[12643]
September 15, 2000
TO: ACCOUNTING/TREASURERS COMMITTEE No. 35-00
CLOSED-END INVESTMENT COMPANY COMMITTEE No. 24-00
SEC RULES COMMITTEE No. 113-00
RE: INSTITUTE DRAFT COMMENT LETTER ON SEC AUDITOR INDEPENDENCE RULE
PROPOSALS
As we previously informed you,1 the SEC has proposed substantive rule amendments
intended to modernize and strengthen auditor independence requirements. Attached is a draft
of the Institute’s comment letter.
Comments on the SEC’s proposals are due Monday, September 25, 2000. Please provide
any comments you may have on the draft letter to Greg Smith by telephone at (202) 326-5851 or
email at smith@ici.org or to Barry Simmons by telephone at (202) 326-5923 or email at
bsimmons@ici.org by the close of business, Wednesday, September 20, 2000.
Statement of General Principles
The Commission’s proposals include a statement of general principles under which an
accountant will be deemed to lack independence from his client. Also included is a non-
exclusive list of specific investments in an audit client, along with services provided to an audit
client, that would violate these principles. The Institute’s draft letter agrees with the proposed
principles but recommends against incorporating them into the rule because the combined
effect of the general principles and the statement that the rule is non-exclusive is an open-ended
rule that leaves accountants (and issuers) uncertain as to the type of financial relationships and
non-audit services that constitute an independence violation.
Non-Audit Services
The proposing release identifies certain non-audit services provided by audit firms that,
if provided to an audit client, would impair an auditor’s independence. The draft letter agrees
that most (but not all) of the services listed in the proposing release can potentially create
conflicts, but recommends that any such rulemaking in this area should be curtailed until a
determination has been made as to the effectiveness of the recently adopted rules relating to
1 Memorandum to Accounting/Treasurers Committee No. 27-00 and SEC Rules Committee No. 96-00, July 14, 2000.
2corporate audit committees. The letter recommends, however, that if the Commission
determines nonetheless to go forward, then the non-audit services related to the design and
implementation of (i) financial systems, and (ii) systems intended to ensure regulatory
compliance should be excluded from the list of incompatible services. The letter explains that
these services do not compromise an auditor’s independence but rather provide important
benefits to the audit client and its shareholders as they focus on enhancing certain aspects of the
firm’s business, such as improving its ability to control costs or enabling it to better monitor its
compliance system.
Proxy Disclosure Requirements
The proposals would require issuers to disclose in their proxy statements information
relating to non-auditing services provided by the auditor and the associated fee paid for each
such service. The draft letter supports the proposed disclosures but suggests a few
modifications to enable the disclosure to effectively provide useful information to investors and
others concerned with auditor independence.
Financial Relationships
The proposals would significantly reduce the number of audit firm employees and their
family members whose investments in audit clients impair an auditor’s independence. Such
restrictions would generally be limited to those who work on or can influence the audit. The
proposals also provide a limited exception from independence violations to an accounting firm
if the firm satisfies certain criteria. The draft letter supports these proposals but suggests certain
modifications in order to better reflect the changes in the accounting profession as well as
demographic changes in our society (e.g., increase in dual-career families and the substitution of
defined-contribution pension plans for defined-benefit pension plans in the workplace).
Exceptions to Independence Violations
The proposals would establish a limited exception for accounting firms that maintain
certain quality controls and satisfy certain conditions, in recognition that inadvertent
independence violations may occur from time to time that are beyond the control of the
accounting firm and the covered persons. The Institute’s draft letter strongly supports this
proposal but recommends that the Commission consider a similar limited exception for audit
client issuers, in order to protect them from being unduly penalized for their auditors’ missteps.
Barry E. Simmons
Assistant Counsel
Attachment