Wells Fargo & Company
January 13, 2003
Sent By Email (firstname.lastname@example.org)
Jonathan G. Katz
U.S. Securities and Exchange Commission
Mail Stop 0609
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: File No. S7-49-02
Dear Mr. Katz:
Wells Fargo & Company respectfully submits the following comments in response to the Commission's proposal to strengthen the Commission's requirements regarding auditor independence.
Audit Committee Administration of the Engagement. Under the proposal, an accountant would not be independent of an issuer if, at any point during the audit and professional engagement period, the accountant provides certain enumerated non-audit services to an audit client. An accountant also would not be independent of an issuer under the proposal unless all permissible non-audit services are pre-approved by the issuer's audit committee, are approved pursuant to pre-approval policies and procedures established by the audit committee, or qualify for the de minimis exception.
Our comments on this part of the proposal:
- We believe there is an ambiguity as to the effective date of the pre-approval requirements of Section 202 of Sarbanes-Oxley. Unlike Section 201, which makes it unlawful for a "registered public accounting firm" to render certain enumerated non-audit services and which, as a result, will not become effective until the public accounting firm registers with the Public Company Accounting Oversight Board, Section 202 and the proposed implementing rules do not expressly condition the application of the pre-approval requirements on the accountant being a registered public accounting firm. We recommend that the Commission clarify in the final rules or provide guidance in the adopting release whether the pre-approval requirements apply regardless of whether the accountant is a registered public accounting firm. If the Commission intends for the pre-approval requirements to apply regardless of the accountant's registration status, we recommend that the Commission provide guidance in the adopting release to help issuers reconcile Section 201 with Section 202 and the final implementing rules.
- We recommend that in the final rules the Commission create an exception to the pre-approval requirements that would allow an audit committee to adopt a policy that would authorize management to engage the issuer's accountant for services that are recurring and for which the fees would be less than a threshold amount. This would give issuers more flexibility in engaging their accountants to provide certain categories of services (e.g., as noted in the proposing release, due diligence engagements in connection with insignificant acquisitions) where the services are recurring and the amount of fees would be insufficient to raise auditor independence concerns. We recommend that the threshold amount be stated in relative terms (e.g., percentage of annual revenues) rather than in absolute terms.
Expanded Disclosure. The proposal would increase from three to four the disclosed categories of professional fees paid for audit and non-audit services and require such disclosure for each of the two most recent fiscal years rather than just the most recent fiscal year. (The four fee categories would be "audit," "audit-related," "tax" and "all other.") The proposal also would require an issuer to disclose the audit committee's pre-approval policies and procedures and the percentage of audit-related, tax and all other services that were approved by the audit committee using each of the following procedures: (i) pre-approval, (ii) approval pursuant to pre-approval policies and procedures, and (iii) approval under the de minimis exception. The proposal would require an issuer to include this disclosure in its proxy statement and annual report but would allow the issuer to incorporate the required disclosures from its proxy statement into its annual report.
Our comments on this part of the proposal:
- We recommend that the Commission establish a compliance effective date for the expanded disclosure requirements that dovetails with the effective dates of the prohibition against a registered public accounting firm providing certain non-audit services and the pre-approval requirements with respect to permissible non-audit services. Specifically, we believe the expanded disclosure requirements should not apply to fees billed for services rendered prior to the prohibition and pre-approval rules becoming effective. This would avoid an "apples-to-oranges" proxy statement presentation of fee information insofar as fees billed prior to the prohibition and pre-approval rules becoming effective might include fees billed for services that later become prohibited or become subject to the pre-approval requirements. Without consistency in effective dates, the fee information disclosed in the proxy statement might not be presented on a comparable basis from year to year or even within the same year. Coordinating the effective dates of the expanded disclosure rules and the prohibition and pre-approval rules would also enable issuers to begin tracking the required information prospectively for classification and disclosure in the appropriate fee categories and would avoid forcing issuers to reclassify and restate fee information previously disclosed.
- We believe that providing the expanded disclosure for only the most recent fiscal year would be sufficient to enable an investor to make an informed decision as to the election of directors and the ratification of the independent accountant. If the Commission decides to require disclosure for the two most recent fiscal years, we recommend that, for the reasons discussed in the bullet point immediately above, the Commission phase in the requirement so that disclosure for two years is required only after two years of information under the new disclosure regime is available.
- We question the relevance to investors of the disclosure of the percentage of fees for audit-related, tax and all other services that were pre-approved, approved pursuant to policies and procedures or qualified for the de minimis exception, insofar as each of the three methods would be acceptable under the proposal. We fail to see a meaningful distinction, in terms of investor protection, between whether a greater percentage of fees was for services separately pre-approved versus approved pursuant to pre-approval policies and procedures established by the audit committee. We also fail to see the importance of the percentage of fees for services that qualified for the de minimis exception given that the aggregate amount of fees for all such services may not exceed five percent of the total amount of fees paid by the issuer to the accountant for the fiscal year and given that such services must be approved by the audit committee prior to completion of the audit.
