NAREIT Submission to the AICPA on Proposed Amendments to SAS No. 61 and 71


December 15, 1999


Ms. Sherry Boothe
Audit and Attest Standards
File 2280
American Institute of Certified Public Accountants
1211 Avenue of the Americas
New York, New York 10036-8775


Re: File No. 2280; Proposed Statement on Auditing Standards, Amendments to SAS Nos. 61 and 71


Dear Ms. Boothe:


The National Association of Real Estate Investment Trusts (NAREIT) is pleased to have the opportunity to respond to the AICPA's proposed Amendments to Statements on Auditing Standards Nos. 61 and 71 (the Proposal). NAREIT is the national trade association for REITs and publicly traded real estate companies. Members include real estate investment trusts (REITs) and other businesses that develop, own, operate, and finance income-producing real estate, as well as those firms and individuals who advise, study, and service these businesses.


General Comments
NAREIT agrees with all of those involved in implementing the proposals of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees (the BRC) that a vigilant and informed audit committee is essential to ensure both investor protection and investor confidence. The Proposal suggests certain amendments to SAS Nos. 61 and 71 in response to the BRC's recommendations and related proposals of the Securities and Exchange Commission and the major stock exchanges. Below are NAREIT's specific comments on the Proposal.


Comments Regarding Proposed Amendments to SAS No. 61
Auditor's Judgements About the Quality of a Company's Accounting Principles
The Proposal would require that the auditor discuss with the audit committee the auditor's judgements about the quality, not just the acceptability, of an SEC client's accounting principles. The understandings of certain criteria, which may be used in making these judgements, are relatively simple and clear. These include consistency, clarity, completeness and verifiability. Other criteria such as neutrality and representational faithfulness may not be clearly understood by auditors, management or audit committee members. This represents a radical change from previous practice.


For over fifty years, accounting professionals, including both financial managers and auditors, have generally operated under the notion that accounting principles used by a company are acceptable if they are consistent with Generally Accepted Accounting Principle (GAAP). In addition, many believe that the U.S. capital markets are the most efficient in the world, in large part because of the quality of U.S. financial reporting. We are concerned that, until a common framework for assessing reporting quality is established by standard setters, conversations between auditors and audit committees about the quality of acceptable accounting principles may be confusing and dysfunctional.


Therefore, we urge the AICPA to delay the requirement for auditors to communicate their judgements about the quality of a company's accounting principles until a common framework for assessing this quality is established and understood by management, auditors and audit committee members. If this requirement for the auditor to discuss a client's accounting principles is included in a final standard, we would suggest that it only require the auditor to discuss alternative accounting treatments in a neutral manner-not assessing the relative quality of alternative principles.


Prohibition Against Written Auditor/Audit Committee Communication
The proposal prohibits auditors from communicating in writing the auditor's judgements about the quality of a company's accounting principles. We believe that it is appropriate to base conversations between auditors and audit committees on written communications.


Therefore, we suggest that the amendment to SAS No. 61 prohibit the use of "solely" written communications. It should require discussions between auditors and audit committees "in addition to" any written communications.


Comments Regarding Proposed Amendments to SAS No. 71
Although we support an SEC requirement that registrants engage their outside auditors to conduct a SAS 71 review of interim financial information prior to the company's filing of its quarterly Form 10-Q, we do not support the Proposal's requirement that the accountant of an SEC client "attempt" to discuss with the audit committee the matters described in SAS No. 61 prior to filing or announcing interim information. Because of the time pressures involved with quarterly reporting, we believe that this "attempt," or even a phone conversation between management, auditors and the audit committee chair, will devolve into a superficial review and discussion. Worse, we are concerned that this superficial process will become a substitute for a more substantive conversation between the auditor and the full audit committee regarding interim financial reports. In addition, we are concerned about a standard containing the vagueness of a notion of an auditor attempting to have discussions with audit committees.


Accordingly, we urge the AICPA to eliminate from its Proposal the requirement that an auditor of an SEC client "attempt" to have discussions with the audit committee prior to the filing or otherwise releasing interim financial information. We recommend that the standard require that the auditor communicate appropriate findings from their SAS 61 review with the full audit committee at its next subsequent meeting.


NAREIT fully supports the efforts of all parties to enhance the effectiveness of corporate audit committees and thanks the AICPA for the opportunity to comment on its proposed amendments to SAS Nos. 61 and 71. Please contact me at (484) 530-1888 or George Yungmann, NAREIT's Senior Advisor, Financial Standards, at (202) 739-9432 if you have any questions regarding this letter.




Timothy A. Peterson
Executive Vice President and Chief Financial Officer, Keystone Property Trust
Co-Chair, NAREIT Accounting Committee