Comments of Computer Sciences Corporation on S7-49-02

Computer Sciences Corporation

January 13, 2003

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

Re: File No. S7-49-02

FILED ELECTRONICALLY (rule-comments@sec.gov)

Dear Mr. Katz:

Computer Sciences Corporation ("CSC") respectfully submits the following comments regarding the Securities and Exchange Commission's ("the Commission") "Proposed Rule: Strengthening the Commission's Requirements Regarding Auditor Independence," Subject File No. S7-49-02 (the "Proposed Rule").

We believe integrity in financial reporting is absolutely essential to the effective, efficient operation of our capital markets and economy. Effective audits of registrants are critical to investor confidence in our financial reporting system, and investor confidence is heavily dependent on the real and perceived integrity and effectiveness of the audit process. Consequently, auditor independence is critically important.

Executive Summary

We support the efforts of the Commission, Congress and the President to strengthen auditor independence, both in fact and appearance. Further, we agree with the Commission's efforts to strengthen corporate governance and believe a number of the provisions under the Proposed Rule will enhance the effectiveness of audit committees in discharging their responsibilities to stockholders. However, we have significant concerns in certain areas of the Proposed Rule, as follows:

Partner Rotation: The provisions regarding auditor rotation, as written, exceed the requirements of the Sarbanes-Oxley Act of 2002 (the "Act") and would likely diminish the efficacy of independent audits.
Prohibited Non-Audit Services: The Proposed Rule also exceeds the requirements of the Act in the area of prohibited non-audit services and would unnecessarily deprive registrants and their stockholders of the benefits of certain tax-related and other non-audit services, which can be provided most efficiently by their auditors without compromising independence.
Conflicts of Interest Resulting From Employment of Auditors' Former Personnel: The proposed definition of "financial reporting oversight role" included in the Proposed Rule extends the scope of this requirement beyond the officers identified in the Act to include the director of internal audit, director of financial reporting and treasurer. We recommend this requirement be limited to the officers identified in the Act.
Auditor Communication With Audit Committees: The Proposed Rule essentially codifies existing requirements regarding auditor communication with audit committees under GAAS. However, the Proposed Rule also incorporates by reference detailed and extensive requirements under the Commission's pending "Proposed Rule Concerning the Application of Critical Accounting Policies." This previous proposal introduces, with dubious merit at best, an entirely new level of granularity and subjectivity to audit committee communications. These expanded disclosure requirements risk over-prescribing even a rules-based approach to matters involving accounting and business judgments, estimates and subjective assessments and judgments regarding alternative accounting principles. We recommend the Commission consider a more principles-based approach.
Cumulative Effect of Increased Regulation: The rapidly expanding array of rules-based legislation, regulations and reporting standards is already beginning to mire directors, executives and senior management of public companies in a morass of complex and arcane rules. We strongly suggest the Commission seriously evaluate the potential unintended consequences and consider a more principles-based approach to ongoing regulatory initiatives.

We have provided more detailed discussion and rationale for these significant concerns in the following sections of the letter. Additionally, we have included responses to each "Request for Comment" within the Proposed Rule in the attached Exhibit.

Partner Rotation

The provisions regarding auditor rotation, as written, exceed the requirements of the Sarbanes-Oxley Act of 2002 (the"Act") and would likely diminish the efficacy of independent audits. We suggest the following:

Limit the five-year rotation requirement to the lead audit and concurring review partners.
If the Commission nonetheless concludes to require rotation for other audit partners:
- Require rotation over longer periods of service - seven to ten years, for partners serving significant subsidiaries and divisions.
- Reduce the "cooling-off period" for audit partners other than the lead audit and concurring review partners - perhaps two or three years.
Provide a transition period of at least one year to facilitate an orderly implementation and transition of client engagements.
Permit a one-year overlap for the lead partner rotating off the engagement and the incoming partner to facilitate a smooth transition.
Extend the transition period for the concurring review partner for an additional year so both the lead audit and concurring review partners would not be subject to rotation in the same year.

We agree with the Commission, Congress and the President that partner rotation is critical to auditor independence, in fact and appearance. Partner rotation is designed to enable a periodic "fresh look" at issuers accounting and reporting. We think the Act Section 203 provisions, requiring partner rotation for the lead audit partner and the audit partner responsible for reviewing the audit (the concurring review partner), are adequate to address this objective. However, we strongly disagree with the provisions under the Proposed Rule requiring partner rotation for all partners directly involved in the audit engagement. This requirement would be substantially more onerous than the actual requirement under the Act, and likely would result in unintended adverse consequences to audit quality. We strongly urge partner rotation rules be limited to those deliberated and determined by Congress, and specified in the Act.

We think partner rotation is only necessary for the lead audit partner and concurring review partner to achieve the objective of a periodic "fresh look" and to avoid relationships of a longer duration which could compromise independence and objectivity essential to an effective audit. The lead engagement partner and concurring review partner are the individuals primarily responsible for issuance of the auditors' opinion on the registrant's financial statements. These individuals are responsible for substantially all decisions material to the audit of the registrant's financial statements, including the scope and nature of required audit procedures, conclusions on the overall results and sufficiency of such procedures, compliance of the registrant's financial statements with generally accepted accounting principles and the nature of the auditors' opinion on the registrant's financial statements based on the results of the audit procedures applied. The rotation of these partners provides the necessary "fresh look". Other partners on the engagement generally do not have this level of responsibility and significant auditing, accounting and reporting matters are typically elevated to the lead audit and concurring review partners.

The audit engagement team responsible for the audit of CSC is extensive. There are partners directly involved with the audit in a number of capacities in the United States, as well as in many international locations. The audit partners have in-depth technical expertise regarding areas critical to the business. Specifically, in addition to the lead audit partner, the audit engagement team includes a number of specialists such as EDP audit partners, tax partners and government contracts partners. The engagement team also includes numerous international partners providing audit and statutory services to subsidiaries located in 45 countries around the globe. These partners must have a thorough overall understanding of our business, including high technology industry issues relevant to CSC's vertical industry software products and federal regulatory matters pertinent to our federal government activities. In addition, they need a detailed understanding of multi-year contracts which materially affect the financial results and financial condition of the company's commercial outsourcing and government operations. At the same time, the specialists and international location partners do not make the significant final decisions related to accounting and financial reporting - the lead audit and concurring review partners maintain this responsibility. Also, these specialists and international location partners do not develop significant relationships with senior management.

Rotation of all engagement team partners on a five-year basis would significantly diminish the continuity necessary to an understanding of the auditing, accounting and financial issues critical to the effectiveness of the audit. This issue would be particularly important where specialized industry expertise is necessary since the pool of available audit personnel would be more limited. Furthermore, rotation of audit partners assigned to the company's foreign operations would likewise be constrained by the limited number of audit partners fully knowledgeable in U.S. GAAP and GAAS in certain foreign jurisdictions. Moreover, rotation of audit partners in specialist roles, such as tax and EDP audit, would also be subject to the same issues due to the limited pool of available personnel with the requisite expertise. This could have the unintended consequence of heightened risk to audit quality and, ultimately, an actual diminution in the efficacy of audits.

In order to mitigate these issues, we suggest the Commission limit the five-year rotation requirement to the lead audit and concurring review partners consistent with the actual requirement mandated in the Act. If the Commission nonetheless concludes that rotation requirements must be applied to other engagement team audit partners, we suggest audit partners serving significant subsidiaries or divisions of the registrant could be subject to rotation over longer periods of service, perhaps seven to ten years. For personnel auditing immaterial subsidiaries and divisions of the registrant there would not appear to be any need for rotation. We also suggest the proposed five year "cooling-off period" likewise be reduced for audit partners other than the lead audit and concurring review partners (perhaps two or three years). We believe these modifications would largely resolve the issues and mitigate any potential negative impact on the efficacy of audits while enhancing independence, in appearance and fact.

Finally, we suggest the Commission provide for a transition period in the final rule of at least one year to facilitate an orderly implementation and permit auditors sufficient time to realign partner assignments and transition client engagements. A more rapid transition would likely lead to declines in audit quality for some issuers. To facilitate a smooth transition, we recommend a one year overlap for the lead partner rotating off the engagement and the incoming partner. We insist on this approach each time the lead partner is rotated at CSC. We also suggest the transition period be extended one year for the concurring review partner so both the lead audit and concurring review partner would not be subject to rotation in the same year.

