or her past act, and does nothing to address the remedial purpose of the Rule.
The Proposed Rule also goes beyond the Commission's authority and stated intent by allowing sanctions for conduct that does not in fact harm the Commission's processes. Section (B)(1) purports to reach violations of professional standards that present a "substantial risk" of making a document materially misleading, which apparently would allow the Commission to impose sanctions even when no misstatement has occurred. Under such circumstances, neither the integrity of the Commission's processes nor securities markets would be impaired. The Commission's proposal to sanction such conduct thus plainly exceeds its jurisdiction. No statute currently provides the Commission with the power to exercise pre-violation, preventative jurisdiction.
Finally, the Commission's proposed negligence standard conflicts with many of the substantive laws that the Commission administers. Although the Commission has authority to make rules that are "necessary or appropriate" to administering the securities laws, "[t]here are limits" to the Commission's authority that are "derived from the substantive provisions of the statute." Checkosky I, 23 F.3d at 469 (Randolph, J.). Because "much of the substantive law enforced by the Commission requires a showing of scienter" before liability can be imposed, the use of a negligence standard to penalize professionals would amount to a "back-door expansion of its regulatory powers." Checkosky v. SEC, 139 F.3d 221, 225 (D.C. Cir. 1998)("Checkosky II").
II. THE COMMISSION'S PROPOSED NEGLIGENCE STANDARD IS ARBITRARY AND CAPRICIOUS.
The Commission's proposed negligence standard is arbitrary and capricious for at least two independent reasons. First, such a standard would, without justification, single out accountants for a more stringent standard of care than the standards applicable to other professionals or to officers and directors charged with violations of the securities laws. Second, the negligence standard proposed by the Commission suffers from the same lack of clarity that the D.C. Circuit condemned in Checkosky II less than five months ago.
"One of the abiding principles of administrative law is that when agencies refuse to treat like cases alike, they act arbitrarily, in violation of the Administrative Procedure Act, 5 U.S.C. § 706(2)(A)." Checkosky I, 23 F.3d at 483 (Randolph, J.). If an agency believes that factual variations should lead to variations in the interpretation and application of its rules, it must do more than simply point out differences between cases; it must provide a reasoned explanation to show why such differences should matter. Id. at 483-84. The Commission's proposed standard violates these principles by holding accountants to a higher standard of care than attorneys and even the registrant's directors and officers, who have primary responsibility for financial reporting.
In 1981, in a decision described by the D.C. Circuit as "the Commission's most comprehensive discussion of the history, purpose and operation of Rule 2(e)," Checkosky I, 23 F.3d at 484, the Commission found that attorneys would not be found liable for improper professional conduct absent a finding of "wrongful intent." In re Carter, [1981 Transfer Binder] Fed.Sec.L.Rep. (CCH) ¶ 82,847 (Feb. 28, 1991). In Carter, Messrs. Carter and Johnson, outside counsel for the National Telephone Company, prepared registration statements, proxy materials, an annual report, other Commission filings, press releases and various communications with the company's shareholders. Carter, ¶ 82,847 at 84,152-53. Because some of this material was false and misleading, National violated the securities laws.
The Commission held that Carter and Johnson could not be sanctioned under Rule 2(e) for willfully aiding and abetting National's violations, unless they "were aware or knew that their role was part of an activity that was improper or illegal." Id. at 84,167. In explaining why, the Commission said -- in language broad enough to cover accountants -- that "wrongful intent"
provides the basis for distinguishing between those professionals who may be appropriately considered as subjects of professional discipline and those who, acting in good faith, have merely made errors of judgment or have been careless.
Id. The Commission reasoned that if a securities lawyer is to exercise his "best independent judgment . . . he must have the freedom to make innocent -- or even, in certain cases, careless -- mistakes without fear of [losing] the ability to practice before the Commission." Id. Otherwise, lawyers "motivated by fears for their personal liability will not be consulted on difficult issues." Id. The Commission added that "[s]o long as a lawyer is acting in good faith and exerting reasonable efforts to prevent violations of the law . . . his professional obligations have been met." Id. at 84,172-73.
In publishing its Proposed Rule, the Commission has made no attempt to explain why accountants should be held to a more stringent standard under Rule 102(e) than attorneys. Nor has the Commission explained why the good faith of an attorney should be sufficient to avoid liability under Rule 102(e), while an accountant's good faith actions "are more appropriately considered when determining what sanction would be appropriate." Proposed Rule at 13.
