Via e-mail: rule-comments@sec.gov
September 21, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
RE: Proposed Rule S7-13-00
Revision of the Commission's Auditor Independence Requirements
Dear Mr. Katz:
The Audit and Assurance Committee of the Illinois CPA Society welcomes the opportunity to provide feedback to the Securities and Exchange Commission (SEC) regarding Proposed Rule S7-13-00. Our Committee is a diverse group comprised of CPAs from large and small firms, education, government, and industry. Appendix A contains a listing of and additional information on the Committee members.
The Committee recently met to discuss the SEC proposal and, surprisingly, the views of our members were nearly identical. While we all recognized the need to revise independence requirements, each of us were perplexed as to why this proposal was on a fast track for adoption at the same time the Independence Standards Board was working on the conceptual framework for auditor independence.
On the positive side, we generally support three of the four governing principles for determining whether an auditor is independent. Most CPAs would agree that an auditor cannot be independent if they have a mutual or conflicting interest; audit their own work; or function as management or an employee of their audit client.
We cannot fully support the fourth principle that prohibits auditors from acting as an advocate for the audit client. We believe this principle opens a gray area that is in need of further definition and study. In some circumstances, such as tax issues, audit clients expect the support and advocacy of their audit firm.
Our committee members also generally support the sections of the proposal relating to financial and employment relationships. We believe this segment of the proposal should be segregated from the remaining issues and adopted by the SEC as soon as possible.
The remainder of this comment letter deals with our concerns over the provisions relating to non-audit services. Our Committee members have had the luxury of reading some of the other comment letters regarding the SEC independence proposal and we wholeheartedly support the position of the AICPA on these matters.
Our major areas of concern are as follows:
1. The SEC proposal on independence circumvents the Independence Standards Board (ISB) and ignores the work of this Board over the last few years. The SEC played a major role in the creation of the ISB and our Committee strongly believes this Board should be permitted to complete its work.
The mission statement of the ISB contains 5 objectives, including the need to develop a conceptual framework for independence. We believe this conceptual framework is long overdue and must be finalized before the SEC, the ISB, or the AICPA can begin drafting revisions to independence standards.
We urge the SEC to continue to "look to the ISB for leadership in establishing and improving auditor independence..." as noted in Authorizing SEC Release FRR-50. In this 1998 document, you state "the SEC expects that the public interest will be served by having the ISB take the lead in establishing, maintaining, and improving auditor independence requirements". We would agree.
2. The proposal contradicts one of the primary missions of the SEC, which is to promote investor confidence in the reliability and integrity of issuers' financial statements. Throughout the proposal, the SEC implies there are significant problems with the auditing of publicly traded companies that must be addressed immediately.
As it is currently written, the SEC proposal will lead to a government mandated restructuring of the accounting profession without any factual evidence to support the need for this drastic change. We believe the ripple effect of this SEC proposal will shake investor confidence in the audits of all entities - not just audits of SEC registrants. The "reasonable investor" will be confused by these SEC actions and may begin questioning whether any audits performed by CPA firms involved in non-audit services can be relied upon.
3. We believe this proposal will have a detrimental impact on the ability of businesses in Illinois to hire the auditors and consultants of their choice. The experience and knowledge derived from a long-term relationship between an auditor and a client could no longer be used to advise management as the need arises.
In the major U.S. cities, companies would still be able to choose between the national and regional CPA firms for this assistance. However, there would be far fewer choices in the smaller markets. Restricting the ability of audit firms to provide non-audit services will reduce these choices even further.
Across Illinois, small and mid-sized businesses must look to their local CPAs for advice on a variety of subjects, including technology decisions. These companies would not have the internal expertise to make these important business decisions and should be encouraged to seek the assistance of local professionals. Any attempt to restrict businesses from seeking the professional advice of local CPA's can only lead to an increase in business failures.
