M E M O R A N D U M

Attendees from Deloitte: Barry Huff, Roger Page, and Bob Kueppers

The above listed representatives of Deloitte met with Commissioner Cynthia A. Glassman to discuss the Commission's proposed rule on Auditor Independence. Deloitte discussed two main areas of auditor independence: partner rotation and tax services. Deloitte supported partner rotation generally and has no objections to the proposed rule's requirement of 5-year rotation schedules for audit partners with an accompanying 5-year time out. Their objection goes to the number of persons being proposed to be rotated. They believe the rule needs balance or will result in loss of audit quality. Deloitte believes the proposed rule needs to focus on this threat to audit quality by looking only to those individuals with a high level of relationship with senior management and/or can influence audit results. Additionally, in making the right cut, the proposal should take into context all of the other proposals that provide safeguards against auditor independence impairment, especially those of the audit committee. They recommend that the lead and concurring partner be rotated and if necessary, only one other layer of audit partners should be rotated. Those at major subsidiaries and the determining threshold should be raised from 10 percent to 25 percent of revenues or assets.

As for tax services, Deloitte was concerned that the proposing release which first appeared to be following what they believe is the intention of the Act by not prohibiting tax services, has left confusion. It now appears that audit firms are prohibited from providing tax services to audit clients. They believe that this is incorrect and stated that it is clear in the Act that tax services are allowed and that the proposal needs clarity. Deloitte also pointed to a recent study that indicated that there is an inverse relationship between higher levels tax services and the number of financial restatements. Additionally, Deloitte expressed concern that the proposed rule required audit committees to use the three principles outlined in the Act to determine whether to approve nonaudit services. They believe this is also incorrect. The three principles were to be used in coming up with the list of prohibited services enumerated in the Act. Overall, Deloitte was supportive of the rule.