AICPA Comments on SEC's Proposed Rules to Enhance Independence of Accounting Profession.

Business Editors

WASHINGTON--(BUSINESS WIRE)--Jan. 10, 2003

The American Institute of Certified Public Accountants (AICPA) has submitted its comments on the SEC's proposed rules to enhance the independence of accountants who audit financial statements of public companies.

The AICPA is the largest professional association of certified public accountants in the United States, with more than 350,000 members in business, industry, public practice, government and education.

"We support the Commission's proposal to strengthen the profession's independence rules as they relate to audits of public companies," said Barry Melancon, President and Chief Executive Officer of the AICPA. "Throughout its history the AICPA has been deeply committed to auditor independence. It is a core tenet of the accounting profession. All members of the profession engaged in auditing are required to maintain independence from audit clients in accordance with detailed and regularly updated independence rules, interpretations and ethics rulings," Melancon said.

"The AICPA has been and remains firmly committed to working with the Commission to implement the provisions of the Sarbanes-Oxley Act," William F. Ezzell, Chairman of the AICPA Board of Directors, said. "To that end our comments demonstrate our support for the SEC's initiatives and provide recommendations designed to improve upon the Commission's proposal."

The letter's comments also reflected the AICPA's strong belief that the SEC should focus its current rulemaking on implementing the letter and spirit of the Sarbanes-Oxley Act without creating requirements that go beyond the legislative intent of the Act itself.

Finally, the letter expressed concern about the impact of certain of the proposed rules on small publicly traded businesses and the accounting firms that audit them. "We believe that the Commission should take special care in this critical rulemaking to address the rule's impact on the complexities and costs of operating small publicly traded businesses, and on the ability of smaller audit firms to serve them," concluded Melancon.

Following are some of the AICPA's specific comments on the rule proposal:

Audit Partner Rotation

The AICPA said it "wholeheartedly" supports the concept behind partner rotation, which provides a periodic "fresh look" at an issuer's financial statements. For approximately 25 years the AICPA's SEC Practice Section has required lead audit partner rotation. The AICPA further commented that audit quality depends on a balance between the importance of a "fresh set of eyes" and the continuity and institutional knowledge that a partner brings to an audit engagement. Because of the breadth of the restrictions proposed by the SEC, most firms would be forced to rely on less experienced audit partners, which reduces audit quality and is not in the public interest. The AICPA further expressed concern that for smaller audit firms, audit partner rotation, as proposed by the SEC, would be tantamount to rotation of the audit firms themselves, a concept that was contemplated by Congress and rejected pending further study. This would significantly and adversely affect the small businesses that these firms service. Accordingly, the AICPA recommended the SEC provide an exemption for small public accounting firms because the rule would impose undue hardships on small businesses.

Conflicts of Interest Resulting from Employment Relationships ("Cooling-Off")

The AICPA believes that the public is more thoroughly protected through a combination of restrictions and meaningful safeguards when a member of the audit engagement team accepts employment with an audit client. Imposing a cooling-off period alone, as required by the Act, does not sufficiently mitigate risks to auditor independence. The AICPA suggested strengthening the proposed rule by incorporating specific additional safeguards that would require firms to perform certain activities in the event the auditor accepts employment with the client. The AICPA also encouraged the Commission to consider alternatives to the cooling-off requirement for small, publicly-held businesses, to mitigate potential hardships to hire qualified personnel.

Tax Services

In its comments, the AICPA agreed with the Commission that auditor independence is not impaired by providing traditional tax services to an audit client, including but not limited to preparation of tax returns, tax compliance, tax planning, tax recovery, and reviewing tax accruals in financial statements. The AICPA urged that this be reflected in the final rule.

The AICPA also recommended that the SEC specifically recognize that tax minimization services are appropriate, while precluding auditors from advising audit clients on tax transactions for which there is no business purpose other than tax avoidance (except those that are consistent with the intent of applicable tax laws). Therefore, it urged the Commission to draw a clear line between the very limited class of tax services that accounting firms may not provide to public company audit clients and the great bulk of tax services which may be provided to such clients, with audit committee approval.

Expert Services

The AICPA supports the prohibition of expert services in adversarial and public regulatory or judicial proceedings where the auditor acts as the client's agent, rather than an independent, objective professional. However, the AICPA does not believe that all expert services as defined in the Commission's proposal involve advocacy and expressed concern that the proposed rule will deny companies the use of the specialized skills and expertise of their auditors in such situations. For example, accountants may be recognized by federal courts as "experts," in part because they present conclusions and judgments with integrity and objectivity. Further, accountants are called upon frequently to explain their actions to regulatory authorities such as the SEC and the IRS in non-public settings not involving any appearance of advocating the interests of the client. As such, the AICPA recommended that the Commission should consider revising its definition of "prohibited expert services."

Forensic Audits

The AICPA said it supports the performance of forensic audits as an investigative tool when there is a suspicion or evidence of fraud, but does not regard it as an appropriate tool to mitigate the effects of a partner rotation exemption. Instead, the AICPA recommended alternative safeguards, such as Public Company Accounting Oversight Board review and inspection.

Internal Audit Services

The AICPA has not objected, for at least a year, to additional restrictions on the provision of internal audit services by auditors to their public company audit clients and expressed support for the proposed rule. Responding to questions raised by the Commission, the AICPA commented that it is "imperative that the Commission explicitly identify the types of services that would be included, as well as excluded, under the definition of 'internal audit services'" because the Commission, while prohibiting internal audit outsourcing, should not be discouraging the positive benefit of more audit procedures.

Financial Information Systems Design and Implementation

For at least a year, the AICPA has not objected to additional restrictions on auditors providing financial information systems design and implementation services to public company audit clients. In response to questions raised by the Commission, the AICPA added that it is important that the SEC clarify what is meant by "design or implement" and provide additional guidance as to the types of services that are expressly prohibited under the rule.

Bookkeeping Services

The AICPA supports the proposed rule for public company audit clients and recommends that the Commission incorporate its long-standing exception allowing a company's audit firm to provide bookkeeping services in emergency situations. The AICPA commented that the need for such an exception was made evident by the tragic events of September 11, 2001.

Note to Editors: A copy of AICPA's comment letter to the SEC can be obtained at: http://www.aicpa.org/download/sarbanes/independence1-10-03.pdf.