Prohibited Non-Audit Services

The Proposed Rule also exceeds the requirements of the Act in the area of prohibited non-audit services and would unnecessarily deprive registrants and their stockholders of the benefits of certain tax-related and other non-audit services, which can be provided most efficiently by their auditors without compromising the auditors' independence. We recommend the following:

Remove the Proposed Rule's provisions prohibiting tax services.
Remove the more ambiguous text and restore the more explicit language regarding prohibited services to provide unambiguous "bright line" guidance consistent with the clear intent of Congress and the President.
If the Commission nonetheless prohibits certain tax services, provide very clear, explicit guidance of prohibited services and include these services in the list of prohibited services set forth in Rule 2-01 (c)(4) of Regulation S-X.
For non-audit services such as statutory reporting, fairness opinions and contribution-in-kind reporting, valuation, appraisal, legal and expert services, provide further clarification of circumstances in which these services, otherwise prohibited under the Proposed Rule, may be permissible, such as:
- Explicitly permit preparation of statutory reports, provided the auditor does not maintain the underlying accounting records and does not prepare the financial statements used for inclusion in the consolidated statements of the registrant.
- Permit fairness opinions and contribution-in-kind reporting services where such determinations are not subject to discretion and, as a result, the auditor does not assume an advocacy role.
- Permit appraisal and actuarial services where such services do not materially affect amounts reported in the registrant's financial statements.
- Retain the current approach and exceptions for permissible legal services.
- Permit expert services where the auditor does not effectively act in an advocacy role.
- Provide a de minimis exemption - perhaps as a percentage of audit fees.

Tax Services

We think the provisions regarding permitted and prohibited tax services are not consistent with the specific requirements of the Act, nor the intent of Congress and the President. We think these provisions are internally inconsistent, ambiguous and vague. Furthermore, to the extent these provisions limit permissible tax services we think they are not in the best interest of the registrant's stockholders and the economy at large.

Section 201 of the Act explicitly prohibits registered accounting firms from providing nine specific non-audit services to their audit clients. The Act incorporated this requirement into the Securities Exchange Act of 1934 (the "Exchange Act") as Section 10A(g). The Act further amended the Exchange Act by adding Section 10A(h) which states: "A registered public accounting firm may engage in any non-audit service, including tax services, that is not described in any of the paragraphs (1) through (9) of subsection (g) for an audit client." Consistent with these provisions of the Act, the actual language in the proposed amendment to Rule 2-01 of Regulation S-X, "Qualifications of Accountants," (under the Proposed Rule) does not include taxes as a prohibited non-audit service. Furthermore, the Proposed Rule provides the following additional clarification regarding tax services:

"Nothing in these proposed rules is intended to prohibit an accounting firm from providing tax services to its audit clients when those services have been pre-approved by the client's audit committee. As discussed in our previously proposed rules on independence, tax services are unique, not only because there are detailed tax laws that must be consistently applied, but also because the Internal Revenue Service has the discretion to audit any tax return. (emphasis added)"

It is worth noting that the foregoing guidance does not appear to address the international dimension of taxation under both the U.S. Internal Revenue Code and other jurisdictions applicable to global corporations, but we would expect these international considerations to be generally similar to the U.S.

In addition, the Proposed Rule further states: "Tax services have traditionally been viewed as closely related to audit services and as not being in conflict with an auditor's independence." However, the Proposed Rule also includes the following contradictory statement which would not only preclude certain services relating to tax strategy and representation before tax courts, but would also impose ambiguous standards which could potentially preclude other tax services:

"Classifying a service as a "tax service" however, does not mean that the service may not be within one of the categories of prohibited services or may not result in an impairment of independence under Rule 2-01(b).......the accounting firm and the audit committee should be mindful of the three basic principles that cause an auditor to lack independence with respect to an audit client: (1) the auditor cannot audit his or her own work, (2) the auditor cannot function as a part of management, and (3) the auditor cannot serve in an advocacy role for the client. For example, where an accountant provides representation before a Tax Court the accountant serves as an advocate for his or her client and the accountant's independence would be impaired. Another example would be the formulation of tax strategies (e.g., tax shelters) designed to minimize a company's tax obligations."

We think these prohibitions are inconsistent with the Act and the intent of Congress, and internally inconsistent with other provisions in the Proposed Rule and with the clear fact tax services are not identified as prohibited services by Rule 2-01(c)(4) of Regulation S-X (under the Proposed Rule).

With respect to the legislative record of the Act, there are several extremely important relevant points relating to tax services. First, Congress not only excluded tax services from the nine specific services in the list of prohibited non-audit services, but it affirmatively acknowledged (in the addition of Section 10A(h) to the Exchange Act) that such services are permissible, provided they are approved in advance by the audit committee. We also understand the three "basic principles" described above are part of the legislative record, but were only used to develop the "limited list" of prohibited services. They were not included in the legislation as enacted. Moreover, Congress clearly intended to provide "bright line" guidance regarding prohibited services, rather than more general direction susceptible to misinterpretation. In fact, the stated goal of Congress was to draw a clear line around specific prohibited non-audit services as reflected in the Senate Banking Committee report:

"The intention of this provision is to draw a clear line around a limited list of non-audit services that accounting firms may not provide to public company audit clients because their doing so creates a fundamental conflict of interest for the accounting firms (emphasis added)."

The Congressional record clearly substantiates that tax services were not deemed to impair auditor independence and were not considered a prohibited service.

Notwithstanding the apparent contradiction with the Act and legislative intent, we think services relating to tax strategy and representation before the tax court do not conflict with these "basic principles." We understand the "basic principles" are designed to provide general guidance as to services which may impair the auditors' independence. However, the third principle, which prohibits the auditor from acting in an advocacy role for the client, is ambiguous and vague. The auditor is often in a position, because of expertise, knowledge, and understanding of the client's business, tax and financial matters, to offer valuable tax strategy and tax planning ideas. We think these services do not compromise the auditors' independence, since the auditor merely recommends potential strategies, the ultimate decisions rest with the registrant. In the case of representation before tax courts, the auditor is required under the professional code of conduct to present information in an objective manner.

We strongly urge the Commission to remove the Proposed Rule's provisions prohibiting tax services. We also recommend the Commission remove the more ambiguous text and restore the more explicit language regarding prohibited services consistent with the intent of Congress to provide unambiguous "bright line" guidance (as reflected by the legislative history). If, however, the Commission nonetheless concludes certain tax services compromise auditor independence we think very clear, explicit guidance is of paramount importance. We would recommend, in the alternative, the Commission specifically identify prohibited tax services in the Proposed Rule and include these services in the list of prohibited services set forth in Rule 2-01 (c)(4) of Regulation S-X.

Other Non-Audit Services

Generally, we agree with the specifically prohibited non-audit services, but suggest refinements to the interpretive guidance regarding statutory reports under bookkeeping services, appraisal or valuation (including fairness opinions), actuarial, legal, and expert services. These suggestions are as follows:

In many foreign jurisdictions auditors are generally responsible for preparation of statutory reports. We think the Proposed Rule should clearly indicate auditor preparation of statutory reports for foreign subsidiaries of the registrant would not impair the auditors' independence with respect to the registrant, provided the auditor does not maintain the underlying accounting records and does not prepare the financial statements used for inclusion in the consolidated statements of the registrant.
In certain foreign jurisdictions auditors may submit a variety of reports required pursuant to local statute, including fairness opinions and contribution-in-kind reports. For example, in the U.K. auditors are required to issue a "fairness opinion" relative to changes in share option plans on completion of a stock rights issue. These reports are subject to specific formula under the plan and, as a consequence, would not impair independence or put the auditor in an advocacy position. We suggest the Commission clarify in the interpretive guidance that such services are permissible.
Appraisal and actuarial services which are performed for non-financial reporting purposes and, therefore, do not affect amounts reported in the financial statements do not appear to conflict with the "basic principles." For example, valuation or actuarial services performed exclusively for tax purposes do not appear to violate the basic principles, since they are not likely to be subject to audit procedures in connection with the audit of the registrant's financial statements. We suggest further clarification regarding these two areas in the interpretive guidance.
Under current rules, non-U.S. legal services are permissible provided such services are routine and ministerial or immaterial to the financial statements of the registrant. The Proposed Rule would prohibit "any service to an audit client that, under the circumstances in which the service is provided, could be provided only by someone licensed, admitted, or otherwise qualified to practice law in the jurisdiction in which the service is provided." Since statutes vary from jurisdiction to jurisdiction this would mean prohibited services could be wholly inconsistent from one country to another. This approach would be highly problematic from an administrative standpoint for any global company. Furthermore, in many cases these services may not actually involve any advocacy role, or otherwise violate the basic principles. We recommend the Commission retain the current approach and exceptions for permissible legal services.
We also think further clarification is necessary regarding prohibited expert services. There are many situations in which registrants may request auditors to provide services where there is no pending or imminent proceeding. Although the auditor may be subsequently required to testify as a fact witness, the court may qualify the witness as an expert in order to testify as to conclusions reached. In these situations we recommend the Commission permit expert services where the auditor does not actually act in an advocacy role.

We would further propose an overall caveat permitting certain services which would otherwise be prohibited, provided they do not exceed a reasonable de minimis threshold and do not otherwise violate the "basic principles." The de minimis threshold could be specified as a percentage of the registrant's audit fee.

Conflicts of Interest Resulting From Employment of Auditors' Former Personnel

The proposed definition of "financial reporting oversight role" included in the Proposed Rule extends the scope of this requirement beyond the officers identified in the Act to include the director of internal audit, director of financial reporting and treasurer. We recommend this requirement be limited to the officers identified in the Act.