4. This SEC proposal will not improve audit quality and may actually serve to reduce audit quality. Many of today's staff auditors were able to gain experience in both auditing and consulting and became more competent auditors as a result. We believe this diversity has also given CPA firms the ability to better train, utilize, and retain its staff. Consulting assignments provide audit firms with the work needed to fill scheduling gaps and maintain a constant staffing level throughout the year.
5. The proposed segregation of audit and non-audit services will increase problems the profession is already facing in attracting new accounting students and retaining the best and brightest of the recent graduates. Forcing new accountants to choose between audit firms and non-audit firms will only hinder their personal growth and restrict their career opportunities.
In conclusion, we urge the SEC to slow down and take a deep breath. While the revamping of independence requirements is important, a quick fix may cause more problems than it would solve. We continue to support the efforts of the Independence Standards Board, the AICPA and the Securities and Exchange Commission in improving independence requirements, and request that the SEC allow the standards setting process to follow its normal course.
All professions, including public accountants, recognize the need for self-regulation. Every major profession wants the opportunity to establish standards and provide guidance to its members. The accounting profession must be able to adapt to the changes happening around it. While input from all users is crucial, it is the profession itself that must have the courage and leadership to change as the world around it changes. Forcing change through the regulatory process should be a measure of last resort used only when a profession is unwilling or unable to change.
The members of the Audit and Assurance Committee of the Illinois CPA Society thank you for the opportunity to respond to this proposal. We would have preferred to provide a more complete response, but under the tight time frame you have imposed, an in depth response would not have been possible. The hundreds of questions raised throughout the proposal document are all worthy of comment and deserve more than a cursory review.
Sincerely,
APPENDIX A
ILLINOIS CPA SOCIETY
AUDIT AND ASSSURANCE SERVICES COMMITTEE
ORGANIZATION AND OPERATING PROCEDURES
2000 - 2001
The Audit and Assurance Services Committee of the Illinois CPA Society (Committee) is composed of the following technically qualified, experienced members appointed from industry, education and public accounting. These members have Committee service ranging from newly appointed to more than 20 years. The Committee is an appointed senior technical committee of the Society and has been delegated the authority to issue written positions representing the Society on matters regarding the setting of auditing standards.
The Committee usually operates by assigning Subcommittees of its members to study and discuss fully exposure documents proposing additions to or revisions of auditing and attest standards. The Subcommittee ordinarily develops a proposed response that is considered, discussed and voted on by the full Committee. Support by the full Committee then results in the issuance of a formal response, which at times, includes a minority viewpoint.
Current members of the Committee and their business affiliations are as follows:
PUBLIC ACCOUNTING FIRMS: |
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Large: |
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Dolinar, James A. CPA |
Crowe Chizek & Co. LLP | |
Gabouer, Kurt CPA |
KPMG LLP | |
Graf, William P. CPA |
Arthur Andersen LLP | |
Hirte, Lynne M. CPA |
Ernst & Young LLP | |
McClanahan, James P. CPA |
Altschuler, Melvoin & Glasser LLP | |
Menelaides, Susan L. CPA |
Altschuler, Melvoin & Glasser LLP | |
Niewiedzial, Kim CPA |
PricewaterhouseCoopers LLP | |
Medium: |
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Gregor, Sharon J. CPA |
Selden, Fox and Associates, Ltd. | |
Panfil, Stephen R. CPA |
Bansley & Kiener LLP | |
Sherwood, Amy L. CPA |
Sikich Gardner & Co. LLP |
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Small: |
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Davila, Antonio Jr. CPA |
Hill, Taylor LLC |
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Goltz, Jeffrey M. CPA |
Rosen, Goltz & Associates | |
Owens, Robert W. CPA |
Wermer, Rogers, Doran & Ruzon | |
INDUSTRY: |
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Hunt, Brian J. CPA, J.D. |
Williams Montgomery & John, Ltd. | |
GOVERNMENT: |
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Bailey, Scott P. CPA |
Metropolitan Pier & Exposition Authority | |
EDUCATORS: |
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Hopkins, Debra R. CPA |
Northern Illinois University | |
Tabor, John G. CPA |
Loyola University | |
Whittington, Ray |
DePaul University | |