Any attempt to distinguish the roles played by attorneys and accountants in the administration of the securities laws "would be difficult to justify," Checkosky I, 23 F.3d at 486, and, indeed, would again conflict with the Commission's own prior statements. In Carter, the Commission recognized the "important role which professionals, particularly attorneys and accountants, play in assuring adherence to the federal securities laws . . . ." Carter, ¶ 82,847 at 84,148 (quoting In re Keating, Muething & Klekamp, 17 S.E.C. Docket 1149, 1165-66 (July 2, 1979)(concurring opinion of Chairman Williams)). Former Chairman Williams went on to say that "both professional groups have an equally vital role to play under the scheme of the federal securities laws. . . ." In re Keating, 17 S.E.C. Docket at 1165 n.10 (concurring opinion of Chairman Williams). The Commission has also stated that "the tasks of enforcing the securities laws rests in overwhelming measure on the bar's shoulders," because it is lawyers who prepare "prospectuses, proxy statements, opinions of counsel, and other documents that [the Commission], [its] staff, the financial community, and the investing public must take on faith." In re Emanuel Fields, 45 S.E.C. 262, 266 n. 20 (1973), aff'd without opinion, 495 F.2d 1075 (D.C. Cir. 1974). See also Touche, Ross, 609 F.2d at 580-81 (because of limited resources, "the Commission necessarily must rely heavily on both the accounting and legal professions to perform their tasks diligently and responsibly").
In sum, the Commission has not explained, and cannot explain, "why the varying roles of accountants and lawyers translate into varying standards under a rule that makes the same language applicable to both." Checkosky I, 23 F.3d at 487.
Similarly, the proposed negligence standard is arbitrary and capricious because it would subject accountants to a stricter standard of care than that applicable to officers and directors of registrants charged with disclosure violations or a breach of fiduciary duties. Under section 20(e) of the Securities Act of 1933 and section 21(d)(2) of the Exchange Act of 1934, 15 U.S.C. §§ 77t(e), 78u(d)(2), a federal court may suspend or bar a defendant from serving as an officer or director of a public company at the Commission's request, where the court finds that (i) the defendant has violated either Securities Act section 17(a)(1) or Exchange Act section 10(b), and (ii) the defendant's "conduct demonstrates substantial unfitness to serve as an officer or director." Id. Congress granted the Commission explicit authority to seek court orders suspending or barring individuals from serving as officers and directors of public companies in the Securities Enforcement Remedies and Penny Stock Reform Act of 1990. Pub. L. No. 101-429, § 101, 104 Stat. 931 (1990)(codified at 15 U.S.C. § 77t).
In testifying in support of the suspension or bar authority, Commission Chairman Breeden told Congress that the Commission would seek the remedy "only in those cases . . . that involve egregious fraudulent conduct" -- a statement that has been borne out in the cases brought to date. It simply is beyond rational explanation for the Commission to apply an "egregious fraud" standard to officers and directors -- who have the primary responsibility for financial reporting -- while applying a mere negligence standard to the conduct of independent outside accountants under Rule 102(e).
Another bedrock principle of administrative law is that an agency must give proper notice of the standard of care applicable to a party's conduct before the agency may sanction that conduct. See, e.g., Checkosky II, 139 F.3d at 224. The recent decision in Checkosky II makes clear that the Commission's newly proposed negligence standard violates this principle.
In Checkosky II, the Court of Appeals held that a standard of care permitting Rule 102(e) sanctions of negligent conduct "under certain circumstances" did not provide professionals with adequate notice:
[T]he [Commission's] 1997 opinion failed to adopt an intelligible negligence standard. Instead, as we have already noted, it said only, "We believe that Rule 2(e)(1)(ii) does not mandate a particular mental state and that negligent actions by a professional may, under certain circumstances, constitute improper professional conduct." [citation omitted] Elementary administrative law norms of fair notice and reasoned decisionmaking demand that the Commission define those circumstances with some degree of specificity. It has not done so.
139 F.3d at 224. The Court concluded that "the Commission's statements come close to a self-proclaimed license to charge and prove improper professional conduct whenever it pleases, constrained only by its own discretion (combined, perhaps, with the standards of GAAS and GAAP)." Id. at 225.
In attempting to address the D.C. Circuit's criticism, section (B)(1) of the Commission's Proposed Rule defines "negligent conduct" as:
An unreasonable violation of applicable professional standards that presents a substantial risk, which is either known or should have been known, of making a document prepared pursuant to the federal securities laws materially misleading.