The requirements under the Proposed Rule concerning potential conflicts of interest resulting from previous employment with the registrant's auditor are more inclusive than the actual requirement under the Act. The Act provides an auditors' independence would be impaired if the registrant's "chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of the issuer during the 1-year period preceding the date of the initiation of the audit." The Proposed Rule would expand this requirement to include any person employed in a "financial reporting oversight role." The Proposed Rule includes a definition of this role in the proposed amendment to Rule 2-01(f)(3) (ii) of Regulation S-X which would subject the following additional personnel, not expressly identified in the Act, to these requirements: director of internal audit, director of financial reporting and treasurer.

Since the registrant's financial reporting matters are subject to oversight by the more senior executives identified in the Act, such as the chief financial officer, controller or chief accounting officer, we think that inclusion of other positions, such as the treasurer, director of internal audit and director of financial reporting, is not appropriate or necessary. Accordingly, we recommend the Commission retain the positions subject to this prohibition as specifically identified in the Act. In addition, we suggest that compliance with the one year "cooling-off period" be measured based on date of hire and a date that is more readily determinable than the commencement date of the audit for the current year, such as the date of the auditors' opinion for the preceding year examination.

Auditor Communication With Audit Committees

The Proposed Rule essentially codifies existing requirements regarding auditor communication with audit committees under GAAS. However, the Proposed Rule also incorporates by reference detailed and extensive requirements under the Commission's pending "Proposed Rule Concerning the Application of Critical Accounting Policies." This previous proposal introduces, with dubious merit at best, an entirely new level of granularity and subjectivity to these communications. These expanded disclosure requirements risk over-prescribing even a rules-based approach to matters involving accounting and business judgments, estimates and subjective assessments and judgments regarding alternative accounting principles. We recommend the Commission consider a more principles-based approach.

We believe it is critically important for the auditor and the audit committee to have open lines of communication. Information regarding all significant auditing, accounting and reporting matters is essential to the audit committee in effectively discharging its responsibilities to the stockholders, as well as compliance with its charter and a wide array of regulatory requirements. As indicated in the background to Proposed Rule, the registrant's auditor is already required to communicate a number of significant auditing, accounting and financial reporting matters under existing Generally Accepted Auditing Standards, AU Section 380, "Communication With Audit Committees." These matters include: (1) level of responsibility assumed by the auditor under GAAS, (2) effects of significant accounting policies in controversial or emerging areas (where authoritative guidance does not exist), (3) management's process for developing sensitive accounting estimates and the auditors' conclusions regarding such estimates, (4) material audit adjustments and immaterial adjustments proposed by the auditor but not recorded, (5) the auditors' assessment of the quality of the registrant's accounting policies, (6) auditor responsibility for other information included in documents containing audited financial statements, (7) any disagreements with management concerning the application of accounting principles, accounting estimates and financial statement disclosure, (8) any situations where management consulted with other accountants regarding auditing or accounting matters, (9) any major issues discussed with management prior to the auditors' retention, and (10) any serious difficulties encountered in the course of their audit.

Section 204 of the Act specifically requires the auditor to report to the audit committee all critical accounting policies and practices; all alternative treatments of financial information within GAAP discussed with management, implications of such disclosures and treatments and the treatment preferred by the auditor; and any other material written communications with management, such as the auditors' management letter or schedule of unadjusted differences. The actual text included in Rule 2-07 of Regulation S-X, "Communication With Audit Committees," under the Proposed Rule is identical to the language set forth in Section 204 of the Act. These requirements essentially codify existing requirements under GAAS. We think the reference in the Proposed Rule to the cautionary advice issued by the Commission in December 2001 (FR-60, "Cautionary Advice Regarding Disclosure about Critical Accounting Policies") provides useful context and guidance as to the nature and content of the discussion concerning critical accounting policies.

However, requirements under the Commission's pending "Proposed Rule Concerning the Application of Critical Accounting Policies," introduce, with dubious merit at best, an entirely new level of granularity and subjectivity to the discussion. This proposed rule would require disclosure in the company's annual report on Form 10-K and discussion with the audit committee of (1) detailed assumptions and sensitivity analysis relating to all significant accounting estimates and (2) the effect of alternative accounting policies which could have been, but were not, adopted by the registrant. Generally, we believe this proposed rule would require excessive disclosure which would be confusing and less than useful to the investor. Similarly, we do not think discussion of this detailed information with the audit committee would be appropriate, useful or meaningful. Furthermore, as indicated above, the auditor is already required to discuss management's process for developing sensitive accounting estimates and the auditors' conclusions regarding such estimates, effects of significant accounting policies in controversial or emerging areas (where authoritative guidance does not exist) and the auditors' assessment of the quality of the registrant's accounting policies.

As we indicated in our July 18, 2002 letter to the Commission regarding the "Proposed Rule Concerning the Application of Critical Accounting Policies," the extensive level of detail prescribed for the review of critical accounting estimates with the audit committee, taken together with other Commission proposals and existing matters subject to review by the audit committee, would expand the responsibilities of audit committee members well beyond the personal time commitment substantially all could be reasonably expected to spend. Existing audit committee responsibilities already encompass a registrant's earnings release, filings with the Commission, meetings with a registrant's internal and external auditors and numerous other matters. Such a dramatic expansion in responsibilities, in our view, potentially transforms the audit committee member's status to one of constructive employment and could compromise the independence and objectivity essential to the management oversight role of the audit committee.

Finally, the financial statements and other information included in filings with the Commission are importantly and fundamentally the representations of management. We are concerned the increased participation of the audit committee and auditors in the registrant's accounting and financial reporting not obscure management's absolute responsibility in this area. It is vitally important these regulatory initiatives not dilute management's sense of responsibility, ownership and accountability for the appropriateness of the registrant's financial statements and disclosures. Accordingly, we strongly recommend management report to the audit committee on the registrant's critical accounting policies and any alternative accounting treatments discussed with the auditors in the application of generally accepted accounting principles to the registrant's financial statements. The audit committee could then confer with the auditors, either in the presence of management or in executive session, as to their viewpoint on these matters.

Cumulative Effect of Increased Regulation

The rapidly expanding array of rules-based legislation, regulations and reporting standards is already beginning to mire directors, executives and senior management of public companies in a morass of complex and arcane rules. We strongly suggest the Commission seriously evaluate the potential unintended consequences and consider a more principles-based approach to ongoing regulatory initiatives.

This Proposed Rule is part of a rapidly expanding array of rules-based legislation, regulations and reporting requirements promulgated by Congress, regulatory authorities and standard setting bodies. We think the rules-based approach to these initiatives is already producing serious unintended adverse consequences. The cumulative impact of the numerous legislative and regulatory initiatives in the past year are beginning to mire directors, executives and senior management of literally hundreds of U.S. publicly held businesses in a morass of complex and arcane rules. This is diverting corporate leadership from its primary responsibility to profitably and responsibly manage the corporate enterprise and deliver the return on invested capital necessary for growth. In fact, continued proliferation of these rules and regulations, and related sanctions and penalties could seriously reduce the pool of qualified executives willing to accept responsibility as directors for U.S. corporations. We think it is critically important that the SEC carefully evaluate the overall cumulative impact of these proposed new rules on roles and responsibilities of directors and executives, as well as the overall impact on corporate enterprise in America. Perhaps, a more principles-based approach to these initiatives could accomplish the important and essential objectives of recent legislative initiatives in a manner more consistent with our free enterprise system.

Thank you for the opportunity to comment on this important proposal. We appreciate your consideration of our comments and suggestions.

Sincerely,
Leon J. Level
Vice President and Chief Financial Officer
Computer Sciences Corporation

cc:

The Honorable Harvey L. Pitt, Chairman, Securities and Exchange Commission
The Honorable Paul S. Atkins, Commissioner
The Honorable Roel C. Campos, Commissioner
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Harvey J. Goldschmid, Commissioner

Exhibit

Proposed Rule: Strengthening the Commission's Requirements Regarding Auditor Independence, Subject File No. S7-49-02 (the "Proposed Rule")