- We believe the proxy statement is the appropriate location for the expanded fee disclosure. We agree that the information is most relevant to the election of directors and to the ratification of the independent accountant. We also believe that annual disclosure is appropriate and that more frequent disclosure is not only unnecessary but also could be misleading in that fees are not incurred evenly throughout the year, given the cycle of audit work.
- We agree that an issuer should be able to incorporate the required disclosures from the proxy statement into the annual report. To reprint this information in the annual report would be redundant to investors and an unnecessary expense to the issuer. In addition, we recommend that, with respect to the disclosure of the audit committee's pre-approval policies and procedures, an issuer not be required to include the disclosure in its proxy statement if the issuer has included the information in its proxy statement within the past three fiscal years and there have been no material changes to the policies and procedures, much in the same way that an issuer is required to include a copy of the audit committee charter only once every three fiscal years. As an alternative, perhaps an issuer could even be allowed to incorporate into the proxy statement the required disclosure from an exhibit to an Exchange Act report previously filed by the issuer.
Services Rendered for Benefit of Client of Issuer. We request that the Commission clarify in the final rules or provide guidance in the adopting release as to the applicability of the proposal to audit and non-audit services rendered by the accountant to a client of the issuer or an affiliate if the issuer or affiliate plays a role in selecting the accountant, is billed by the accountant for the services rendered by the accountant to the client, or might be deemed to have a direct or indirect interest in the matter. As noted above, under the proposal, an accountant effectively would be prohibited from providing certain enumerated non-audit services to "an audit client" at any point during the audit and professional engagement period. In addition, "engagements" of an accountant for permissible non-audit services would need to be pre-approved by the issuer's audit committee, be approved pursuant to pre-approval policies and procedures established by the audit committee, or qualify for the de minimis exception.
We believe clarification as to the applicability of the proposal in these situations would be particularly important for bank holding companies. For example, bank subsidiaries frequently serve in a fiduciary capacity as trustee for various trusts. In its capacity as trustee, the bank is often required to either prepare or arrange for the preparation of tax returns and beneficiary K-1s for the trust. The bank as trustee either provides or contracts with a third party accounting firm, such as the issuer's accountant, to provide these tax services. The bank as trustee may either pay the accountant directly and obtain reimbursement or fees from the trust for the tax services, or the accountant may be paid directly by the trust.
In this example:
- Would these tax services, if contracted for by a bank subsidiary of the issuer in a fiduciary capacity as trustee and provided by the issuer's accountant, require pre-approval by the issuer's audit committee or pursuant to pre-approval policies and procedures established by the audit committee (i.e., is this an "engagement" of the accountant)?
- If the answer is yes, would these fees be discloseable in the issuer's proxy statement?
- And if so, would these fees be disclosed under the "tax" services category or under the "all other" services category; in other words, is the "tax" services category intended to apply only to tax compliance, consulting and planning services relating to the issuer's taxes or is it intended to cover any tax compliance, consulting and planning services regardless of whose taxes are involved?
Would any of the answers be different:
- If the trust pays the accountant directly rather than if the bank bills the trust and then pays the accountant?
- If the trust document, signed by the grantor/creator of the trust as well as the trustee, specifically names the issuer's accountant as the provider of tax services?
- If the bank, as trustee, were to obtain bids from a number of accountants for the tax services and, in the exercise of its fiduciary responsibilities, determines to accept the bid from the issuer's accountant (which may not be the lowest bid)?
A bank subsidiary might also be involved in the selection of an accountant to provide to a client or others audit services and various non-audit services, such as valuation, actuarial or expert services. In such cases:
- Could the prohibition against the accountant providing the enumerated non-audit services to the issuer be construed to prohibit the bank, as trustee, from engaging the accountant to provide those same services to a trust?
- Would the prohibition, pre-approval and disclosure rules apply if the bank might be deemed to have a direct or indirect interest in the matter, such as when the bank votes as a member of a creditors' committee to engage the accountant to provide services to a debtor?
We believe that the prohibition against an accountant providing certain enumerated non-audit services to an audit client should be construed narrowly so that the accountant is prohibited only from providing the services directly to the issuer or an affiliate. We also believe that the pre-approval and disclosure requirements should not apply if, in the above examples, the issuer's bank subsidiary does not unilaterally select the accountant. If the bank does unilaterally select the accountant for services rendered to others, we believe that disclosure in the issuer's proxy statement, if any is required, should be separate from the disclosure of fees billed by the accountant for services rendered directly to the issuer or an affiliate.
Thank you for the opportunity to comment on the proposal to strengthen the Commission's requirements regarding auditor independence. If you have any questions about our comments, please call me at (303) 863-2731 or Kip Kirkpatrick at (612) 316-4942. You can also email me at email@example.com or Kip at firstname.lastname@example.org
/s/ Robert J. Kaukol
ROBERT J. KAUKOL
cc: Richard D. Levy, Senior Vice President and Controller
Stanley S. Stroup, Executive Vice President and General Counsel