McCurdy and Associates, CPA's, Inc.
|To:||The Securities & Exchange Commission|
|Re:|| File No. S7-49-02
Proposed Auditor Rotation Rules
This comment is in response to the proposed rule regarding partner rotation on SEC audits.
The proposed rule which would require the partner-in-charge and the reviewing partner to rotate every five years (and then require both partners to remain off the audit for five years) would all but eliminate our type of firm from providing a much needed, reasonably priced service to the Investment Company Industry.
Our firm is a three partner firm that has specialized in mutual fund audits for almost 20 years. We concentrate on small mutual funds and new start-up funds. We perform no audits outside of our specialty in the financial service sector. Our firm consists of extremely well qualified and experienced individuals who have spent their professional careers providing services to mutual funds.
The Investment Company Industry is unique and very different from other SEC registrants for which this rule was primarily written. In this industry there is virtually no latitude in deciding how to apply revenue or expense recognition accounting rules; there is virtually no latitude in deciding how to apply asset valuation accounting rules; and related party transactions are limited and require special disclosures. Partner familiarity which could lead to "bending" accounting rules is not the issue for this industry as it potentially could be for "regular" SEC registrants.
Firms like ours provide the individualized attention and more reasonable prices needed during a fund's start-up and formative years.
We could adjust to this proposed rule by merging or selling out to a larger firm. However, this will have the extremely detrimental effect of increased prices and limited choices for the small and medium sized mutual funds served by firms like ours. To a large extent, this proposed rule will eliminate all but the largest of firms from having the capability to provide this highly specialized service to this unique industry. It will create an oligopoly of only four to six firms nationwide that could satisfy the standard created by the new rule.
Based on our experience in the industry, it is our opinion that if your proposed rule is enacted prices for audit services would more than double for the small and medium sized mutual funds. It would increase the barriers to entry into this industry due to the substantially increased start-up costs as well as ongoing higher costs for the initial developmental years of a new fund.
In the initial proposed rules under section VII Initial Regulatory Flexibility Act Analysis, section D. Small Entities Subject to the Proposed Rules an estimate of the number of small mutual funds was set at 225. After research by the Investment Company Institute I have discovered that the actual number of mutual funds under $50 million is actually 2,642. The potential cost to these funds as well as any new start-up funds will be substantially more in total than was assumed in the writing of these rules based on the fact that ten times more small funds exist than were taken into consideration by the rule making committee.