Request for Comments

II.A. Conflicts of Interest Resulting from Employment Relationships

Is the one-year cooling-off period sufficiently long to achieve an appearance of independence by the accounting firm? If not, what period would be appropriate?
We think the one-year cooling-off period is sufficiently long to achieve independence, in fact and appearance.
Is the term audit engagement team sufficiently clear? If not, what changes would improve the description to describe the group of accountants who would be covered?
We think the term audit engagement team is sufficiently clear.
Is the phrase commencement of the audit sufficiently clear? If not, what changes would improve the description? Is that the appropriate time to mark the commencement of the period? Is there a better mark?
In view of the fact that it can be difficult to determine this date in the case of audits of multi-national registrants we suggest that compliance with the 1 year "cooling-off period" be measured based on the employees date of hire and a date that is more readily determinable than the commencement date of the audit for the current year, such as the date of the auditors' opinion for the preceding examination.
Is the phrase commencement of review procedures sufficiently clear? If not, what changes would improve the description?
As indicated above we suggest that a more readily determinable date be used for measuring the 1-year "cooling off period," such as the date of the auditors' opinion for the preceding examination.
Is it appropriate that the cooling-off period provisions apply to employment relationships involving audit engagement team members and their audit clients? Should the requirements be limited to audit clients who are issuers as defined in Section 205 of the Act?
We think these provisions should apply to all audit clients with publicly traded securities.
Are the appropriate officers covered by the proposed rule? If not, which additional individuals should be subject to the cooling-off period provision? For example, should national office personnel who would be excluded under the proposal be included?
The requirements under the Proposed Rule concerning potential conflicts of interest resulting from previous employment with the registrant's auditor are more inclusive than the actual requirement under the Act. The Act provides an auditors' independence would be impaired if the registrant's "chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of the issuer during the 1-year period preceding the date of the initiation of the audit." The Proposed Rule would expand this requirement to include any person employed in a "financial reporting oversight role." The Proposed Rule includes a definition of this role in the proposed amendment to Rule 2-01(f)(3) (ii) of Regulation S-X which would subject the following additional personnel, not expressly identified in the Act, to these requirements: director of internal audit, director of financial reporting and treasurer.
Since the registrant's financial reporting matters are subject to oversight by the more senior executives identified in the Act, such as the chief financial officer, controller or chief accounting officer, we think that inclusion of other positions, such as the treasurer, director of internal audit and director of financial reporting, is not appropriate or necessary. Accordingly, we recommend the Commission retain the positions subject to this prohibition as specifically identified in the Act.
Should the proposed rules apply equally to large firms/companies as small firms/companies? Would the proposed rules impose a cost on smaller issuers that is disproportionate to the benefits that would be achieved? Why or why not? Should there be an exemption to this requirement for smaller businesses?
The issues in this area have not been isolated to large firms/companies. Accordingly, we feel the proposed rules should apply equally to all registrants without regard to size.
The "cooling off" period applies to all entities in the investment company complex. Is this too broad? Why or why not?
No Comment.
Should the Commission include exceptions subject to certain criteria? If so, what should these criteria be?
We do not think exceptions to this provision would be necessary or appropriate provided the requirement is implemented on a prospective basis.

II.B. Services Outside the Scope of the Practice of Auditors

Are there other non-audit services that are incompatible with Rule 2-01(b) or that raise independence concerns? If so, what are they, and why do they raise independence concerns?
We are not aware of any other non-audit services raising independence concerns.
Is the meaning of the general principles sufficiently clear?
The general principles are sufficiently clear with the exception of the principle that the auditor should not act as an advocate for the client. This principle should be more clearly defined as to what is meant by an advocate.

1. Bookkeeping or Other Services Related to the Audit Client's Accounting Records or Financial Statements of the Audit Client

Should the definition of bookkeeping be further clarified? If so, how?
In many foreign jurisdictions auditors are generally responsible for preparation of statutory reports. We think the Proposed Rule should clearly indicate auditor preparation of statutory reports for foreign subsidiaries of the registrant would not impair the auditors' independence with respect to the registrant, provided the auditor does not maintain the underlying accounting records and does not prepare the financial statements used for inclusion in the consolidated statements of the registrant.
Does the definition cover all the bookkeeping services that would impair an accountant's independence?
Yes, we think the definition adequately covers bookkeeping services that would impair an accountant's independence.
Should an auditor be permitted to provide bookkeeping services to an audit client if it is not reasonably likely that the results of those services will be subject to audit procedures during the audit of the client's financial statements? Why or why not?
No, except that we would suggest the Proposed Rule incorporate a de minimis exemption.
Is the standard of reasonably likely sufficiently clear? If not, should we use some other standard? If so, what standard should we use?
Yes, we believe the reasonably likely standard is clear and readily understood.
Is the phrase "preparing statutory statements which form the basis of U.S. GAAP statements" sufficiently clear? If not, how might the phrase be revised?
Yes, but we would add the clarification noted under the first bullet in this section.

2. Financial Information Systems Design and Implementation

Is an auditor's independence impaired when the auditor helps select or test computer software and hardware systems that generate financial data used in or underlying the financial statements? Why or why not?
We do not feel the auditor's independence is impaired if the auditor merely aids in the selection or testing of computer systems. Auditors are likely to have experience with many computer systems during the course of working with their clients. An auditor's insight and knowledge in this area could yield efficiencies and provide helpful insight. In this role, the auditor is not operating, designing, or implementing financial information systems. Also, this does not appear to be inconsistent with the "basic principles."
Whether a system is used to generate information that is "significant" to the audit client's financial statements may depend on the size of the engagement. Does the magnitude as a percentage of either audit fees or total fees of the fees for such services make a difference on whether performance of the service impairs independence?
No, because the relative size of the fees would not necessarily be indicative of the significance of any potential impact on the financial statements of the registrant as a result of system errors or manipulation.

3. Appraisal or Valuation Services, Fairness Opinions, or Contribution-in-Kind Reports

Does providing valuation or appraisal services that are unrelated to the financial statements, such as for certain regulatory purposes, impair an accountant's independence?
We do not feel that valuation and appraisal service unrelated to the financial statements impair auditor independence. In addition, in many instances utilizing the auditor for these services would be more efficient.
Does providing valuation or appraisal services for tax purposes impair an accountant's independence?
No, tax valuation and/or appraisal services would not appear to impair the auditors' independence.
Are there certain types of appraisal or valuation services, or certain instances in which they are provided, that do not raise auditor independence concerns? Are there circumstances in which an accounting firm may be required by law or regulation to provide such services, either in the United States or abroad?
Refer to our preceding response included above. Appraisal services performed for tax or statutory purposes would not appear to violate the basic principles or impair auditor independence.
Should we provide an exemption for such services provided to a foreign private issuer by its accountant where local law requires such services (e.g. contribution in-kind reports)?
No Comment.
The Commission staff, when providing interpretations of the application of the auditor independence rules to contribution in-kind reports, has worked with foreign jurisdictions to accommodate the statutory requirements in those jurisdictions. Should the Commission's rules provide that similar practices or arrangements be permitted where contribution in-kind reports are required by foreign statute?
Yes, we agree the Proposed Rule should provide an exemption for statutory requirements, such as contribution-in-kind report requirements in foreign jurisdictions.

4. Actuarial Services

Are there certain circumstances under which an accountant can provide actuarial services to an audit client without impairing independence?
Yes, actuarial services which are performed for non-financial reporting purposes and, therefore, do not affect amounts reported in the financial statements do not appear to impair auditor independence.
Have we appropriately described the actuarial services prohibited by the Act?
We think the actuarial services prohibited are appropriately described. We, however, recommend the Commission further clarify the Proposed Rule to indicate actuarial services that do not affect amounts reported in the registrant's financial statements would not impair the auditors' independence.

5. Internal Audit Outsourcing

Is the definition of the "internal audit function" sufficiently clear?
Yes the definition internal audit function is sufficiently clear.
We solicit comment on whether an exception should be provided for small businesses. If so, what criteria should we consider in providing such an exception?
No Comment.
Does it impair an auditor's independence if the auditor does not provide to the client outsourcing services related to the internal audit function of the audit client, but rather performs individual audit projects for the client?
No, we do not feel this type of service would impair auditor independence.
Are there safeguards that can be established by the auditor that would allow the audit client to outsource the internal audit function to the auditor without impairing its independence?
No, we think such services would impair the auditors' independence, in fact and appearance.
Would it impair the auditor's independence if the auditor performs only operational audits that are unrelated to the internal controls, financial systems, or financial statements?
No, we do not think this type of activity would impair auditor independence.
Is additional guidance necessary to distinguish the services that would be prohibited under this proposed rule from those services that would be permitted as operational audits?
We do not think additional guidance is necessary.

6. Management Functions.

Do services related to designing or implementing internal accounting controls and risk management controls result in the auditor auditing his or her own work? Would such services impair an auditor's independence when the auditor is required to issue an opinion on the effectiveness of the control systems that he or she designed or implemented?
Yes, we think designing and implementing internal accounting controls would impair an auditors' independence. It would result in the auditor auditing his or her own work in conjunction with the auditors' evaluation of the registrant's system of internal accounting controls required under Generally Accepted Auditing Standards ("GAAS") in connection with the examination of the registrant's financial statements. The auditors independence would likewise be impaired if the auditor is also separately engaged to audit the registrant's system of internal accounting controls and issue an opinion thereon.
Do services related to assessing or recommending improvements to internal accounting controls and risk management controls result in the auditor auditing his or her own work? Would such services impair an auditor's independence when the auditor is required to issue an attestation report on the effectiveness of the control systems that he or she has assessed or evaluated for effectiveness?
No, we agree with the conclusion in the Proposed Rule that services in connection with the assessment of internal accounting and risk management controls, as well as providing recommendations for improvements, do not impair the auditors' independence.
We request comment on whether there are circumstances under which an accounting firm can perform or assume management functions or responsibilities for an audit client without impairing independence?
No, such responsibilities would directly violate the second of the basic principles and appear to impair the auditors' independence, in fact and appearance.

