The Hon. David M. WalkerComptroller General of the United States

Government Accountability Office

Washington, D.C.

Dear Comptroller General Walker:

Sarbanes-Oxley received loud and sustained applause from shareholders of publicly traded companies when President Bush signed the act on July 30, 2002.

Now, Sarbanes-Oxley is receiving loud and sustained criticism from the U.S. Chamber of Commerce, and from some corporate executives who enjoyed obscene compensation packages and golden parachutes, which contributed to the implosions suffered by America's shareholders, i.e. Enron, WorldCom, Global Crossing and Adelphia Communications, among others.

Section 701 of Sarbanes-Oxley, "GAO Study and Report Regarding Consolidation of Public Accounting Firms," placed a significant responsibility on the GAO to "conduct a study - to identify - the factors that have led to the consolidation of public accounting firms since 1989 and the consequent reduction in the number of firms capable of providing audit services to large national and multinational business organizations that are subject to the securities laws; ways to increase competition and the number of firms capable of providing audit services to large national and multinational business organizations that are subject to the securities laws; the problems, if any, faced by business organizations that have resulted from limited competition among public accounting firms, including higher costs, lower quality of services, impairment of auditor independence or lack of choice."

"In planning and conducting the study under this section, the comptroller general shall consult with the commission, the regulatory agencies that perform functions similar to the commission ... and any other public or private sector organization that the comptroller general considers appropriate."

The GAO report "is required not later than one year after the date of enactment of the act. The comptroller general shall submit a report on the results of the study required by this section to the Committee on Banking, Housing and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives."

General Walker, I have read the GAO report pertaining to rotation of audit firms and believe that the technique and procedures applied in the report could only have led to the following conclusions recited by the authors of the GAO report submitted during November 2003 to members of Congress pursuant to the Sarbanes-Oxley requirement:

"We believe it is fairly certain that mandatory audit firm rotation would result in selection costs and additional support costs for public companies."

The report continued: "We believe that mandatory audit firm rotation may not be the most efficient way to enhance auditor independence and audit quality, considering the costs of changing the auditor of record and the loss of auditor knowledge that is not carried forward to the new auditor. We also believe that the potential benefits of mandatory audit firm rotation are harder to predict and quantify, while we are fairly certain there will be additional costs. In that respect, mandatory audit firm rotation is not a panacea that totally removes pressures on the auditor in appropriately resolving financial reporting issues that may materially affect the public companies' financial statements."

General Walker, the GAO report that led to the foregoing conclusions was based primarily on questionnaires sent to 97 accounting firms that conduct audits of corporations registered with the Securities and Exchange Commission.

It is significant that, of audits conducted on companies listed on the New York Stock Exchange, 97 percent were conducted by PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche and KPMG. Would these firms that are currently retained pursuant to engagement letters executed by the client and the audit firm wish to be "rotated out?"

The response is obvious. In addition, the authors of the GAO report also relied on questionnaires sent to corporate audit committees, and the responses from the audit committees (who are members of the board of directors) did not support rotation of audit firms.

Rotation of audit firms should not be confused with rotation of lead partners in audits prescribed by the SEC - Section 10A of the Securities Exchange Act of 1934 15 U.S.C. 78j-l, which was confirmed by Sarbanes-Oxley. Rotation of lead auditors did not work in the case of KPMG's audit of Xerox, where two lead auditors were sanctioned and fined $150,000 each by the SEC because they failed to disclose practices that permitted Xerox to overstate revenues by $3 billion and overstate earnings by $1.2 billion.

In this writer's opinion, the extensive research into the views of accounting firms and audit committees in the report exceeded by far any references to the views of the true owners of corporate America - the shareholders. When the bubble burst, billions invested in corporate stocks and bonds held by pension funds, including funds responsible to teachers and other civil service participants, were lost.

The report neglected to cite and quote some important observers who have publicly endorsed rotation of audit firms.

For example, the authors did not communicate with Dr. John H. Biggs when he was chairman of TIAA-CREF. In testimony in February 2002 before the Senate Committee on Banking, Housing and Urban Affairs, Dr. Biggs stated: "We have had two auditor rotations since I have been chairman, and each has been not only successful but also highly energizing for our financial management work."

He continued: "We are particularly concerned about the following relationships between companies and their audit firms: Have they used the same audit firm for a very long time, say 20 to 30 years? Is the chief financial officer, the chief accounting officer or any other financial manager a former employee of the audit firm?"

"A far more powerful antidote to this blindness to conflicts of interest would be to require auditor rotation every five to seven years. Such a requirement will be fiercely opposed by the accountants and the companies, who will see only additional costs of having to make such changes. But I can vouch from my experience that the costs can be managed and that there are many positive benefits. Even if the cost-benefit ratio were unfavorable, which I doubt, isn't such a simple solution worthwhile, given the importance to our capital markets of confidence in financial reports?"

"Consider the advantages of rotation for the issues of independence that concern us. First, rotation reduces dramatically the financial incentives for the audit firms to placate management. If the audit firm has a kind of virtual perpetuity of millions in fees every year (from whatever source), the present value of that relationship is enormous. In the Enron case, probably over a half-billion dollars, given that total fees paid to Arthur Andersen for fiscal year 2000 were $52 million." (Author's note: General Electric has retained KPMG for over 100 years; General Motors has retained Deloitte & Touche for over 85 years.)

"Had rotation been in effect at Enron in 1996, and Arthur Andersen had known that a new auditor would be appointed for 1997, and that the new auditor would do an exhaustive review of the former audit workpapers, it is likely that Arthur Andersen would have assured that transactions and documentation were fully transparent."

Dr. Biggs concluded, "Clearly, had Enron been required to rotate its auditors every five to seven years, it is unlikely that misleading financial reporting would have continued or that the board's audit committee would have been kept in the dark, as they claim they were."

General Walker, Dr. Biggs' testimony was widely publicized, and when I telephoned one of the signatories to the GAO report and asked if she was familiar with Dr. Biggs' testimony, she replied, "Yes."

When I further inquired if Dr. Biggs was contacted with respect to the research of the GAO report, she responded, "No."

I was somewhat disappointed by the response, because Dr. Biggs, as custodian for billions in pension funds, should at least have been consulted, just as the Big Four accounting firms were consulted.

It is interesting to note that when Dr. Biggs testified before the Senate committee in February 2002, he enumerated and anticipated the objections to rotation of audit firms similar to those itemized in the GAO report to Congress during November 2003.

In my opinion, there should have been a meaningful and intensive inquiry into the views of shareholders and bondholders of America's wealth. Many thousands of investors lost significant portions of their net worth. It appears that the authors of the report did not communicate with state bodies with responsibility for billions in pension funds' investments (state comptrollers, etc.). If the Big Four firms were consulted, then the state agencies should also have been consulted, pursuant to Section 701 of the Sarbanes-Oxley Act.

May I respectfully suggest that the assignment charged by Sarbanes-Oxley for the GAO to submit a report on the rotation of audit firms be revisited so as to present a more balanced inquiry, which may safeguard the investments of shareholders and bondholders in America's wealth.

The issue is not moribund - it is very much alive.

Eli Mason is a past president of the New York State Society of CPAs, a past chairman of the New York State Board for Public Accountancy, a past vice president of the American Institute of CPAs, and the recipient of the American Accounting Association's Exemplar Award. He recently wrote Conscience of the Profession - A Personal Journey.

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