National Association of State Boards of Accountancy
David A. Costello, CPA
November 25, 2002
U. S. Securities and Exchange Commission
Re: File No. S7-39-02
The National Association of State Boards of Accountancy appreciates the opportunity to review and comment on the Securities and Exchange Commission's Proposed Rule: Improper Influence on Conduct of Audits. Many reforms have been included in the Sarbanes-Oxley Act of 2002 and we look forward to reviewing the rules the SEC develops in accordance with those changes. We submit for your consideration the following remarks, as recommended by the NASBA Litigation Response and Assistance Committee, keyed to the questions posed in the SEC's exposure document RIN 3235-AI67:
Should we amend the definition of "officer" in rule 3b-2 to include specific references to additional individuals and entities who may perform "corresponding functions"?
The definition of "officer" and "director" should continue to include person or persons who normally perform duties of an officer or director whether elected or "defacto." The definition should include persons who normally have the responsibility for governance of an entity (see proxy rules for appropriate language).
Should we define by rule the scope of "any other person acting under the direction" of an officer or director?
The prohibition should pertain to the individuals described in the SEC comments, as well as any entity whose operating, financial, or accounting policies can be controlled (as defined by generally accepted accounting principles (GAAP) for consolidation purposes) by any such officer or director or by two or more such officers or directors. If there is sufficient authority for the SEC to do so, the scope of the prohibition could also include officers, directors and agents of subsidiaries and affiliates. The issuer's internal auditors should be expressly referenced in the rules.
Should the types of conduct that might constitute actions to fraudulently influence an auditor be set forth in the rule?
If types of conduct are to be set forth, then the language should make it clear that the types specified are not all inclusive.
Should we define by rule the phrase "independent public or certified public accountant"?
Since a licensed individual may still use the title "CPA" while providing non-attest services without being independent, a rule differentiating "independent public or certified public accountant" would be helpful. It should also be reiterated that any such independent public or certified public accountant must be one who is "licensed by a state board of accountancy."
Is subparagraph (b)(2) of the proposed rule helpful or necessary?
The provision is helpful and should be retained.
Should we replace the statement in subparagraphs (b)(1) and (c)....?
It is better to add "on behalf of." And add "or in collusion with."
Should the word "fraudulently" in subparagraphs (b)(1) and (c)(2) be replaced with the word "improperly" or some other word to convey a mental state short of scienter?
If there is a clear standard that differentiates "improperly" from "fraudulently" then "improperly" might be better. In most states (as well as under federal law), the term "improper" is broader and includes not only "fraud" but also "deceptive" and coercive conduct which would be intentional and harmful to the public even though it did not technically constitute fraud. On the other hand, the rules must permit an honest open discussion when differences of opinion on accounting principles or auditing procedures occur between the issuer and the accounting firm. An officer or director could have an opinion different from the auditor's. A strong advocacy for the issuer's position should not be automatically considered an attempt to "improperly influence."
Should the phrase in subparagraphs (b)(1) and (c)(2) that "if the person knew or was unreasonable in not knowing that such action could, if successful, result in rendering such financial statements materially misleading" be replaced....?
Other securities laws state "knew or should have known" and that language is preferable.
Is it necessary or appropriate to expressly extend the prohibition on improper influence on the conduct of audits, and existing rule 13b2-2, to officers and directors of the investment company's service providers? If so, which service providers should be covered?
The rule should be retained as written
We request comment on whether it is feasible to further clarify, consolidate, or simplify the proposed rules for small entities.
Special rules are not necessary for small entities if "person or persons acting in the capacity of an officer or director" is included (see response to first question).
As noted in the cost-benefit section, if section 303 of the Act and the proposed rules leads to increased investor confidence in financial reporting, they also may facilitate capital formation. We request comment on these matters in connection with our proposed rules.
We agree that the cost of compliance (as well as the cost of enforcement) can be minimized, especially if communication, cooperation, consistency and substantive input among federal and state regulators are enhanced.
While the Commission has issued many exposure drafts over the years, to increase the transparency of the process and encourage input from interested parties, it would be very helpful if the SEC staff numbered the questions posed. This would be helpful to those who want to respond in a timely, useful manner, and to the SEC in interpreting those remarks.
We thank you for your consideration of our comments and hope they have been of some help.
c: NASBA Litigation Response and Assistance Committee