7. Human Resources

Are there additional types of human resource and employee benefit services that impair an auditor's independence?
Other than personnel recruitment and executive search activities prohibited under the Proposed Rule, we are not aware of any other human resource or employee benefit services that would impair an auditor's independence.
Would an auditor's independence be impaired if the auditor provided personnel hiring assistance for only non-executive or non-financial personnel?
We do not think that this activity impairs an auditors' independence.
Does it impair an auditor's independence if the auditor provides consultation with respect to the compensation arrangements of the company's executives?
We do not think that this activity impairs an auditors' independence.

8. Broker-Dealer, Investment Adviser Or Investment Banking Services

We solicit comment on the scope of the proposal. Are there other securities professional services that the rule should expressly identify as impairing independence?
No comment.
Would an auditor's independence be impaired if the auditor acted as a securities analyst covering the sector or industry of an audit client?
We think an auditor's independence would be significantly impaired if the auditor acted as a securities analyst covering the sector or industry of an audit client. This would clearly violate of the "basic principle" prohibiting the auditor from acting as a promoter of the company's stock or other financial interest.
Should we adopt rules that would clarify when the auditor is acting as an unregistered broker-dealer? If so, what should those rules be?
No, we are not aware of any controversy or lack of clarity regarding situations which would constitute "acting as an unregistered broker dealer."

9. Legal Services

Are there any particular legal services that should be exempted from the rule?
We recommend non-U.S. legal services be permitted, provided such services are routine and ministerial or immaterial to the registrant's financial statements.
Would making the rule's application depend upon the jurisdiction in which the service is provided leave the rule subject to any significant uncertainty, or pose the prospect of any significant complexity or unfairness?
Since statutes vary from jurisdiction to jurisdiction this would mean that prohibited services could be wholly inconsistent from one country to another. This approach would be highly problematic from an administrative standpoint for any global company. Furthermore, in many cases these services may not actually involve any advocacy role, or otherwise violate the basic principles.
Should there be any exception for legal services provided in foreign jurisdictions? For example, in some countries only a law firm may provide tax services. Should a foreign accounting firm be permitted to provide, through an affiliated law firm, tax or other services that a U.S. accounting firm could provide to a U.S. audit client without impairing the firm's independence? Why or why not?
Yes, we think foreign accounting firms should be permitted to provide, through an affiliated law firm, tax or other services that a U.S. accounting firm could provide to a U.S. audit client without impairing its independence.
Should there be an exception for legal services provided to issuers in foreign jurisdictions? Should any such exception be tailored to avoid undermining the purpose of the restriction? For example, could fees for legal services be limited to a small percentage (e.g., 5% or 10%) of the amount of fees for audit services? Could partners providing audit services be prohibited from being involved in the provision of legal services or from receiving compensation based on such services?
Yes, we recommend a de minimis exemption.
Should any such exception have a "sunset" provision that would both allow foreign private issuers a transition period and allow the Commission to review the situation regarding legal services?
No, we think a de minimis exemption should be retained.

10. Expert Services

Are there circumstances in which providing audit clients with expert services in legal, administrative, or regulatory filings or proceedings should not be deemed to impair independence?
Yes, we think there could be many situations in an auditor might act as an expert without necessarily assuming the role of an advocate for the client. We understand the Commission feels constrained by the prohibition against expert services (unrelated to the audit) in Section 201 of the Act. In issuing the Proposed Rule, we understand the Commission was further guided by legislative history, such as the following comment by Senator Sarbanes:
A public company auditor, to be independent, should not act as an advocate of the client (as it would if it provided legal or expert services to an audit client in judicial or regulatory proceedings).
However, the AICPA Code of Professional Conduct, Rule 102, "Integrity and Objectivity" requires the auditor to maintain his or her objectivity and integrity, free of conflicts of interest, and explicitly prohibits knowing misrepresentation of facts or subordination of the auditors' judgment to others. Furthermore, an ethics interpretation concerning client advocacy and expert witness services requires that the certified public accountant "not serve as an advocate but as someone with specialized knowledge, training and experience in a particular area who should arrive at and present positions objectively." We do not believe that an auditor necessarily compromises his independence when providing expert services. Accordingly, we recommend there not be a unilateral prohibition against all expert services; rather each situation should be evaluated against the "basic principle" based on the specific facts and circumstances.
Should an auditor be permitted to serve as a non-testifying expert for an audit client in connection with a proceeding?
Yes, as indicated in the preceding response we think an auditor should be allowed to serve in this capacity.
Is the definition of prohibited expert services appropriate? Why or why not?
No, the definition of prohibited expert services is far too expansive, significantly broader than the Act. As indicated previously, we do not think a unilateral prohibition is appropriate and recommend that each situation be evaluated against the "basic principle" based on the specific facts and circumstances.
Is the distinction between advocacy and providing appropriate assistance to an audit committee sufficiently clear?
No, we suggest the distinction between advocacy and appropriate assistance requires further clarification.

11. Tax Services

We request comment on whether providing tax opinions, including tax opinions for tax shelters, to an audit client or an affiliate of an audit client under the circumstances described above would impair, or would appear to reasonable investors to impair, an auditor's independence.
No, we do not feel these services impair auditor independence. We also do not think that investors would view these services as impairing an auditor's independence.
Are there tax services that should be prohibited by the Commission's independence rules?
Generally we do not believe tax services violate the "basic principles" and consequently do not believe such services impair auditor independence. We believe this perspective is consistent with the exclusion of tax services from the specific list of prohibited services included in the Act, as well as the clear intent of Congress and legislative history.
Is it meaningful to categorize tax services into permitted and disallowed activities? If so, what categories and related definitions would make the demarcation meaningful?
No, as indicated above we do not think this is meaningful.

