[12675]
September 26, 2000
TO: ACCOUNTING/TREASURERS COMMITTEE No. 36-00
CLOSED-END INVESTMENT COMPANY COMMITTEE No. 26-00
SEC RULES COMMITTEE No. 117-00
RE: ICI COMMENT LETTER ON SEC AUDITOR INDEPENDENCE RULE PROPOSALS
The Institute has recently filed with the Securities and Exchange Commission a
comment letter regarding the Commission’s proposed rule amendments to its auditor
independence rules. The letter has been modified somewhat from the draft letter we sent to
you previously.1 The letter is attached, and it is summarized below.
General Principles
The Commission’s proposal includes a statement of four general principles under which
an auditor will be deemed to lack independence from his client. Also included is a non-
exclusive list of specific investments in an audit client, and services provided to an audit client,
that would violate these general principles. The Institute’s letter recommends against
incorporating the general principles into the rule. It notes that the combined effect of the
general principles and the statement that the list of services and financial relationships is non-
exclusive is an open-ended rule that would leave auditors (and issuers) uncertain as to the types
of financial relationships and non-audit services that constitute an independence violation.
Non-Audit Services
The Commission’s proposals identify certain non-audit services provided by audit firms
that, if provided to an audit client, would be deemed to impair an auditor’s independence.
Although the Institute’s letter agrees with the Commission’s view that most of the services
identified in the proposed rule raise independence concerns, it questions the need for adopting
such a rule at this time in light of recent actions taken by the Independence Standards Board,
the Commission and the Exchanges, which are designed to improve the effectiveness of audit
committees’ oversight in this area. More specifically, the letter questions whether auditors to
registered investment companies should be subject to the prohibition, adding that, at the very
least, the Commission should exclude from the proposed rule services designed to ensure
regulatory compliance for investment advisers and investment companies.
1 Memorandum to Accounting/Treasurers Committee No. 35-00, Closed-End Investment Company Committee No.
24-00, and SEC Rules Committee, No. 113-00, September 15, 2000.
2Proxy Statement Disclosure
The proposals would require issuers to disclose in their proxy statements information
relating to non-audit services provided by their auditor and the fees associated with those
services. The Institute’s letter supports enhanced disclosure in this area, but recommends that
the Commission’s proposed disclosure requirement be modified so that it would provide
information that is more useful to investors and others concerned with auditor independence.
Financial Relationships
The proposals would significantly reduce the number of audit firm employees and
family members whose investments in audit clients would be deemed to impair an auditor’s
independence. Restrictions on auditor investment in audit clients would generally be limited to
those who work on or can influence the audit. Although generally supporting this aspect of the
proposal, the Institute’s letter notes that the proposed rules are still too restrictive and limit
persons from investing in situations where the investment cannot affect the reliability (or
perceived reliability) of the audit. The letter adds that this is particularly problematic when an
immediate family member of a covered person is investing through an employer-sponsored
retirement plan and the range of available investments is largely or exclusively limited to audit
client funds. Accordingly, the letter recommends that investments of family members through
an employer-sponsored retirement program not be taken into account in assessing the
independence of an auditor, or in the alternative only be taken into account when they exceed
5% of the issuer’s securities. At the very least, the Commission should exclude investments by
family members in non-audit client affiliate funds through an employer-sponsored retirement
program.
The letter also recommends the elimination of the limitation on investments by “close”
family members. The letter explains that the proposed limitation would impose undue burdens
on audit firms to track the securities holdings of these persons, which would be particularly
true in the case of emancipated children, parents and sibilings.
Curing Independence Violations
The proposals provide a limited safe harbor for an accounting firm if an individual
employed by the firm causes it to violate the independence rules. The safe harbor would be
available if the firm has adopted certain quality controls and promptly corrects any
independence violations identified. The Institute’s letter supports this proposal, but
recommends that it be expanded in two ways. First, the safe harbor should be provided to an
audit firm that has adopted the requisite quality controls even if an individual associated with
the firm recklessly or intentionally violated the rules. Second, the Commission should adopt a
comparable safe harbor for issuers in order to protect audit clients and their shareholders, who
are frequently the innocent bystanders when audit firms breach independence rules, from being
unduly penalized for their auditors’ missteps.
Barry E. Simmons
Assistant Counsel
Attachment
3Attachment (in .pdf format)