The SEC's proposed auditor rule threatens our profession and the public.

THE SEC's PROPOSED AUDITOR RULE THREATENS OUR PROFESSION AND THE PUBLIC

As you probably are aware, a current flurry of activity at the SEC could force sudden and major changes in the fundamental relationship between accountants and their clients.

To reform the way in which independent audits are conducted, the SEC proposed new rules governing auditor independence. Fewer than four weeks remain in the 75-day comment period the SEC allotted for the proposal, which, among other things, would prohibit firms from rendering nonaudit services to their audit clients.

This would force some clients to dismiss CPA firms with which they are otherwise satisfied in order to meet the new regulatory requirements.

Because of the sweeping nature of the SEC proposal, it could affect the way firms of any size--not just those that audit SEC registrants--provide almost any nonaudit services, including accounting, financial information systems design and implementation, valuation, management, consulting and outsourced internal auditing, as well as actuarial, human resources, financial planning, investment, legal and expert-witness services.

The SEC proposal also would restrict accounting firms' entry into joint ventures, partnerships and multidisciplinary practices and limit the circumstances under which CPAs can represent their clients before the IRS. In addition, it could affect the way in which firm associations serve their members.

Released at the end of June, the proposed rules address two complex, disparate topics--auditors' financial interests in their clients and audit firms' provision of nonaudit services--that require more analysis than is feasible in the SEC's brief comment period.

The proposal unnecessarily combines the scope of services issue with modernization needed to address important demographic changes. Certainly, developments such as the increased number of two-career families investing in 401(k)s and other savings programs have made it necessary to modernize the guidelines governing financial interests in audit clients by auditors and their relatives.

And, in response to globalization and the advent of new professional services, it makes sense to continually assess the effectiveness of rules that preserve auditor independence and ensure the accuracy and completeness of the financial statements on which orderly capital markets depend.

But it also is essential to consider carefully a proposal that would disrupt effective relationships between audit firms and their clients. This is especially true in view of the findings of a new survey by the Independence Standards Board, which revealed a majority of corporate executives are confident of their auditors' independence and are satisfied with the overall quality of financial reporting. The survey also found most individual investors have faith in the quality and reliability of financial information available to them.

Furthermore, neither the SEC nor the Panel on Audit Effectiveness, appointed by the Public Oversight Board at the SEC's request, found evidence that providing nonaudit services impaired audit quality. In fact, the panel discovered that, in some cases, nonaudit services improved audit quality.

I therefore urge you to swiftly communicate your position on this proposal--not only to the SEC, but also to your clients and representatives in Congress, giving them time to contact the SEC before September 25, when the comment period ends.

The Institute recently mailed members detailed information on these issues. If you require additional copies, please contact member services at 888-777-7077.