From: Vianna Chan [vianna@radica.com.hk] Sent: Tuesday, January 07, 2003 10:39 PM To: rule-comments@sec.gov Cc: David Howell Subject: File No. S7-49-02 TO Jonathan G Katz Secretary US Securities and Exchange Commission 450 Fifth Street NW Washington DC 20549-0609 USA Ref: File number S7-49-02 8 January, 2003 Dear Mr Katz I refer to your proposed strengthening to the auditor independence rules published for comment on 2nd December, 2002. We welcome your efforts to strengthen the auditor independence rules and believe that this will play an important role in restoring investor confidence in the wake of the recent corporate scandals. However, there are two areas where I have particular concerns. These are the restrictions that you are proposing to place on tax services and the proposed new partner rotation rules. I will deal with each of these concerns in turn. Restrictions on tax services The commentary to the SEC¡¯s proposed ruling suggests that auditor independence might be impaired ¡®by the formulation of tax strategies (eg tax shelters) designed to minimise a company¡¯s tax obligations¡¯. It then asks for comment on whether this or indeed any other tax services should be prohibited. I am concerned that there may be restrictions placed in this area, particularly in the context of the effective general principle that auditors are proscribed in any event from auditing their own work. When seeking advice from tax advisers, companies need to have confidence that they are receiving complete advice, not advice that is restricted by regulatory constraints. If the SEC introduces rules on tax services which place restrictions on the type of tax advice that may or may not be offered by an audit firm, the inevitable consequence will be a restriction on the choices available to registrants when selecting tax advisors. There are many tax strategies that are acceptable and legitimate to adopt but for which, specialist tax advice is necessary. In addition, for some complex transactions, the choice of tax professionals with the requisite experience may often be very limited particularly in jurisdictions such as Hong Kong and mainland China. If the auditing firm is to be prohibited from providing certain tax advisory services, our choice of service provider may be significantly limited to the detriment of the company¡¯s legitimate aims of minimising costs and maximising shareholders¡¯ returns. For these reasons we would like you to reconsider your proposals in this respect. Partner rotation rules My second area of concern relates to your proposed partner rotation rules. The partner rotation rules as legislated for in the Sarbanes-Oxley Act (ie that the lead and independent reviewing partners should be rotated every five years) seemed to be an appropriate strengthening in this area. However, I have concerns about the implications of your proposed ruling which significantly extends the scope of those partners that need to rotate (ie extending to all partners with an ongoing role in the audit ¨Cincluding taxation and other specialist partners- and to partners on significant subsidiaries). I am concerned about the effect of these proposals on the quality of audit opinions particularly for complex groups with distant or specialist subsidiaries. It is important for registrants to have access to auditors with the necessary US GAAP/GAAS skills both at the corporate head office level and also for overseas subsidiaries. The proposals may restrict availability of suitable audit and specialist partners where there is limited availability in overseas locations of the requisite professionals. This could have detrimental consequences on reporting quality from such locations irrespective of whether or not there would be any real strengthening of auditor independence there. Furthermore, the widening of the scope of partners subject to rotation to include other partners who may also play a limited role on the audit would restrict our choice of specialists available to provide other non audit professional services to us, with little obvious benefit in terms of auditor independence, given that the role of such individuals on the audit may be quite limited. I would therefore ask that you reconsider whether it is necessary to implement partner rotation proposals that go beyond those legislated for by the Sarbanes-Oxley Act. Yours sincerely David C.W. Howell Radica Games Limited