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January 13, 2003 Mr. Jonathan G. Katz Re: File No. S7-49-02 Dear Mr. Katz: We appreciate the opportunity to provide you with our views on the Securities and Exchange Commission's (the "SEC") Proposed Rule: Strengthening the Commission's Requirements Regarding Auditor Independence (the "Proposed Rules") relating to enhanced independence requirements for accountants that audit and review financial statements and prepare attestation reports filed with the SEC. We support the SEC's efforts to implement provisions of Title II, "Auditor Independence", of the Sarbanes-Oxley Act of 2002 (the "Act"). We also understand the difficulty in balancing the specific mandates of the Act with practical application of the securities laws and accounting and auditing standards and practices. However, we believe certain provisions of the Proposed Rules are much too restrictive and arduous than may be necessary to achieve the Act's intended goals. Specifically, although we support the rotation of the lead audit partner after 5 years, we are concerned that the Proposed Rule, requiring rotation of all partners of an issuer's audit firm who perform significant audit services for the issuer, would place undue burden on the management of the issuer. This would result in less efficient and more costly audit engagements, without necessarily improving the quality of those audits and with possibly decreasing the quality by forcing knowledgeable partners on a engagement to rotate off the engagement when there may not be other similarly qualified audit personnel available to substitute. We believe this is especially true for those who serve specialized industries, such as insurance and health care. Our position on this and other related matters is described in further detail below. Rotate the Lead and Concurring Partner, but not All Partners We agree with the American Institute of Certified Public Accountant's SEC Practice Section, which requires rotation of the lead audit partner on audits of public companies after seven-years of service in such a role and a two-year cooling-off period. We also agree with the Proposed Rules to decrease the requirement for rotation from seven-years to five-years and to extend the cooling-off period from two-years to five-years. Additionally, we support rotation of the concurring (or reviewing) partner every five-years. We believe the lead partner assumes overall responsibility for establishing the scope of the audit and is involved, in some capacity, in all significant accounting, auditing and reporting decisions. Rotating the lead partner every five years would likely result in the new lead partner reassessing the scope of the work performed, thereby providing a "fresh look" to the audit approach. We believe this fresh look would achieve the SEC's and the Act's intended results. However, we strongly believe that the proposed expansion of the mandated rotation to any and all partners who provide audit, review or other attestation services would have unintended negative consequences to investors, issuers and the audit profession. These consequences include increased audit fees, the ability of an audit firm to retain qualified audit professionals and significant loss of valuable experience. This loss of client and industry knowledge could lead to decreased audit quality and efficiency. The audit of an issuer operating in a specialized industry, such as insurance or health care, requires the audit team to have certain industry experience to adequately perform audit procedures. Further, audit firms must confirm each respective audit team's qualifications (i.e., industry experience) to regulators when performing statutory-based audits. Requiring rotation of all partners that perform significant audit procedures would limit the available pool of partners with the requisite experience. The risk of audit quality is further impacted by the already limited pool of specialty partners that play a limited role on the audit but are relied upon by the lead partner, such as actuarial, tax and information technology partners. These partners, in particular, often do not "grow-up" on the audit engagement and their involvement in the audit is far less than that of the lead audit partner (both in terms of hours worked and scope of responsibility) and as such, they are at much less risk of losing independence and impacting the independence of the audit as a whole. In our experience, there are much fewer of these specialists than auditors at audit firms and their knowledge of the issuer, industry and subject matter are often critical to an effective audit. We believe issuers would bear increased audit fees due to the increased investment in time required by all the new partners familiarizing themselves with the company and more so with specific issuer industry practices. We believe that investors are better served by an audit engagement team that has an appropriate level of familiarity with the issuer, balanced with a fresh look at the audit approach by the lead partner. We strongly believe this objective can best be achieved solely by requiring rotation of the lead and concurring partners. We also believe that in the new accounting and regulatory model envisioned under the Act, there are other checks and balances that would help mitigate a lack of independence by an issuer's independent auditors, such as the quality inspections that will be performed by the Public Company Accounting Oversight Board ("PCAOB") and independent audit firms' internal controls focused on preventing and detecting independence violations. As the PCAOB evaluations will include firms' quality controls as well as the quality of audits, these evaluations will likely result in the identification of problems that lead to audit failures. As a result, we believe that the mandatory rotation of all partners would be an unnecessary requirement and that it has potentially significant risks and costs associated with it. Accordingly, we strongly suggest that the Proposed Rules limit the audit partner rotation requirements to the lead and concurring partners only. Do Not Include Time Spent on the Audit by the Lead Partner in Other Capacities towards the Five-Year Service Period Given the complex role the lead partner has, we believe experience with the issuer prior to such role as lead partner should not be considered when calculating service on the audit for rotational purposes. Therefore, we further suggest that the Proposed Rules permit the lead partner to serve five-years in that role regardless of his/her experience as a partner in other previous capacities serving on the same engagement. Do Not Require Forensic Audits as an Alternative With regard to alternatives to partner rotation, we do not agree with the suggestion that a second audit firm periodically perform a forensic audit to evaluate the work of the existing auditor and other matters. Much of the Act, as well as other rules and regulations, are already aimed at ensuring the independence of the audit committee and the audit firm from the company being audited, and there is no reason to believe that the desired results of independence will not be achieved. Truly independent auditors do not need to be double-checked by conducting forensic audits. Further, we do not believe that this suggested alternative would be less costly than the rotation of all partners, as the cost of the forensic audit and the additional burden placed on management to support the forensic auditors would be significant. Further, we believe the concern of quality audits would be adequately addressed by the PCAOB, as discussed above. Therefore, we do not believe the use of forensic audits would provide significant incremental benefits to investors or issuers. Do not Mandate a Position on Whether Providing Tax Services Impairs the Auditor's Independence Finally, we believe the Proposed Rules (including examples) contain a certain degree of ambiguity regarding the decision on whether the provision of tax services provided by an issuer's independent accountants is considered an independence violation. Given this ambiguity, we believe audit committees may inappropriately deem tax services an independence violation when, in fact, those services would not impact the independence of the auditor. Therefore, we believe the ambiguity in the Proposed Rules (and examples) regarding the provision of tax services should be removed to be clearer that routine types of tax services (such as income tax return preparation) would not pose independence issues. - - - We appreciate your consideration of our views on the Proposed Rules. We would be pleased to discuss our comments further with you or members of your staff. If you have any questions regarding this letter, please feel free to contact us. Sincerely,
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