CASTAING, HUSSEY & LOLAN, LLC
525 WEEKS STREET
NEW IBERIA, LA 70560
January 10, 2003
Jonathan G. Katz, Secretary
U. S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: File No. S7-49-02
This letter is in response to the Commission's request for comment on the proposed rules regarding auditor independence. I would like to first make some general comments, followed by answers to some of the specific questions raised.
As a CPA with over twenty years in public practice I am disgusted by the audit failures that have happened. However, I believe the central issue is integrity, not independence.
Our firm is a local firm located in south central Louisiana. We have had a concentration in bank auditing for over twenty years, and currently have three bank clients who are subject to SEC reporting requirements. We take our responsibility seriously and strive hard to maintain our competence. Our banking partners attend national CPA conferences and our library of SEC and auditing materials is very extensive. Our clients have remained with us because of the level of service we provide, with things like low staff turnover, partner accessibility, and reasonable response time. We do not provide many non-audit services other than tax. We refer those services to the network of larger firms that we have developed to assist us in servicing our clients, or our clients choose their own provider. We are a four partner, eighteen person firm with revenues under six million dollars. We have two partners who perform all of the SEC audit work, and we work together on all of the accounts.
Predictions are that the number of firms auditing SEC registrants will drop from over 1,000 firms to less than 200. Accounting firms will be forced to assess whether it is feasible to have only a few SEC clients. Many firms simply will not be able to comply with partner rotation rules unless a small firm exception is in place. We may very well be one of them.
To put it bluntly, the crisis in the accounting industry occurred at the international company and large firm level, and the solution will hurt the small company and penalize the small firm. The national accounting firms, whose business model contributed to the crisis, will be the beneficiaries.
In this world there are bad people in every profession, including physicians, congressmen and priests. The bad CPAs have caused a change in the entire system. Although I agree with the need for the Sarbanes-Oxley bill, it is unfortunate that so many small firms will be negatively impacted.
Without a small firm exception to the auditor rotation rules, many competent, qualified CPA firms, including those servicing specialized industries such as banking, will be forced to relinquish clients that they have served well. The result will be de facto firm rotation at the small firm level.
The demise of Andersen has caused a change in the auditor for a large number of registrants. This has caused concerns of strains in firms' quality control systems. If a great number of smaller firms are driven out of the market it will cause another big wave of changes in auditors, without any benefit to the public.
B. Services Outside the Scope of the Practice of Auditors
Should the definition of bookkeeping be further clarified? If so, how?
Small registrants do not always have the expertise to complete certain sections of financial statements that go beyond the basic balance sheet and income statement. Examples include the cash flow statement and the tax footnote. An exception should be made for small registrants.
C. Partner Rotation
Should issuers be given a choice between engaging forensic auditors periodically and having the audit partners on their engagement team be subject to the rotation requirements? Why or why not?
No, it should not be a choice. The issue of forensic auditors should be kept separate from that of partner rotation. Additionally, it is not a feasible solution for small CPA firms, because it requires a client to expend significant additional funds to retain their present auditors. Very few if any companies would accept this arrangement.
Should the rotation requirements apply to all partners on the audit engagement team? If not, which partners should be subject to the requirements?
No, it should not apply to all partners. Having the lead and concurring partners rotate is sufficient, especially with a long cooling off period. Again, requiring all partners to rotate hurts smaller firms, who typically have lower staff-to-partner ratios and greater partner participation on audits. Requiring a tax partner that audits solely the tax accounts to rotate off is definitely overkill.
Should certain partners providing non-audit services for the client in connection with the audit engagement be excluded from the rotation requirements?
Yes, partners other than the two mentioned above should be excluded. They are not in a position to assert influence over the engagement partner or the job as a whole. The lead partner reviews their work.
Should additional personnel (such as senior managers) be included within the mandatory rotation requirements?
No, unless there is not real and significant partner oversight on the job. Maybe this could be measured by the percentage of hours attributable to those being rotated, such as 15%.
Is it appropriate to provide transitional relief where the proposed rules are more restrictive than the provisions of the Sarbanes-Oxley Act?
Yes, as noted above it is essential if small firms are to be given a chance to retain their clients. Some possible scenarios:
- Give one partner a fresh start. That partner would be allowed to remain on the job for five more years before having to rotate off. Perhaps this would only apply to small firms.
- Give a longer transition period for small firms, perhaps five years.
- Have a shorter time out period for small firms. Two years would be more manageable.
An exemption from the rotation requirements for small firms is a better solution.
Should the rotation requirements be different for small firms? What changes would be appropriate and why? If so, how should small firms be defined?
Small firms should continue to be exempted as they are under current SECPS rules for the reasons enumerated throughout this letter. The definition of small firm should be changed to allow for the measurement to be based on the number of audit partners, so that tax, technology and investment services partners, for example, do not count against the firm. Other possible definitions could be the total dollar amount of a firm's audit fees (perhaps $1 million as the cutoff), number of SEC registrants, size of SEC registrants, and total firm fees.
Would the proposed rules impose a cost on smaller firms that is disproportionate to the benefits that would be received?
Yes, the proposed partner rotation rules would force many competent small firms out of the market and would unfairly benefit the larger firms. At the same time, many small publicly traded companies would not get the level of service to which they are accustomed and that they need.
Is the five-year time out period necessary or appropriate? Would some shorter time period be sufficient, such as two, three or four years? Should there be different "time out" periods based on a partner's role in the audit process?
A five-year time out period becomes a bigger problem for firms of all size as more partners and personnel are subject to it. Only the lead and client service partner should have a five-year time out period, as they are the partners with the most client management contact. Two years should be sufficient for any other partners subject to rotation, including the concurring partner. Again, small firm relief is appropriate from any partner rotation rules.
The proposed rules would not require all partners on the audit engagement team to rotate at the same time. Should it? Why or why not?
It should not. A reasonable tradeoff has to be maintained between rotation and competence on the job. Rotation of all partners at the same time would lead to a decrease in the quality of audits.
The Commission should also consider exempting companies who are not publicly traded, but file with the SEC because of the number of shareholders from most, if not all, of the provisions of the act.
Thanks you for your attention to our comments.
Samuel R. Lolan, CPA