II. C. Partner Rotation

Should the Commission adopt rules requiring that issuers engage forensic auditors periodically to evaluate the work of the financial statement auditors? If so, how often should the forensic auditors be engaged? What should be the scope of the forensic auditors' work? Would doing so obviate the need to require partner rotation for the audit firm? Alternatively, could the company obtain the necessary expertise by engaging other outside consultants? If so, what type of consultants should it engage?
We do not think the Commission should adopt rules requiring issuers to engage forensic auditors in addition to financial statement auditors. Certainly, the additional requirements under the Act imposed on auditors, audit committees, and management will enhance and improve the financial statement audits. Furthermore, the Public Accounting Oversight Board will also oversee the audits of public companies. A requirement to engage forensic auditors seems wholly unnecessary. This would result in significant additional cost to issuers without any commensurate benefit. We believe these recently enacted requirements under the Act, taken together with existing professional standards and regulatory requirements, will be sufficient to ensure the integrity of independent audits of the registrants, as well as the integrity of registrants' financial statements.
Would the establishment of rules requiring companies to engage forensic auditors periodically provide an opportunity to other firms to enter the market to provide these services?
Refer to the preceding response relative to the requirement to engage forensic auditors included above.
Should the Commission establish requirements for firms conducting forensic audits? If so, what should those requirements be?
Refer to the response relative to the requirement to engage forensic auditors included above.
Should issuers be given a choice between engaging forensic auditors periodically and having the audit partners on their engagement team be subject to the rotation requirements? Why or why not?
Refer to the response relative to the requirement to engage forensic auditors included above.
What are the costs and benefits of engaging forensic auditors to evaluate the work of the financial statement audit firm?
Refer to the response relative to the requirement to engage forensic auditors included above.
This proposed rule would apply to the audits of the financial statements of "issuers." Should the Commission consider applying this rule to a broader population such as audits of the financial statements of "audit clients" as defined in 2-01(f)(6) of Regulation S-X? Why or why not?
Refer to the response relative to the requirement to engage forensic auditors included above.
For organizations other than investment companies, the rotation requirements would apply to significant subsidiaries of issuers. Should a different approach be considered? Is so, what approach would be appropriate?
Yes, a different approach would be more appropriate.
We think partner rotation is only necessary for the lead audit partner and concurring review partner to achieve the objective of a periodic "fresh look" and to avoid relationships of a longer duration which could compromise independence and objectivity essential to an effective audit. The lead engagement partner and concurring review partner are the individuals primarily responsible for issuance of the auditors' opinion on the registrant's financial statements. These individuals are responsible for substantially all decisions material to the audit of the registrant's financial statements, including the scope and nature of required audit procedures, conclusions on the overall results and sufficiency of such procedures, compliance of the registrant's financial statements with generally accepted accounting principles and the nature of the auditors' opinion on the registrant's financial statements based on the results of the audit procedures applied. The rotation of these partners provides the necessary "fresh look". Other partners on the engagement generally do not have this level of responsibility and significant auditing, accounting and reporting matters are typically elevated to the lead audit and concurring review partners.
The audit engagement team responsible for the audit of CSC is extensive. There are partners directly involved with the audit in a number of capacities in the United States, as well as in many international locations. The audit partners have in-depth technical expertise regarding areas critical to the business. Specifically, in addition to the lead audit partner, the audit engagement team includes a number of specialists such as EDP audit partners, tax partners and government contracts partners. The engagement team also includes numerous international partners providing audit and statutory services to subsidiaries located in 45 countries around the globe. These partners must have a thorough overall understanding of our business, including high technology industry issues relevant to CSC's vertical industry software products and federal regulatory matters pertinent to our federal government activities. In addition, they need a detailed understanding of multi-year contracts which materially affect the financial results and financial condition of the company's commercial outsourcing and government operations. At the same time, the specialists and international location partners do not make the significant final decisions related to accounting and financial reporting - the lead audit and concurring review partners maintain this responsibility. Also, these specialists and international location partners do not develop significant relationships with senior management.
Rotation of all engagement team partners on a five-year basis would significantly diminish the continuity necessary to an understanding of the auditing, accounting and financial issues critical to the effectiveness of the audit. This issue would be particularly important where specialized industry expertise is necessary since the pool of available audit personnel would be more limited. Furthermore, rotation of audit partners assigned to the company's foreign operations would likewise be constrained by the limited number of audit partners fully knowledgeable in U.S. GAAP and GAAS in certain foreign jurisdictions. Moreover, rotation of audit partners in specialist roles, such as tax and EDP audit, would also be subject to the same issues due to the limited pool of available personnel with the requisite expertise. This could have the unintended consequence of heightened risk to audit quality and, ultimately, an actual diminution in the efficacy of audits.
Should the rotation requirements apply to all partners on the audit engagement team? If not, which partners should be subject to the requirements?
No, the rotation requirement should not apply to all partners on the audit engagement team. The partners subject to the requirements should be the lead audit and the audit concurring review partners. As indicated above, these individuals are responsible for substantially all decisions material to the audit of the registrant's financial statements. Other partners on the engagement generally do not have this level of responsibility and significant auditing, accounting and reporting matters are typically elevated to the lead audit and concurring review partners.
Is the proposed guidance sufficiently clear as to which audit engagement team partners would be covered by the rule? Is the proposed approach appropriate? If not, how can it be improved?
The proposed guidance is sufficiently clear as to those partners covered by the rule. However, as discussed above, we disagree with the proposed approach. We feel strongly that the proposed approach is overly broad and far more expansive than what is necessary.
Is the exclusion of certain "national office partner" personnel from the rotation requirements appropriate?
Yes, national office partners should be excluded from the rotation requirements. National office partners are generally involved with audit clients on a very limited basis. Yet, their knowledge of particular issues can be extremely beneficial for audit partners and issuers.
Is the guidance on national office partners who are exempted from the rotation requirements sufficiently clear?
Yes.
Is the distinction between a member of the engagement team and a national office partner who consults regularly (or even continually) on client matters sufficiently clear?
Yes.
Should certain partners performing non-audit services for the client in connection with the audit engagement be excluded from the rotation requirements?
Yes, partners performing non-audit services should be excluded from the rotation requirements since independence requirements are not germane to their work and their services would not have any impact on the independence of audit services.
Should additional personnel (such as senior managers) be included within the mandatory rotation requirements?
We do not think additional personnel should be included within the mandatory rotation requirements. As indicated above, the lead audit partner and concurring review partner are primarily responsible for issuance of the auditors' opinion on the registrant's financial statements. These individuals are responsible for substantially all decisions material to the audit of the registrant's financial statements. The rotation of these partners would provide the "fresh look" necessary to ensure objectivity. Furthermore, the Act does not require rotation beyond the lead audit and concurring review partners.
Is it appropriate to provide transitional relief where the proposed rules are more restrictive that the provisions of the Sarbanes-Oxley Act?
We think it is absolutely critical to provide transitional relief if the rules adopted are more restrictive than the requirements set forth in the Act. Auditors will need sufficient time to hire, train and develop personnel to comply with the rules.
Are there situations in foreign jurisdictions that extended partner rotation could be modified with additional safeguards or limitations that would recognize the jurisdictional requirements as well as logistical limitations that may exist?
We do not feel that partner rotation is needed in foreign jurisdictions.
Should the rotation requirements be different for small firms? What changes would be appropriate and why? If so, how should small firms be defined?
No, we think these requirements should be consistent without regard to the size of the audit firm.
Would the proposed rules impose a cost on smaller firms that is disproportionate to the benefits that would be achieved?
No Comment.
Is the five-year "time out" period necessary or appropriate? Would some shorter time period be sufficient, such as two, three or four years? Should there be different "time out" periods based on a partner's role in the audit process?
We think the five-year "time out" period is appropriate. As indicated above, we feel only the engagement partner and the concurring review partner should be subject to the rotation requirements and we think the five-year "time out" period for these partners is appropriate.
If the Commission concludes that rotation requirements must be applied to other engagement team audit partners, we suggest audit partners serving significant subsidiaries or divisions of the registrant could be subject to rotation over longer periods of service, perhaps seven to ten years. For personnel auditing immaterial subsidiaries and divisions of the registrant there would not appear to be any need for rotation. We also suggest the proposed five year "time out" period likewise be reduced for audit partners other than the lead audit and concurring review partners (perhaps two or three years).
If a partner rotates off an engagement after fewer than five years, should the "time out" period also be reduced? Why or why not? If so, how much should the reduction in the time out period be?
We think the "time out" period of five years should be reduced in these circumstances.
Are the partner rotation requirements, as proposed, for investment company issuer's or other entities in the investment company complex too broad? Should we only prohibit a partner from rotating between investment company issuers within the same investment company complex? Why or why not?
No Comment.
The proposed rules would not require all partners on the audit engagement team to rotate at the same time. Should it? Why or why not?
As indicated above we think the rotation requirement should be limited to the lead audit and concurring review partners. If the Commission concludes rotation must be applied to other engagement team audit partners we would suggest audit partners serving significant subsidiaries or divisions of the registrant could be subject to rotation over longer periods of service, perhaps seven to ten years. For personnel auditing immaterial subsidiaries and divisions of the registrant there would not appear to be any need for rotation. In any case, we think that partner rotation should be staggered to preserve continuity necessary to an effective audit. It takes significant time and effort for partners to become well versed on the significant issues relative to their clients. New engagement partners generally rely heavily on existing partners involved on the audit engagement team to impart their knowledge of a client. This process creates a more efficient, effective audit. It would be extremely difficult and certainly inefficient to require all partners to rotate simultaneously. As indicated above, it is critical that partner rotation not result in heightened risk to audit quality or, ultimately, any diminution in the efficacy of the audit.
In addition, to facilitate a smooth transition, we recommend a one-year overlap for the lead partner rotating off the engagement and the incoming partner. We insist on this approach each time the lead partner is rotated at CSC. We also suggest the transition period be extended one year for the concurring review partner so both the lead audit and concurring review partner would not be subject to rotation in the same year.

