State of Wisconsin Investment Board

January 13, 2003

Jonathan G. Katz, Esq.
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: File No. S7-49-02
Proposed Rule Changes Regarding Auditor Independence

Dear Mr. Katz:

The State of Wisconsin Investment Board ("SWIB") appreciates the opportunity to comment on Release No. 33-8154 (the "Release") published by the Securities and Exchange Commission (the "Commission") regarding the proposed amendments to the Commission's auditor independence requirements. SWIB manages the tenth largest public pension fund in the U.S. and currently invests more than $58 billion of retirement funds and government assets. SWIB strongly supports the proposals, because for many years we have advocated for enhanced auditor independence requirements. Although SWIB believes that accountants should be prohibited from providing any non-audit services to audit clients, we support the proposals because they will implement an important objective of Sarbanes-Oxley - restoring auditors to the role of professionals who ensure the integrity of financial statements. In particular, we believe the proposed amendments will strengthen auditor independence, enhance audit committee oversight of accounting engagements and improve disclosure regarding auditor compensation and audit committee approval policies. However, we believe that the Commission should consider certain modifications, as discussed below.

Background

As a large institutional investor, SWIB depends on auditors to ensure the reliability and integrity of a company's financial statements. We believe that the quality of financial disclosures has been impaired in recent years as the accounting industry changed its focus from providing professional audit services to generating lucrative fees from information technology and other consulting work. In 2000, SWIB urged the Commission to adopt a bright line rule prohibiting auditors from providing any non-audit service to their current audit clients. Rather than adopting such a blanket prohibition, the Commission adopted rules that permitted auditors to provide certain categories of non-audit services, including internal audit work and information technology consulting. As evident in the Enron scandal, auditors may be less critical of a company's financial statements when the auditing firm receives most of its fees from providing consulting and other non-audit services to the audit client. SWIB has served as lead plaintiff in several cases that have challenged auditor independence because of consulting arrangements, and we have seen numerous other situations where auditing services may have been impaired because the auditors were also providing consulting services to the company.

Summary of Proposals

Section 208(a) of the Sarbanes-Oxley Act of 2002 directs the Commission to propose rules relating to, among other things, the provision of non-audit services by a company's outside auditor, auditor conflicts of interests and the rotation of audit partners. Consistent with this directive, the Release includes the following proposals:

1. Auditor Independence. The proposals would strengthen the SEC's existing auditor independence rules by incorporating the list of prohibited non-audit services contained in Section 201(a) of Sarbanes-Oxley and by eliminating exceptions that currently permit auditors to provide certain non-audit services. Under the proposed rules, an accounting firm would not be considered independent if it provides any of the following non-audit services to an audit client:

   • Bookkeeping or other services related to the accounting records or financial statements of the audit client;

   • Financial information systems design and implementation;

   • Appraisal or valuations services, fairness opinions or contribution-in-kind reports;

   • Actuarial services;

   • Internal audit outsourcing services;

   • Management functions;

   • Human resources;

   • Broker-dealer, investment adviser or investment banking services;

   • Legal services; and

   • Expert services unrelated to the audit.

   Auditors would be able to provide non-audit services not on the list of specifically prohibited services, including permitted tax-related services, if the company's audit committee approves the services in advance. Any non-audit services must be consistent with the following principles: an accounting firm should not (1) audit its own work, (2) function as a part of management or as an employee of the audit client, (3) act as an advocate of the audit client, or (4) promote the issuer's stock or other financial interests.

2. Employment-Related Conflicts of Interest. The proposal would impose a one-year "cooling-off" period during which no member of the audit engagement team may be employed by the company in a financial oversight role (e.g., a company director or the company's CEO, CFO, COO, general counsel or controller).

3. Audit Partner Rotation. Section 203 of Sarbanes-Oxley establishes mandatory rotation of audit partners every five years. The proposed rules provide that rotation would be required not just of the lead and reviewing partner, but also of other partners who perform audit services for the company.

4. Audit Committee Oversight of Accounting Engagements. The proposals would require a company's audit committee to pre-approve all engagements for both audit and non-audit services.

   In addition to the provisions required under Sarbanes-Oxley, the Release includes the following rule proposals:

5. Auditor Compensation. The proposed rules provide that an auditor is not independent if, at any time during the engagement period, any partner, principal or shareholder of the auditor serving as a member of the audit engagement team earns compensation based on performing, or procuring an engagement to perform, non-audit services.

6. New Disclosure Requirements. The proposals would amend the current proxy disclosure rules to require disclosure of audit fees, audit-related fees, tax fees and all other fees paid to a company's outside auditors during the past two years.

Analysis of Proposals

SWIB supports the proposals because they represent a significant improvement over current requirements. We believe the proposals will enhance the independence of auditors, strengthen the role of the audit committee in the financial reporting process and improve disclosure. Although SWIB generally supports the proposals, we believe that the following modifications are needed:

1. Auditors should be prohibited from providing any non-audit service to audit clients. A bright line rule will help ensure auditor independence and will eliminate the need for auditors and audit committees to make difficult factual determinations about permissible services. The financial markets will take greater comfort from work of auditors whose independence is clear.

2. Former audit firm accounting employees should not be employed in any capacity at the company during the "cooling-off" period. We believe that the appearance of a conflict of interest, if not an actual conflict, may result whenever an audit firm professional employee moves directly to employment in any capacity with the audit client, not just as officers with a "financial oversight reporting role." The continuing lack of investor confidence in the marketplace requires strong measures to eliminate relationships that create even the appearance of a conflict of interest. Investors should not be made to wonder whether the results of an audit were affected by a job offer from the audit client.

Conclusion

SWIB supports the proposed rules, because they should help restore auditors to their historical role of providing professional audit services and ensuring the integrity of financial statements. However, we believe that auditor independence and investor confidence may still be impaired as long as auditors can sell non-audit services to clients and audit firm professional employees are allowed to move directly into jobs with their audit clients.

I note that the Conference Board Commission on Public Trust and Private Enterprise headed by Treasury Secretary nominee John W. Snow recently issued "best practice" recommendations that (a) tax shelter advice not be provided by auditors because of the apparent conflict when the auditors end up reviewing their own work and (b) audit firms rethink their business models and practices to ensure that providing quality audits is their number one priority. The Conference Board Commission also concluded that audit firm employee movement to an audit client is one of the key factors to be taken into consideration in determining whether a company should change audit firms on a periodic basis. We believe these findings support the recommendations contained in this letter and respectfully ask the Securities and Exchange Commission to make the modifications we have suggested.

We hope our comments will assist the Commission as it considers the proposals. If we can be of further assistance, please do not hesitate to contact me.

Very truly yours,

Keith Johnson
Chief Legal Counsel

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