From: padkins@capfed.com
Sent: Tuesday, December 24, 2002 2:01 PM
To: rule-comments@sec.gov
Subject: File No. S7-49-02

Jonathan G. Katz, Secretary, U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC  20549-0609

December 24, 2002

File No. S7-49-02


Dear Mr. Katz,

The Securities and Exchange Commission (SEC) has requested comments on proposed
rules to enhance the independence of public accountants attesting to the
financial statements of publicly held companies.  I am the chief internal
auditing executive for a publicly held company.  I would like to comment on the
area of internal auditing.

Proposed Rule 2-01(b) defines activities that by their very nature are
incompatible with the independence requirements of public accounting.
Specifically, question 5, Internal Auditing Outsourcing, addresses the concern
of the auditor certifying the financial statements of a publicly held company
while also performing internal audit services.  I agree with the proposed rule
2-01 (c) (4) (v) that the independent auditor cannot perform internal audit
services without compromising independence, regardless of the size of the
business.

Is independence a function of the size of the business or the work being
performed?

The proposed rule expresses concern that small business may be negatively
affected by the proposed rule.  I disagree.  Management is responsible for the
internal control environment.  Outsourcing internal audit functions to the same
firm that performs the independent audit because of a small business exception
expresses the view, in policy, that the independence issue is really a matter of
materiality based upon the size of the business.  I believe that view is flawed.
For example, does an external auditor have an independence problem if they own
just a few shares of the public company that they audit?  Of course they do,
thus the independent auditor should have no investment in the company they
certify.

I agree with the presumption that internal auditing is incompatible with the
independent audit, regardless of the size of the firm being audited  Whether
large or small, the goal is to enhance the public perception that the
independent audit is in fact independent, even in appearance.  The small
business is welcome to take on their own internal audit program or outsource it
to a public auditor not associated with the certification of the financial
statements.  True, there may be certain efficiencies to the external auditor
performing internal audit work.  But, efficiency is not the goal, independence
and public respect for the audited financials is the real goal.  I strongly
recommend that the small business exception should not be allowed.


You also asked for comments on the following:

     Do services relating to designing or implementing internal accounting
controls and risk management controls result in the auditor auditing his or her
own work?  Yes.  A recommendation for improvements is certainly appropriate,
however designing and especially implementing accounting controls would be a
direct violation of independence standards.  The attestation on internal
controls would be "tainted" if the external auditor designed and/or implemented
the controls to which they are attesting.

     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?  No.  As long as it is clear that management is responsible
for designing, selecting, and implementing accounting controls and risk
management systems there is no problem.  However, if in the professional
judgment of the external auditor, the current systems are inadequate, they
should be reported in the normal course of the audit.


In summary, there are no circumstances where outsourcing the internal audit
function to the external auditor maintains or enhances the independence of the
external auditor.  The internal audit function, if a part of a publicly held
company, should be recognized as a valuable and distinct function unassociated
with the independent audit.  A quality internal audit function can be a
significant help to the external auditor, in much the same way a strong internal
control environment helps.  But,  combining internal with independent audits,
based upon company size, is bad policy.

Thank you for the opportunity to comment.

Sincerely,


Perry Adkins - CIA, CPA, CISA