II. D. Audit Committee Administration of the Engagement

Should the Commission create other exceptions (beyond the de minimis exception) that would allow an audit committee to adopt a policy that contracts that are recurring (e.g., due diligence engagements in connection with a series of insignificant acquisitions) and less than a stated dollar amount (such as $25,000) or less than a stated percentage of annual revenues (such as 1% or 5%) could be entered into by management and would be reviewed by the audit committee at its next periodic meeting?
We think the Commission should permit a categorical exception for contracts that are recurring where fees are less than a stipulated threshold. Management should have the leeway to enter into these contracts so long as the audit committee subsequently reviews them. It is likely to be very inefficient to require audit committee approval for these types of contracts.
Is allowing the audit committee to engage an auditor to perform non-audit services by policies and procedures, rather than a separate vote for each service, appropriate? If so, how do we ensure that audit committees have rigorous, detailed procedures and do not, in essence, delegate that authority to management?
We think the audit committee should be allowed to engage the auditor to perform non-audit services via established policies and procedures, rather than requiring a separate vote in each instance. However, we recommend the Proposed Rule require ratification of such actions at the next regularly scheduled meeting of the audit committee.
Should more or fewer aspects be left to the discretion of the audit committee?
We feel the exact form and content of these policies and procedures should be left to the discretion of the audit committee so that they can be tailored to the specific business circumstances and requirements of the registrant.
Are there specific matters that should be communicated to or considered by the audit committee prior to its engaging the auditor?
We think the audit committee should be given the full latitude to determine communications and considerations relevant to the selection and retention of the registrant's auditor.
What, if any, audit committee policies and procedures should be mandated to enhance auditor independence, interaction between auditors and the audit committee, and communications between and among audit committee members, internal audit staff, senior management and the outside auditor?
We do not think any additional policies and procedures should be mandated in this area.
Our proposed rules do not contain exemptions for foreign filers. Are there legal or regulatory impediments which may make it difficult for certain foreign filers to comply? If so, what safeguards can these foreign filers employ to ensure that they comply with the proposed rules?
No Comment.
Our proposed rules requiring the audit committee to pre-approve non-audit services to be provided by the company's auditor do not contain an exemption for foreign filers. Are there legal or regulatory impediments which may make it difficult for certain foreign filers to comply? If so, what safeguards can these foreign filers employ to ensure that there is an authorization process to pre-approve such services that is separate from management?
No Comment.
In addition to legal or regulatory impediments, are there practical impediments which would make it difficult for certain foreign filers to comply with the pre-approval requirements? If so, what are these impediments? What safeguards can such an entity establish to better implement the proposed rules (which is to separate the decision to engage the auditor for non-audit services from management)?
No Comment.
Should the Commission provide additional specific guidance to assist audit committees when deliberating auditor independence issues? What topics would be helpful?
Yes, the Commission should provide additional guidance to assist audit committees in evaluating and monitoring auditor independence. The Proposed Rule states that the nine non-audit services prohibited under Section 201(a) of the Act are not all-inclusive. In addition, the Proposed Rule states that an accountant's independence should be measured against the "basic principles": an auditor should not audit its own work, an auditor should not function as part of management or an employee of the audit client, and an auditor should not act as an advocate for its audit client. First, we strongly believe the Commission should limit prohibited services to the services specifically prohibited under the Act. Second, the Commission should provide detailed guidance and examples for use in determining prohibited services. Third, in the event the Commission nonetheless concludes certain additional services not specifically precluded under the Act should be prohibited, we recommend the Commission provide "bright line" guidance to avoid misinterpretation.
Our proposed rules would require the audit committee of an investment company to pre-approve the non-auditing services provided by the accountant of the investment company to the investment company's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides services to the investment company. Should the audit committee of an investment company registrant be required to approve any non-auditing services provided to the investment adviser and any entity controlled, controlled by, or under common control with the investment adviser that provides services to the fund? Should the scope of the pre-approval requirement be expanded or narrowed? Why or why not?
No Comment.
Under the proposed rules, the pre-approval of non-auditing services would permit, for purposes of determining whether a non-auditing service meets the de minimis exception, the investment company's audit committee to aggregate total revenues paid to the investment company's accountant by the investment company, its investment adviser and any entity controlled, controlled by, or under common control with the investment adviser that provides services to the fund. Should the de minimis exception be determined separately based on the total revenues paid to the investment company's accountant by each entity?
No Comment.
This proposed rule would apply to "issuers." Should the Commission consider applying this rule to a broader population such as "audit clients" as defined in 2-01(f)(6) of Regulation S-X? Why or why not?
We think these rules should apply to all registrants with publicly traded securities.
In addition to the requirement that a majority of the directors who are not interested persons of the registered investment company appoint the independent accountant of a registered investment company under the Investment Company Act of 1940, the proposed rules would also require the audit committee of an investment company to separately approve the accountant. For registered investment companies, who should approve the selection of the accountant, i.e. independent directors, the audit committee, or both? If both, should the audit committee nominate the independent accountant with the independent directors making the selection?
No Comment.

II. E. Compensation

We seek comments on all aspects of incentive compensation for audit partners, principals and shareholders and on the following:
No Comment.
What economic impact will our proposal have on the current system of partnership compensation in accounting firms?
No Comment.
Are there other approaches that should be considered with respect to compensation packages that pose a concern about auditor independence? If so, what are they?
No Comment.
Would the proposed rule change be difficult to put into practice? If so, why? How could it be changed to be more effectively applied?
No Comment.
Should managers, supervisors or staff accountants who are members of the audit engagement team also be covered by this proposal?
No Comment.
Does this proposal cover the appropriate time period or should a measure other than the audit and professional engagement period be considered?
No Comment.
Does the proposed rule cover the entire component of an audit partner's compensation that gives rise to independence concerns?
No Comment.
Will this compensation limitation disproportionately affect some firms because of their size or compensation structure? If so, how may we accomplish our goal while taking these differences into account?
No Comment.
Our proposal references compensation based on the performance or sale of non-audit services. Is there a better test that permits partners to participate in the overall success of the firm while addressing the influence that such services might have on a particular auditor-client relationship?
No Comment.

II. F. Definitions

2. Accounting Role

Is this proposed definition sufficiently clear? If not, what changes would make the definition clearer and more operational?
We think the proposed definition is sufficiently clear.
3. Financial Reporting Oversight Role
Is this proposed definition sufficiently clear? If not, what changes would make the definition clearer and more operational?
We think the proposed definition is sufficiently clear.
4. Audit Committee
Some registrants may not have designated boards of directors or audit committees (e.g. benefit plans required to file Form 11-K). Does the definition of audit committee sufficiently describe who should serve in this capacity where such situations exist? If not, what additional guidance would be appropriate?
We think the definitions provided are sufficient.
Our proposed rules exempt unit investment trusts and asset-backed issuers from the rule requiring the audit committee to approve auditing and non-auditing services. Should unit investment trusts and asset-backed issuers be subject to these requirements? If so, given that unit investment trusts and asset-backed issuers are not actively managed, who should be responsible for approving the auditing and non-auditing services? Are there other, similar entities that should be exempt from the pre-approval requirements?
No Comment.
Are the existing definitions in Regulation S-X and Rule 2-01 of Regulation S-X of audit client, issuer, and subsidiary sufficiently clear?
We think the existing definitions are sufficiently clear.

II.G. Communication with Audit Committees

In light of the requirements for the CEO and CFO to certify information in the company's periodic filings, should the auditor be required to communicate information on critical accounting policies and practices and alternative accounting treatments to management as well as to the audit committee?
We feel that the auditor should communicate information regarding critical accounting policies to management, as well as the audit committee. This is consistent with GAAS and the intent and spirit of the Act. Our detailed comments and concerns are addressed below.

1. Critical Accounting Policies and Practices

Should the auditor be required to provide additional information to the audit committee regarding the company's critical accounting policies?
The actual text included in Rule 2-07 of Regulation S-X, "Communication With Audit Committees," under the Proposed Rule is identical to the language set forth in Section 204 of the Act. These requirements essentially codify existing requirements under GAAS. We think the reference in the Proposed Rule to the cautionary advice issued by the Commission in December 2001 (FR-60, "Cautionary Advice Regarding Disclosure about Critical Accounting Policies") provides useful context and guidance as to the nature and content of the discussion concerning critical accounting policies.
However, requirements under the Commission's pending "Proposed Rule Concerning the Application of Critical Accounting Policies," introduce, with dubious merit at best, an entirely new level of granularity and subjectivity to the discussion. This proposed rule would require disclosure in the company's annual report on Form 10-K and discussion with the audit committee of (1) detailed assumptions and sensitivity analysis relating to all significant accounting estimates and (2) the effect of alternative accounting policies which could have been, but were not, adopted by the registrant. Generally, we believe this proposed rule would require excessive disclosure which would be confusing and less than useful to the investor. Similarly, we do not think discussion of this detailed information with the audit committee would be appropriate, useful or meaningful.
Furthermore, as indicated above, the auditor is already required to discuss management's process for developing sensitive accounting estimates and the auditors' conclusions regarding such estimates, effects of significant accounting policies in controversial or emerging areas (where authoritative guidance does not exist) and the auditors' assessment of the quality of the registrant's accounting policies.
As we indicated in our July 18, 2002 letter to the Commission regarding the "Proposed Rule Concerning the Application of Critical Accounting Policies," the extensive level of detail prescribed for the review of critical accounting estimates with the audit committee, taken together with other Commission proposals and existing matters subject to review by the audit committee, would expand the responsibilities of audit committee members well beyond the personal time commitment substantially all could be reasonably expected to spend. Existing audit committee responsibilities already encompass a registrant's earnings release, filings with the Commission, meetings with a registrant's internal and external auditors and numerous other matters. Such a dramatic expansion in responsibilities in our view transforms the audit committee member's status to one of constructive employment and compromises the independence and objectivity essential to the management oversight role of the audit committee.
Finally, the financial statements and other information included in filings with the Commission are importantly and fundamentally the representation of management. We are concerned increased participation of the audit committee and auditors in the registrant's accounting and financial reporting not obscure management's absolute responsibility in this area. It is vitally important these regulatory initiatives not dilute management's sense of responsibility, ownership and accountability for the appropriateness of the registrant's financial statements and disclosure. Accordingly, we strongly recommend management report to the audit committee on the registrant's critical accounting policies and any alternative accounting treatments discussed with the auditors in the application of generally accepted accounting principles to the registrant's financial statements. The audit committee could then confer with the auditors, either in the presence of management or in executive session, as to their viewpoint on these matters.
When should the communication take place?
We think this communication should take place prior to filing the registrant's annual report on Form 10-K with the Commission. Ideally, this communication should occur throughout the year as developments arise as a part of the regular audit committee meetings and the ongoing dialogue between management, the auditors and the audit committee. This ongoing dialogue should be supplemented by an overall assessment at the end of the year in connection with the audit and filing of the annual report on Form 10-K.
Should the auditor be required to provide the communication in writing?
No, we believe the form of this communication should be left to the discretion of the audit committee, management and the auditor. The auditor should have the latitude to present this information in a manner they deem appropriate. The most important attribute of this communication is assuring the audit committee is informed regarding the registrant's critical accounting policies.
Is it appropriate that investment companies would be subject to the rules regarding critical accounting policies?
No comment.

