BALCH & BINGHAM LLP
Attorneys at Law
2 Dexter Avenue
Montgomery, Alabama 36104
Michael D. Waters
(334) 269-3121
(877) 453-6423 (fax)
mwaters@balch.com
January 13, 2003
Mr. Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Ladies and Gentlemen:
In Release No. 34-46934 dated December 2, 2002 (the "Release"), the Commission has proposed rules relating to auditor independence under Section 201(a) of the Sarbanes-Oxley Act of 2002 (the "Act"). Specifically, Section 201(a) of the Act amends Section 10A of the Securities Exchange Act of 1934 to add subsection (g) prohibiting certain non-audit services by a public accounting firm for an issuer, including a prohibition on the provision of "(8) legal services and expert services unrelated to the audit."
In the Release, the Commission proposes to amend Section 210.2-01(c)(2) of Regulation S-X to provide that, among other prohibited non-audit services, the following shall be a prohibited service:
"(x) Expert services unrelated to the audit. Providing expert opinions for an audit client in connection with legal, administrative, or regulatory proceedings or acting as an advocate for an audit client in such proceedings."
The Release indicates that the prohibition on non-audit services listed in the proposed amendment to Regulation S-X is premised upon three broad principles, which state that an auditor cannot (1) audit his or her own work, (2) perform managementfunctions, or (3) act as an advocate for the client. Focusing primarily upon the third principle, the Release indicates that the proposed rule will prohibit the auditor from providing expert opinions for an audit client in connection with legal, administrative or regulatory proceedings. The Release goes on to say that under the proposed rule, "an auditor's independence would be impaired if the auditor were engaged by the audit client's legal counsel to provide expert witness or other services . . . in connection with the client's participation in a legal, administrative, or regulatory proceeding." The Commission has asked in the Release for comment on whether there are circumstances in which an auditor's providing audit clients with expert services in legal, administrative, or regulatory filings or proceedings should not be deemed to impair independence.
We understand and agree with the need to ensure auditor independence and acknowledge that there are instances in which the provision of expert services, including an auditor's serving as an expert witness, is not consistent with the requirement for independence in the audit of an issuer. In keeping with the Commission's request for comment, however, we believe there is at least one circumstance in which the provision of expert services should not be deemed to impair independence. That circumstance exists where, under the existing rules of the Commission, including Regulation S-X, an audit firm is currently serving as an expert witness for the issuer, and a trial date has already been set.
We represent an issuer which has been in litigation and in which its auditor has been retained to provide expert services. The discovery in the litigation is substantially complete and the issuer has spent significant sums in preparing for trial, including the expenditure of a substantial amount for the expert services of the auditor. A trial date has been set for July 3, 2003, and if the issuer were forced to terminate the expert services of its auditor and retain a new expert witness at this late date, substantial hardship would be worked upon the issuer, including the necessity to expend additional funds to acquaint the new expert with the issues in the case. (It is not even clear under the proposed rule whether the auditor could assist in acquainting the new expert as to the issues that the expert would testify to.) A delay in the trial could also be necessary which the issuer does not deem to be in its best interests.
We recommend that the Commission consider implementing limited exceptions for the proposed rule relating to the provision of expert services to permit an auditor who is already providing expert testimony in a legal proceeding to complete that service, especially where the work is substantially complete and a trial date has been set. We do not believe an exception in that circumstance would violate the principles of the Actbecause it would be limited in scope and duration and to do otherwise will harm issuers who have relied upon such services. In addition, if no exception is recognized, and where work by the auditor as an expert has already commenced, but the auditor does not complete the work following the adoption of the rule as proposed so that it may continue to audit the issuer, the auditor will nevertheless be in the position of reviewing the work it previously performed, which violates one of the basic principles of the proposed rules. Allowing the auditor to complete the project, therefore, does not violate the essential principles noted in the Release to any substantial degree beyond what a termination of the auditor's role on an existing project would do.
For the foregoing reasons, we recommend that the Commission provide an exception to its proposed rule regarding non-audit expert services to permit an auditor which has commenced the performance of expert witness services to complete that service without impairing auditor independence.
Sincerely yours,
/s/ Michael D. Waters
Michael D. Waters
MDW/trh
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