Osler, Hoskin & Harcourt LLP

January 13, 2003

SENT BY E-MAIL TO: rule-comments@sec.gov

U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

Attention: Jonathan G. Katz, Secretary

Ladies and Gentlemen:

File No. S7-49-02
Proposed Rule: Strengthening the Commission's Requirements
Regarding Auditor Independence (Release No. 33-8154)

This letter sets forth our comments on the proposed rule titled "Strengthening the Commission's Requirements Regarding Auditor Independence" (the "Proposed Rules").

We are limiting our comments in this letter to the proposed amendment to Rule 2-01(c)(4) of Regulation S-X that would add "expert services unrelated to the audit" to the list of non-audit services which, if provided at any point during the audit and professional engagement period, would cause an accountant to be deemed to be not independent. We are very concerned that this amendment could result in significant unintended prejudice to issuers who are subject to periodic reporting obligations in the United States and currently engaged in litigation or arbitration proceedings in Canada.

We are asking the Commission to delay the effective date of this amendment, or to provide transitional relief or grandfathering provisions, to prevent this prejudice from arising.

The Proposed Prohibition of Expert Services Unrelated to the Audit

The Proposed Rules would add a new Rule 2-01(c)(4)(x) to Regulation S-X which would state:

(4) Non-Audit Services. An accountant is not independent if, at any point during the audit and professional engagement period, the accountant provides the following non-audit services to an audit client:

(x) Expert services unrelated to the audit. Providing expert opinions for an audit client in connection with legal, administrative, or regulatory proceedings or acting as an advocate for an audit client in such proceedings.

The Commission's release states:

Our prohibition on the provision of expert services would include providing consultation and other services to an audit client's legal counsel in connection with litigation, administrative or regulatory proceedings.... An auditor who takes on such duties, either directly or by being engaged by the audit client's legal counsel, takes on a role as an advocate for the client.

The prohibition on providing "expert" services included in this rule proposal covers services that result in the accounting firm's specialized knowledge, experience and expertise being used to support the contentions of the audit client in various adversarial proceedings. Therefore, under our proposed rule, an auditor's independence would be impaired if the auditor were engaged by the audit client's legal counsel to provide expert witness or other services, including accounting advice, opinions, or forensic accounting services, in connection with the client's participation in a legal, administrative, or regulatory proceeding.... [emphasis added]

The effect of Rule 2-01(c)(4)(x), when it comes into force, will be to preclude an issuer's independent accountant from acting as an expert witness for its audit clients in a legal, administrative or regulatory proceeding. The corollary is that an accounting firm will become ineligible to audit the financial statements of an issuer if it acts as an expert witness on behalf of that issuer.


The Sarbanes-Oxley Act of 2002 requires the Commission to adopt final rules by January 26, 2003 prohibiting the provision of certain non-audit services by a "registered public accounting firm". The definition of that term is limited to firms which are registered with the Public Company Accounting Oversight Board. If Rule 2-01(c)(4)(x) applied only to a "registered public accounting firm", its adoption as a final rule by the January 26, 2003 deadline would not have any immediate consequence because the Commission has not yet determined that the Public Company Accounting Oversight Board is organized and has the capacity to carry out its requirements, and no accounting firms have registered with it.

However, the Proposed Rules make amendments to the Commission's existing auditor independence requirements, and therefore Rule 2-01(c)(4)(x) will apply to an "accountant". If this rule were adopted as a final rule by the January 26, 2003 deadline, it would immediately require an issuer's accounting firm to cease providing all expert services, or else render the accounting firm ineligible to perform the functions of an independent accountant. Although the Commission has specifically requested comments on this issue, the Proposed Rules do not make any provision for a delayed effective date, a transition period, or other relief in respect of expert services which are already ongoing.

Consequences of Requiring an Immediate Termination of Ongoing Expert Services

Perhaps unintentionally, the adoption of Rule 2-01(c)(4)(x) as an immediately effective rule on or before the January 26, 2003 deadline could result in seriously prejudicial consequences for any issuer that is then receiving any expert services from its independent accounting firm, particularly in connection with an ongoing litigation, arbitration or other dispute. As changing accounting firms would generally be the more onerous and less acceptable result, these issuers will be required to terminate immediately any ongoing expert services being provided by their accountants.

For example, an issuer may have retained a partner with its independent accounting firm to provide expert advice, or act as an expert witness, with respect to a currently ongoing dispute. It is possible that the expert will have spent considerable time and effort reviewing the facts of the dispute and preparing reports or other testimony. In fact, given that expert reports are generally required to be delivered well in advance of a hearing date, it is possible that an expert who has already delivered a report would be unable to testify at the hearing, rendering the report useless. If Rule 2-01(c)(4)(x) comes into effect without appropriate transition arrangements, the expert will have to be replaced and the time and effort already expended will be wasted. Issuers that are on the eve of a trial or other proceeding when the Rule comes into effect could be very seriously prejudiced, as they may not be able to replace the witness in time or secure an adjournment.

Recommendations for Revisions to the Proposed Rules

We urge the Commission to provide a transition period, exemption or grandfathering provision that would allow expert services that are already ongoing, and not prohibited under current rules, to be completed without compromising an accountant's independence. Specifically, if an accounting firm has been retained in accordance with the current rules to act as an expert with respect to any legal, administrative or regulatory proceeding, or a dispute that could ultimately require resolution through such a proceeding, the firm should be allowed to continue providing any or all of the services referred to in Rule 2-01(c)(4)(x) with respect to that proceeding or dispute until it has been finally and conclusively resolved.

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If you have any questions or would like to discuss further any aspect of this comment letter, please contact Robert Lando at (212) 907-0504 or rlando@osler.com.

Yours very truly,

Osler, Hoskin & Harcourt LLP
Canadian Lawyers