CPA Associates International, Inc.
Meadows Office Complex
301 Route 17 North
Rutherford, NJ 07070
January 3, 2003
Mr. Jonathan G. Katz, Secretary
U. S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-49-02
Proposed Strengthening the Commission's Requirements Regarding
Dear Mr. Secretary:
CPA Associates International, Inc. is an international association of independent CPA and chartered accounting firms with 45 members in the United States and 71 member firms in 52 countries around the world. On behalf of our members in the United States who are local CPA firms, we offer the following comments to your proposed rules concerning Strengthening the Commission's Requirements Regarding Auditor Independence.
The partner rotation provisions of the Sarbanes-Oxley Act and, to an even greater extent, the SEC proposal are discriminatory to small and medium sized public accounting firms who audit Securities and Exchange Commission registrants. These firms, for the most part, do not provide significant consulting and other non-auditing services to their clients and they are rarely involved in significant financial statement restatements. With the possible exception of assisting their smaller public clients with the preparation of their financial statements, these firms have always conducted their practices within the general independence parameters now established by Sarbanes-Oxley and with a high level of integrity and commitment to the reliance placed on their work by the United States capital markets.
Smaller firms typically serve smaller SEC registrants. Due to the size of these engagements, normally there are only two partners on the engagement - the lead partner and the concurring partner. Typically these partners have already served on these engagements for more than five years. Under these circumstances, if partner rotation is mandated there may be no senior level of continuity of knowledge on these engagements.
If the proposed partner rotation rules are enacted as proposed by the SEC, a large number of smaller CPA firms will be forced out of SEC practice. This forced reduction in the number of firms who can serve SEC registrants will serve to restrain trade, causing smaller registrants to move to larger firms, who will be relatively unaffected by the provision and significantly increase their audit fees. Registrants who feel their smaller firm auditors have served them with a high level of competence and integrity will be forced to consider hiring those firms whose indiscretions have been so widely publicized. Smaller SEC registrants do not fit the large firm client profile and, therefore, the service they receive may be less than they deserve and capital markets expect. Finally, the transfer of audits to larger firms, that as a group are implicated in audit failures, will neither assure the protection of investors nor improve investor confidence.
In some smaller states, there are a limited number of firms who are technically capable of serving SEC registrants. If the partner rotation rules are enacted as they are proposed, these practitioners may be forced to resign their SEC engagements not because of wrongdoing or incompetence but simply because of their small size. This forced divestiture does not further the business interests of and is demoralizing to local economies, is costly to the smaller SEC registrants and severely limits the number of firms "SEC eligible" to provide these services.
The idea of substituting a forensic audit for required partner rotation appears to ignore the fact that all registered firms would have their peer review conducted by the Public Company Accounting Oversight Board under the auspices of the SEC. What would be gained, other than additional costs to the registrant, from adding yet another level of bureaucracy to this already intricate process?
Those who practice in smaller firms have always understood the necessity of more stringent auditor independence rules. Their communities tend to be smaller where they are highly visible. They realize that every time they sign an audit report - SEC or otherwise - if their work is found to be substandard or they are found to not be independent, their personal and professional reputations will be severely damaged. This is a strong incentive to maintain a high quality and independent practice.
We understand that Sarbanes-Oxley has passed and clearly requires action. We urge the SEC to delay, if possible, application of audit partner rotation requirements for small to medium size firms for up to five years from implementation. That would give Congress the opportunity to reevaluate this provision for smaller firms. If that is not possible, we recommend that the SEC adopt partner rotation requirements for smaller firms that do not go beyond what was mandated by Sarbanes-Oxley i.e., one year rotation off after five years on engagement for lead and review partner. Congress should still reevaluate this provision that discriminates against small and medium size accounting firms.
We would also like to comment on one of the other proposals relating to audit professionals accepting employment with SEC registrant audit clients. The concept of a mandatory cooling off period was discussed at length and ultimately rejected by the Independence Standards Board (ISB) since it concluded that the cost of such a rule would exceed its benefits. It seems unreasonable to require the registrant to change auditors because they hire a highly qualified individual from their audit firm to assist in their financial reporting. We offer the following reasons as outlined by the ISB to reject the concept of a mandatory cooling off period: companies, particularly smaller companies who may be at a disadvantage in recruiting competent personnel, benefit from the ability to hire staff at all levels from their audit team; the attraction of future employment opportunities draws talented and ambitious recruits to the profession; and talented individuals join public accounting firms because of the broad experience they expect to gain at the firm and the contacts they expect to make in industry.
The ISB acknowledged that a mandatory cooling off period might force a client to choose between its audit professional and its audit firm; recognized that the replacement of an audit firm carries costs to firms, clients and investors; and stated its belief that audits are strengthened by institutional continuity and rotation of auditors carries a cost to investors because of the increased risk that first year audits pose. We assume a document can be drafted focusing on partners accepting positions with SEC registrant clients, however, it seems unreasonable for the audit firm to be required to resign an engagement because a member of their staff accepts a position with a client. We would urge you to reconsider the controls embodied in ISB Statement Number 3 and not mandate a cooling off period as proposed.
In conclusion, the proposed rules that we have highlighted above will restrict the ability of many companies to exercise free choice in a market economy in selecting their auditors. We recognize there are independence problems that the SEC is rightfully addressing, but urge the adoption of new requirements that will be equitable for small and medium sized public accounting firms auditing Securities and Exchange Commission registrants.
|Anthony J. Sejba
Chairman of the Board
|Robert W. Folger|