July 11, 2002

ALERT: Gramm Amendment Would Undermine Impartiality of Audits

Vote NO on Creating a Small Firm Exception to Auditor Independence Rule

Dear Senator:

Senator Phil Gramm intends to offer an amendment to S. 2673 that would seriously undermine not only that bill's provisions to enhance auditor independence, but existing public policy that demands an independent audit for all public companies. As such, it runs counter to the whole thrust of the audit reform legislation and would seriously compromise the quality of small company audits.

At a time when Congress is looking to enhance the independence of the audit, the Gramm amendment would create a broad new exemption from auditor independence rules for small companies. Specifically, it would permit the auditing oversight board created by the Senate bill to exempt whole classes of companies and audit firms from the rules that limit the consulting services that auditors may provide to their audit clients. Not just the Securities and Exchange Commission, but the accounting profession itself, has never granted a small-firm exemption from the auditor independence rules. Thus, the proposed amendment would be more lenient even than the existing rules of the profession.

While recent attention has focused on the audit failures at major corporations, just over half the financial statements required to be restated between 1997 and 2001 were from companies with under $100 million in revenues. Clearly, we need to be strengthening the audits of these companies, not eliminating existing protections that minimize auditor conflicts of interest.

In promoting the amendment, Sen. Gramm has suggested that it is needed to provide the new auditing oversight board with flexibility in implementing the independence rules. However, the bill already gives the board ample flexibility with its provision permitting the board to grant exemptions on a case-by-case basis. The board should not be given the "flexibility" to open up gaping new loopholes in auditor independence rules, as this amendment would allow.

Lack of independence in the independent audit is a common thread in the recent accounting crime wave. We urge you to vote no on this anti-investor amendment.

For more information contact Travis Plunkett at the Consumer Federation of America at 202-387-6121.

Sincerely,

Barbara Roper Director of Investor Protection Consumer Federation of America	Scott Harshbarger President Common Cause
Kenneth McEldowney Executive Director Consumer Action	Frank Torres Legislative Counsel Consumers Union

Edmund Mierzwinski
Consumer Program Director
U.S. Public Interest Research Group