Under section (B)(1) of the Proposed Rule, in order for conduct to be deemed "negligent," two conditions must be met. Nonetheless, the two conditions are so broad that this two-pronged test continues to give the Commission license to sanction as "improper professional conduct" any negligence involving an alleged violation of GAAS or GAAP.
First, section (B)(1) requires "an unreasonable violation of applicable professional standards." However, by definition, professional negligence always involves an unreasonable failure to adhere to professional standards. Second, the violation must "present a substantial risk . . . of making a document prepared pursuant to the federal securities laws materially misleading." However, as the Commission is well aware, independent auditors' reports for registrants must contain a representation that a financial statement audit has been conducted "in accordance with generally accepted auditing standards." The Commission has consistently held that, where this representation is untrue, a registration document containing such a representation is considered to be "materially misleading." In other words, under the Commission's precedent, any violation of GAAS will satisfy the second condition of section (B)(1).
In sum, the Commission's proposed negligence standard gives accountants no more notice of what constitutes "improper professional conduct" than the "negligence under certain circumstances" formulation rejected just a few months ago by the D.C. Circuit in Checkosky II. And, as before, the Commission's proposed standard affords it "close to a self-proclaimed license to charge and prove improper professional conduct whenever it pleases." 139 F.3d at 225. Accordingly, the proposal violates "elementary administrative law norms of fair notice and reasoned decisionmaking." Id. at 224.
III. THE COMMISSION'S PROPOSED NEGLIGENCE STANDARD UNDERMINES SOUND PUBLIC POLICY
Finally, even if the Commission had authority to apply a negligence standard under Rule 102(e), such a standard would undermine the healthy functioning of securities markets that the Commission was created to protect. See generally Proposed Rule at 25-28 (Separate Statement of Commissioner Johnson). Our system of securities regulation is founded on disclosure. The investing public as well as the Commission and its staff rely heavily on professionals, particularly attorneys and accountants, to ensure adherence to federal securities laws. Carter, ¶ 82,847 at 84,148; In re Keating, 17 S.E.C. Docket at 1165-66 (concurring opinion of Chairman Williams).
Accountants, like other professionals, in carrying out their professional responsibilities, must make innumerable judgment calls, working through complicated statutory and regulatory requirements as well as professional standards. "These determinations demand the application of independent professional judgment and often involve matters of first impression." Proposed Rule at 26 (Separate Statement of Commissioner Johnson). As the Commission recognized in Carter, ¶ 82,847 at 84,167, if a securities lawyer is to exercise his "best independent judgment . . . he must have the freedom to make innocent -- or even in certain cases, careless -- mistakes without fear of [losing] the ability to practice before the Commission." Otherwise, lawyers "motivated by fears for their personal liability will not be consulted on difficult issues." Id. These principles apply with equal force to accountants and should move the Commission to refrain from adopting a standard that would sanction accountants for even isolated acts of negligence.
Finally, the Commission need not fear that such a course of action will leave accountant negligence unremedied. A variety of other public entities (principally state licensing authorities and professional societies) and the AICPA closely regulate both the accounting profession and the professionalism of licensed accountants. Thus, state regulatory bodies and membership organizations require accountants to participate in, and meet minimum requirements for, continuing professional education in order to retain their licenses; member firms of the AICPA's SEC Practice Section are required to submit to periodic peer reviews designed to test compliance with quality control policies and practices; the AICPA Ethics Division and Quality Control Inquiry Committee investigate claims and/or complaints questioning auditor competence; and, finally, the pervasive threat of private civil litigation motivates accounting firms to monitor and improve the professional competence of their members and employees has resulted in many cases in the adoption of rigorous self-review practices. Duplicative regulation of the profession by the Commission is thus both unauthorized and unnecessary.
IV. THE COMMISSION SHOULD CLARIFY ITS PROPOSED STANDARDS REGARDING RECKLESS VIOLATIONS AND REPEATED VIOLATIONS.
Section (A)(1) of the defines "improper professional conduct" to include "a reckless violation of applicable professional standards." The Commission has inquired as to what definition of "reckless" should be used for the purpose of Rule 102(e). Proposed Rule at 14-15. KPMG believes that the Commission should define "reckless" as "conscious and deliberate disregard" of applicable professional standards.