2. Alternative Accounting Treatments

Is the discussion of which accounting policies require communication with the audit committee sufficiently clear?
Refer to our response to the first question under the preceding section, Critical Accounting Policies and Practices.
Should additional matters be required to be communicated to the audit committee? If so, which matters?
We think that the GAAS requirements sufficiently address additional items that should be communicated to the audit committee.
Is it appropriate that investment companies would be subject to the proposed rules regarding alternative accounting treatments?
No Comment.

4. Timing of Communications

Should the timing of these communications be required to occur before any audit report is filed with the Commission or at some other time?
We think these communications should be required prior to the filing a report with the Commission. The audit committee needs to be provided sufficient time to adequately address critical issue that are raised.
Should these communications regarding critical accounting policies be required to be in writing? If so, why?
No, as indicated above the form of this communication should be left to the discretion of the audit committee, management and the auditor.
Should we include specific instructions within the proposed rule regarding the nature of communications of critical accounting policies? If so, what instructions should be provided and why?
No, we do not think further instructions are necessary.
Do these required communications fulfill existing GAAS requirements? If not, why?
Yes, the required communications appear to fulfill existing GAAS requirements.
Should these communications regarding alternative accounting treatments be required to be in writing? If so, why?
No, as indicated above the form of this communication should be left to the discretion of the audit committee, management and the auditor.
Do these required communications fulfill the statutory requirements? If not, why?
Yes, these requirements appear to fulfill the statutory requirements.
Should the minimum requirements for discussion of alternative accounting treatments be expanded or reduced? If so, how?
The minimum requirements for discussion appear adequate.
Should the list of recommended other communications be expanded or reduced? If so, what specific items should be added and why?
The list of recommended other communications is adequate.
Should the list of recommended other communications be required to be communicated to the audit committee? Why or why not?
Yes, we think these requirements are consistent with existing GAAS.
Are the appropriate entities included under the term "issuer" appropriate? If not, what entities should be included or excluded?
Yes.
Is it appropriate that investment companies are required to make these communications to their audit committees? Why or why not?
No comment.
This proposed rule would apply to "issuers." Should the Commission consider applying this rule to a broader population such as "audit clients" as defined in 2-01(f)(6) of Regulation S-X? Why or why not?
We think these rules should apply to all registrants with publicly traded securities.

II. H. Expanded Disclosure

2. Audit Committee Actions

Is the proxy statement the appropriate location for this disclosure? If not, why?
Yes, the proxy statement is the appropriate location for this disclosure.
Should we permit incorporation by reference into the company's annual report?
We think it is more transparent and efficient for the investment community to be able to view the information in one, specific location.
Would expansion of the proxy disclosure of professional fees paid to the independent auditor from three categories to four provide more useful information to investors?
Yes, except we do not think it is necessary to separately report fees approved subject to agreed upon policies and procedures, rather than a vote of the committee.
Are the new categories of disclosure appropriate? Are they well defined, or should they be more accurately defined? Should there be additional (or fewer) categories?
Yes, except as otherwise noted above.
Is disclosure of two years of fees appropriate? Should the proposed additional fee disclosures be expanded to three years or remain at one year?
We think that the disclosure of two years of fees is appropriate. This provides a measure of comparability for the investment community.
What, if any, additional information about professional fees would be useful to investors?
No Comment.
For a registrant not subject to the proxy disclosure rules, such as foreign private issuers, should we require that the same disclosures be placed in annual reports?
No Comment.
Is there any additional disclosure concerning the activities of audit committees that would be beneficial to investors?
We do not feel any additional disclosure of audit committee activities would be beneficial to investors.
Should companies be required to provide the information in their quarterly reports? Should it be required that the information be included in other filings such as Form 10-Q or 10-QSB?
We think disclosure of the information in the proxy statement is adequate.
Should registered investment companies be required to provide the information in their semi-annual report to shareholders on proposed Form N-CSR?
No Comment.
Registered investment companies are required to provide disclosure of audit fees billed for the registrant only, but are required to disclose other types of fees in the aggregate for the registrant, its investment adviser, and certain other parties.¹⁰⁶ Is this appropriate, or should we also require disclosure of audit fees on an aggregate basis? In the alternative, should we require disclosure of audit-related fees or any other fees for the registrant only and not on an aggregate basis?
No Comment.
If we adopt such a requirement, should we require or permit registrants to recalculate and report fees already disclosed for more than two years so that all fee information is consistently reported and available?
We think registrants should be permitted to recalculate and report fees to ensure comparability of the disclosed fee information.

II. I. Transition Period

Would a period of time beyond the adoption date of the final rules be necessary or appropriate for compliance with the final rules by smaller companies or companies with whose securities currently are not listed or quoted? If so, which rules should we consider a delayed effective date?
No comment.
How should an effective date be determined with respect to each amendment?
We think the additional significant time and effort required by auditors, audit committees, and management should be heavily weighted in determining the effective dates of the amendments.
Are there special considerations that we should take into account in providing a transition period for foreign private issuers?
No comment.

V. Cost - Benefit Analysis

We request comments on all aspects of this cost-benefit analysis, including the identification of any additional costs or benefits. We encourage commenters to identify and supply relevant data concerning the costs or benefits of the proposed amendments.

D. Request for Comments

As noted above, we request comments on all aspects of this cost-benefit analysis, including the identification of any additional costs or benefits. We encourage commenters to identify and supply relevant data concerning the costs or benefits of the proposed amendments. We request comments, including supporting data, on the magnitude of the costs and benefits mentioned in this section.

Are there any other costs or benefits that we have not identified? For example, would the additional duties on audit committees increase the cost of maintaining those committees? Would the amount of compensation demanded by audit committee members increase? Would there be a shortage of potential audit committee members that would lead to higher costs related to finding and retaining such members? Would the cost of officer/director liability insurance increase? Please describe any such costs and provide relevant data.
No comment.
Are there additional costs related to the proposed disclosures? If there are, please identify them and provide supporting data.
No comment.
We request comments on the reasonableness of the burden hour, cost estimates, and underlying assumptions related to the proposed disclosures.
No comment.
Will the prohibition of certain non-audit services impose greater costs on companies? If so, what will those costs be and how significant will those costs be?
No comment.
How much cost will issuers incur from not being able to retain their preferred providers of non-audit service, when that preferred provider happens to also be their auditor?
No comment.
What will be the impact, if any, on audit fees from the proposal to prohibit certain non-audit services?
No comment.
Are there any economies of scope that will be lost due to implementation of the auditor independence rules?
No comment.
Are there any economies of scale that will be lost due to implementation of the auditor independence rules?
No comment.

VI. Consideration of Impact on the Economy, Burden on Competition, and Promotion of Efficiency, Competition, and Capital Formation

Given that only larger clients have more than two partners as part of the audit process, would this provision impose higher costs on mid-tier firms?
No comment.
We request comment on the anti-competitive effects of the proposals.
No comment.
The possible effects of our rule proposals on efficiency, competition, and capital formation are difficult to quantify. We request comment on these matters in connection with our proposed rules.
This Proposed Rule is part of a rapidly expanding array of rules-based legislation, regulations and reporting requirements promulgated by Congress, regulatory authorities and standard setting bodies. We think the rules-based approach to these initiatives is already producing serious unintended adverse consequences. The cumulative impact of the numerous legislative and regulatory initiatives in the past year are beginning to mire directors, executives and senior management of literally hundreds of U.S. publicly held businesses in a morass of complex and arcane rules. This is diverting corporate leadership from its primary responsibility to profitably and responsibly manage the corporate enterprise and deliver the return on invested capital necessary for growth. In fact, continued proliferation of these rules and regulations, and related sanctions and penalties could seriously reduce the pool of qualified executives willing to accept responsibility as directors for U.S. corporations. We think it is critically important that the SEC carefully evaluate the overall cumulative impact of these proposed new rules on roles and responsibilities of directors and executives, as well as the overall impact on corporate enterprise in America. Perhaps, a more principles-based approach to these initiatives could accomplish the important and essential objectives of recent legislative initiatives in a manner more consistent with our free enterprise system.

VII. Initial Regulatory Flexibility Act Analysis

H. Solicitation of Comments

We encourage the submission of comments with respect to any aspect of this Initial Regulatory Flexibility Analysis. Specifically, we request comments regarding the number of small entities that may be affected by the proposed rules, and the existence or nature of the potential impact on those small entities. We also seek comments on how to quantify the number of small accounting firms that would be affected by the proposals, and how to quantify the impact of the proposed rules on those firms.

Commenters are requested to describe the nature of any impact and provide empirical data supporting the extent of the impact. Such comments will be considered in the preparation of the Final Regulatory Flexibility Analysis, if the proposed rules are adopted, and will be placed in the same public file as comments on the proposed rules.

No Comment.