From: John Lyon [jlyon@arthurconsulting.com]
Sent: Thursday, December 12, 2002 2:39 PM
To: rule-comments@sec.gov
Subject: Comments on Proposed Rule Regarding Auditor Independence, 
File: S7-49-02

Dear SEC:
 
The following comments relate to the proposed revision to section (c)(4) 
Non-audit services. (iii) Appraisal, or valuation services, fairness 
opinions, or contribution in kind reports.
 
In the Discussion of Proposed Rules addressing this section, it is stated 
that "Our proposals do not prohibit an accounting firm from providing such 
services for non-financial reporting (e.g. transfer pricing studies, cost 
segregation studies) purposes."  We have a number of concerns with this 
comment:
 
1.  Does this comment mean that "non-financial reporting" is "for tax 
purposes"?  If so, this seems completely inconsistent with Sarbanes-Oxley 
and the discussed elimination of the (4) prior exemptions from this section, 
including the elimination of "(B)(3) The valuation is performed in the context 
of the planning and implementation of tax-planning strategy or for tax 
compliance services."    If valuation studies for tax purposes are to be 
allowed, what is the point of removing this exemption from the Rule?  How can 
a major expense such as taxes not be regarded as being subject to "audit 
procedures"?
 
2.  Alternatively, if valuations for tax purposes are intended to be prohibited 
under the revised Rule, why are transfer pricing studies and cost segregation 
studies excluded from this prohibition?  These types of studies are specifically 
for "the planning and implementation of tax-planning strategy or for tax compliance 
services."  Again, if these studies are to be allowed, what is the point of 
removing this exemption from the Rule?
 
3.  If transfer pricing and cost segregation studies are to be allowed because 
they are not regarded as appraisal or valuation services, we believe that these 
services should be prohibited both due their nature and CPA firms' past behavior 
with respect to these services.
 
a) As to their nature, prohibited valuation services involve the determination of 
fair market value through the cost, market and income approaches.  Transfer pricing 
studies determine the income streams of related entities for tax and/or customs 
duty purposes.  Determination of such income streams involves judgment, whether 
performed for "valuation" or transfer pricing purposes.
 
Cost segregation studies do not merely involve "assisting management in determining 
the appropriate allocation of a management determined purchase price and/or 
interpreting income tax law and regulations," as has apparently been the position 
of the SEC staff in the past.  As reflected on the Moss Adams LLP website (www.mossadams.com/services/appraisal_clientsvcs.htm), a cost segregation study 
includes "accurate estimation of the installed cost of personal property and land 
improvements using tax-oriented valuation techniques...".  According to the Ernst 
Consulting Group website (www.bestcostseg.com), a cost segregation study is required 
because "Estimating costs by your contractor or your accountant are not acceptable 
unless they are part of an engineering study.  (IRS Legal Memorandum 19991045)."  
In other words, these studies involve specialized skill and judgment and are not 
merely a mechanical allocation of costs provided to the accountant by management.
 
If these tax-related studies are proposed to be allowed because they are subject 
to review by the IRS, note that the IRS has said, "Resource constraints may limit 
the ability of the IRS to monitor and judge the appropriateness of these 
section 1245 designations.  The sheer volume of individual items is staggering 
and the IRS may not be able to review adequately each cost segregation study."  
Further,  "The use of such studies may provide an advantage for aggressive taxpayers 
and may otherwise provide depreciation allowances that inappropriately vary among 
taxpayers."  (2000ARD 147-1, Treasury Report:  Report to Congress:  Depreciation 
recovery periods and methods.)
 
b) As to CPA firms' past behavior, clients have reported to us (when competing 
against CPA firms for cost segregation work) that they were told by their auditor 
that audit fees could be reduced if "their people" performed the cost segregation 
study.  Their justification is that they have confidence in their own people and 
would have to give additional scrutiny to a study performed by another firm.  Isn't 
that what we want?  These statements acknowledge a lack of independence and it would 
be the height of irony for CPA firms to be allowed to continue in this service area 
after making claims of such "synergies" in the past.
 
Further, please recall the U.S. v. Ernst & Whinney debacle from the early 1980s, 
where the IRS accused the firm of a broad pattern of deception and falsification 
with respect to investment tax credit (cost segregation) studies performed for 
clients.  In promoting their services, the firm distributed advertising materials 
suggesting that they could help claim more investment tax credit than allowed under 
"traditional methods" of claiming property.  The IRS alleged that the following 
items were claimed and disguised though the use of misleading terminology:  
concrete blocks were called "knock-out panels"; fixed walls were called "movable 
partitions-gypsum"; doors were called "movable partitions-wood."
 
In summary, CPA firms do not have a track record of restraint when it comes to 
serving their clients.  They already have a unique, "conflicted" role when providing 
tax services to an audit client (simultaneously an advocate of the taxpayer and 
serving the public).  The AICPA's Statement on Standards for Tax Services (STTS) 
4 states that "The CPA may advise on estimates used in preparation of a tax return, 
but responsibility for estimated data is that of the client."  The CPA should not 
provide the estimated data.  Both STTS-1 and IRS circular 230 require that a 
practitioner may not prepare, sign, or recommend that a position be taken on a tax 
return unless the position has a "realistic possibility" of being sustained.  How 
can a CPA firm objectively rely on a tax-related valuation study when it has been 
prepared by the same firm?  CPA firms should not be allowed to perform valuation 
services, including cost segregation and transfer pricing studies, for their audit 
clients for either financial or tax purposes.
 
Thank you,
John Lyon
Senior Vice President
Arthur Consulting Group, Inc.
Westlake Village, CA