Under section (A)(1), a violation of Rule 102(e) can occur only if scienter is present. As the D.C. Circuit has recognized, however, it is appropriate to "legitimate[ly] substitut[e]" a recklessness standard as "a proxy for . . . a scienter requirement," given the difficulty of proving an actor's subjective intent. Saba v. Compagnie Nationale Air France, 78 F.3d 664, 667-68 (D.C. Cir. 1996). Otherwise, "it might be all too easy for the wrongdoer to deliberately blind himself to the consequences of his tortious actions." Id. at 668. However, courts have also made clear that, in order to equate recklessness with scienter, "[t]he kind of recklessness required" is not "merely a heightened form of ordinary negligence: it is an extreme departure from the standards of ordinary care which presents a danger of misleading [others] that is either known to the defendant or is so obvious that the actor must have been aware of it." SEC v. Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992) (quotation omitted). Defining reckless as a conscious and deliberate disregard of professional standards would make clear that violations under section (A)(1) must include proof that "the defendant was subjectively aware of the consequences of his act -- not necessarily that it would cause the exact injury, but at least that it was certainly likely to cause an injury." Saba, 78 F.3d at 668.
Section (B)(2) of the Proposed Rule defines "negligent conduct" to include "Repeated, unreasonable violations of applicable professional standards that demonstrate that the accountant lacks competence." The Commission states that, under its proposed rule, it could consider even "two . . . violations" within a single audit to constitute improper professional conduct, even if such violations are "similar." Proposed Rule at 12. Such a definition is vague, overly broad, and is not focussed on the threat to the Commission's future processes.
As described above, the Commission lacks authority to sanction professional misconduct that does not threaten the integrity of the Commission's processes. However, the proposal to sanction an accountant for repeated negligence even where the "repeated" errors reflect the application of a single judgment (or related judgments) on related issues occurring in a single audit (or are the same judgments arising in successive audits) is broader than necessary to protect the Commission's future processes. As Commissioner Wallman has stated, "the Commission must be able to protect itself from the clear incompetence of incorrigibly inept professionals . . . . Consequently, a pattern of negligence may rise to the level where a professional should not be permitted to practice before us." Potts, 1997 WL 690519 at *14 (Wallman dissenting) (emphasis added). However, the pattern of negligence must "evidence unfitness to practice before the Commission" such that "the professional will likely engage in such wrongful behavior in the future (e.g., a pattern of acts indicating that the professional lacks the knowledge, competence or moral fiber to perform the responsibilities and duties expected of such a professional." Id. KPMG submits that a judgment, even one negligently made, reached by the same accountant in successive audits for the same client, based on substantially similar facts, is better viewed as a single negligent act and should not be adequate to support a finding that the accountant lacks competence and poses a threat to the Commission's processes. To do otherwise would inequitably penalize for the inadvertent repetition of a mistake -- in effect a "piling on" of offenses for a single thought process. In order to stay within its authority, the Commission should clarify its Proposed Rule to make clear (as does the AICPA's proposed rule) that even repeated violations are not subject to sanction under Rule 102(e) unless they demonstrate that a professional is substantially unfit to practice before the Commission and constitutes a current threat to the integrity of the Commission's processes.
KPMG welcomes the Commission's decision to seek public input prior to revising its Rules of Practice for accountants who practice before the Commission. Fundamental fairness and due process considerations require that the Commission to provide clear notice as to the standard of care it will apply in disciplinary proceedings and that the standard adopted not exceed the powers granted by Congress to the Commission.
KPMG believes that the Proposed Rule, to the extent it purports to discipline accountants for an innocent and isolated error of judgment, exceeds the Commission's statutory authority because such acts do not threaten the future integrity of the Commission's processes. The Commission's proposed negligence standard also treats accountants in a discriminatory manner by holding them to a standard of conduct higher than that to which other professionals and corporate officers are held, and suffers from the same vagueness defect as the current Rule 102(e) standard rejected by the D.C. Circuit earlier this year. Finally, a negligence standard would likely impair the important role accountants play in the financial reporting system, in effect influencing independent accountants to temper their objective judgments to avoid the risk that those judgments might be challenged later on in a disciplinary proceeding. Such a result, we submit, benefits neither investors, the profession, nor the Commission.
KPMG believes that a definition of "improper professional conduct" like the one contained in the AICPA's rulemaking petition of May 7, 1998, would be more consistent with the Commission's limited statutory authority and would avoid subjecting the profession to ambiguous rules and second guessing of difficult professional judgments. At the same time, a definition of this type would better address the Commission's legitimate interests in safeguarding its future processes and protecting the investing public.
/s/ Robert K. Elliott
Robert K. Elliott
cc: Honorable Arthur Levitt, Jr. Chairman
Honorable Norman Johnson Commissioner
Honorable Isaac C. Hunt, Jr. Commissioner
Honorable Laura S. Unger Commissioner
Honorable Paul R. Carey Commissioner