From: A.N. Midwest [jmeinfo@yahoo.com] Sent: Thursday, January 16, 2003 2:04 PM To: rule-comments@sec.gov Subject: S7-49-02 To Whom it may concern, My comments below are regarding excessive business process outsourcing, (http://www.sec.gov/rules/proposed/33-8154.htm ), through the use of their primary and secondary Audit engagement partner vendor. The Sarbanes-Oxley Act and the present rules being considered do not prevent Audit engagement firms from using "Shadow Entities" to continue business as usual. A Shadow Entity is one that on paper APPEARS TO NOT BE the same "Audit engagement partner" engaging the client, however the shadow entity is owned and controlled by many former partners of the aforesaid same "Audit engagement partner". While the current partners of the shadow entity may not simultaneously be a partner of the same "Audit engagement partner"?? The original "Audit engagement partner" directly channels OUTSOURCING BUSINESS to this shadow entity to usurp the Accounting Industry Independence guidelines. The present rules and legislation under review must not be weakened. I have worked within the accounting field for more than a decade and there are serious dangers in permitting outsourcing to continue. This includes NOT ONLY PRIMARY AUDIT ENGAGEMENT PARTNER OUTSOURCING but "Shadow Entities" as well. American company categories that fall under the oversight of the Sarbanes-Oxley Act must stop outsourcing internal employment positions within their companies that control the Financial Reporting, Audit, Most other Accounting, Accounting Informations System Control, and Tax functions. To usurp the past Accounting Industry Independence oversight bodies, unethical and regrettably still legal, extensions of the same "Audit engagement partner firms" establish "Shadow Entities". While present securities laws do not permit certain "Shadow Entities" from signing off on any client's financial statements as a Certified Audit engagement firm, this does not remove the conflict of interest. If these Shadow Entities were completely owned and controlled by the Insurance company(s) that provide insurance to Corporate America against shareholder lawsuits, and similar company liability, this would be less of a concern. However, most past and present Shadow Entities do not have this ownership mandate. So why is this a problem? The Audit engagement partner engaging the client not only has control over the Shadow Entity through the present and past relationships of former employees of the Audit engagement partner but control is asserted through the CHANNELING of present and future OUTSOURCING BUSINESS. This Outsourcing Business channeling includes the higher margin "Financial information systems design and implementation" as well as the CHANNELING of other business services like Outsourced Internal Auditors, Outsourced Accounting personnel, and other Outsourced Financial services. Can an Internal Auditor today be truly "Internal" if they are NOT on the payroll of the actual company that they are internally auditing? Their allegiance will be to the company that is paying their payroll check and NOT to the shareholders and NOT for the intended financial integrity purpose reporting to the Audit Committee. So why is this a problem for the "client" Corporate America. The Audit engagement partner CANNOT ethically, due to the conflict of interest, properly audit the the client while their shadow entity has provided the on site INTERNAL auditors to the client. The "shadow entity internal auditors" would advise the audit committee, while the audit committee may or may not know that the "shadow entity internal auditors" maintain their allegiance to the PRESENT AUDIT ENGAGEMENT PARTNER. The PRESENT AUDIT ENGAGEMENT PARTNER maintains it's allegiance to the CEO & CFO and NOT the AUDIT COMMITTEE or the SHAREHOLDERS. Which in turn will lead to Enron, World Com, and similar previous disasters. Another solution proposal: The shareholders will hire the Audit Engagement Firm and any "Shadow Entity Firms", through a 51% vote mandate. This will stop the Audit Engagement Firm and any "Shadow Entity Firms" from being hired by the CFO, the CEO, or any of the Board of Directors. The SEC MUST consider as part of the present "Strengthening the Commission's Requirements Regarding Auditor Independence" the aforementioned loop hole which has unethically existed for years. Further, the present "cooling-off" hiring period rules being considered are attempting to prevent Internal and External auditor conflict of interest as a result of employment hiring from the same "Audit engagement partner", because so many company internal auditors are being hired from their same "XYZ" External Audit Engagement auditor. This begs the question about the hiring of new company employees from a shadow entity. As long as these shadow entities are more or less controlled by the "Audit engagement partner" there must be a cooling off hiring period limitation applied to "Shadow Entities" as well! We all know that many of America's companies today have an Audit committee director from XYZ auditor, and that the CFO frequently is from the same XYZ auditor, as well as many, if not all, of the below ranking accounting management are also from the same XYZ auditor. If you overlook "Shadow Entities" from SEC/Accounting oversight board scrutiny, you will not protect the financial integrity desired by shareholders. The hiring of company accounting and audit staff from the shadow entity will maintain the status quo and not increase Independence nor reduce conflict of interest. Finally, "Shadow Entities" may be difficult to define, but make no mistake the CFO of a company knows which "Shadow Entity" firm has direct relationships to not only their former Audit Engagement Employer but their present "Audit Engagement Partner" In terms of Finance/Acccounting Business Outsourcing Services (BPO), the proposed rules must require not only the stopping of MOST if not ALL BPO Services from being rendered by the Audit Engagement Partner Firms BUT ALSO the rotation of the Audit Engagement Partner proposal does not adequately address BPO. If the rotation moves next toward a firm that is soon to be merging with the previous Audit engagement partner, the 1st Audit Engagement Partner has circumvented the Sarbanes-Oxley Act. As a condition of Audit engagement Firm merger, the rotation rules must prevent either of these merging Firms to be permitted the opportunity of the next audit rotation relationship. Further, permitting Finance/Accounting BPO Services to a so called Audit Engagement Firm competitor of the present Audit Engagement Firm, is a moot point if the two firms will be merging shortly. We know today that the Enron "Special Purpose Entities" are not preferred ethical business behavior today in America. The existence of Audit Engagement Partner "Shadow Entities" will be the Second coming of an Enron debacle down the road. The former shareholders of Enron stock have learned the hard way that Internal Finance/Accounting positions were not only a "CORE" business process at the former Enron, but they are not to be long-term contracted out under the disguise that they are "NON-CORE". The pitch is that you would ALLEGEDLY achieve increased shareholder value by using Accounting/Finance B.P.OUTSOURCING AT ANY COMPANY. Tell that to the people who were holding World Com stock! Let's be proactive today, not reactive tomorrow. Stop Corporate America from continuing to use Finance/Accounting Business Process Outsourcing Services today! Sincerely, A.N. Midwest CC: U.S. Senator Sarbanes U.S. Senator Oxley __________________________________________________ Do you Yahoo!? Yahoo! Mail Plus - Powerful. Affordable. Sign up now. http://mailplus.yahoo.com