ALAN M. ROSEN
4817 Longridge Avenue
Sherman Oaks, California 91423-2116
Phone: (818) 995-7576
December 9, 2002
Senator Paul Sarbanes
309 Hart Building
United States Senate
Washington, DC 20510
Dear Senator Sarbanes:
Congratulations on the fine work you did in connection with the Sarbanes-Oxley Act. This act will go a long way in helping to increase corporate responsibility and restore investor confidence.
I agree with the audit partner rotation requirements included in Section 203 of the Act. However, on December 2 the SEC issued proposed rules on partner rotation that go beyond Section 203 of the Act, primarily by requiring rotation of all partners on the "audit engagement team". I believe the SEC's proposed rules could have the unintended consequence of increasing audit risk and lowering the quality of audits.
I have been a practicing CPA for over 40 years. I do not audit any public companies, so the proposed rules do not impact my practice. However, as an investor and user of financial statements, I am very concerned.
Large multi-national engagements often have dozens (if not hundreds) of divisions in numerous different locations. Often, these divisions are in industries having specialized transactions or accounting principles. Audit firms should be able to determine the best partners to be assigned at the divisions, based on the partners' knowledge, experience level, complexity and materiality of the division, etc. A thorough understanding of a company's business and industry is necessary in order to perform a good audit. Requiring the extensive rotation contemplated in the SEC's proposed rules may result in less competent audits as partners are not "fungible"...in other words, partners have different skill sets and firms may simply not have the resources in all locations to have the best partner auditing the divisions of a large global company. Forcing the firms to find the "next best" person will increase audit risk.
When there is a new lead partner (i.e., after the prior partner rotates off the audit), he/she must assess the overall audit approach used on the engagement. This assessment includes challenging the scope of work that will be done at the various divisions (which is often determined by the "corporate" audit team-i.e., the lead partner). Such procedures are necessary for the lead partner to gain the knowledge and understanding necessary to "sign-off" on the accounts of the entity, and will result in the fresh look benefits of partner rotation.
I strongly believe mandatory rotation should only include the lead partner and concurring partner-as was contemplated in the Sarbanes-Oxley Act, and would appreciate any assistance you can give in this regard.
Alan M. Rosen