PricewaterhouseCoopers LLP
     
     
                                         August 20, 1998
     
     
BY E-MAIL AND US MAIL
     
Jonathan G. Katz, Secretary
United States Securities and Exchange
  Commission
450 Fifth Street, N.W.
Washington, D.C.  20549
     
Dear Mr. Katz:
     
     Re:  Comments on Proposed Rule 102(e) Amendment; File No. S7-16-98
     
     PricewaterhouseCoopers LLP (?PwC?) submits these comments on the
     
     
proposed amendment to the Commission?s Rule 102(e) to define ?improper
     
     
professional conduct? as applied to certified public accountants.
     
     
     
     
     
     At the outset, PwC realizes that the proposed amendment reflects a
     
     
commendable effort to add clarity to a definition that, in the past, has
     
     
been vague and ambiguous, and has allowed almost completely unbridled
     
     
discretion.  Unfortunately, for reasons explained below, we believe the
     
     
proposed amendment falls short of a solution to the problem.  We
     
     
respectfully request that the Commission take more time to seek the views
     
     
of knowledgeable persons, and also that the Commission consider any
     
     
proposed amendments to Rule 102(e) in the broader context of all securities
     
     
professionals, not just certified public accountants.  Any attempt to
     
     
define the basis for the institution of a Rule 102(e) proceeding should
     
     
have application to all professionals who practice before the Commission.
     
     
It is inappropriate and unfair and may be legally untenable to single out
     
     
certified public accountants alone.
     
     
     
     
     1.   Any proposed change to Rule 102(e) must, of course, conform to
     
     
limits on the Commission?s statutory authority.  In this context, it should
     
     
be understood that Congress has never granted to the Commission the power
     
     
to engage in a de facto regulation of the accounting profession.  The
     
     
vagueness of existing Rule 102(e) and a practice that permitted unbridled
     
     
discretion has troubled the federal courts in part because it appears to
     
     
amount to an attempt at de facto regulation.  See Checkosky v. SEC, 23 F.3d
     
     
452 (D.C. Cir. 1994); (Checkosky I); Checkosky v. SEC, 139 F.3d 221 (D.C.
     
     
Cir. 1998) (Checkosky II).  Because the proposed amendment likewise fails
     
     
to give adequate clarity and provide clear limits to discretion, it
     
     
presents the same problem.
     
     
     
     
     2.   The reference to ?applicable professional standards? throughout
     
     
the amendment unnecessarily introduces ambiguity.  Generally accepted
     
     
accounting principles (?GAAP?) and generally acceptable auditing standards
     
     
(?GAAS?) are the applicable standards that govern the conduct of a
     
     
certified public accountant.  Any reference to standards should refer
     
     
specifically to them.
     
     
     3.   Subpart (A) of the proposed amendment refers to ?an intentional
     
     
or knowing violation, including a reckless violation, of applicable
     
     
professional standards ?.?  The reference to an ?intentional or knowing
     
     
violation? is a commendable effort to add clarity and clear limits, but the
     
     
phrase ?including a reckless violation? immediately introduces the
     
     
ambiguous, slippery concept of ?reckless? conduct.  The U.S. Supreme Court
     
     
has never in the context of federal securities laws held that ?reckless?
     
     
conduct is the equivalent of scienter.  See Ernst & Ernst v. Hochfelder,
     
     
425 U.S. 185 (1976).  Some lower federal courts have defined a concept of
     
     
recklessness that they have considered equivalent to scienter, but the
     
     
proposed amendment to Rule 102(e) fails to include a comparable definition
     
     
of what constitutes ?reckless? conduct.  In any event, we agree with the
     
     
Commission that any such reckless conduct should be a form of ?intentional
     
     
or knowing? conduct.
     
     
     4.   Subpart (B) of the proposed amendment moves beyond ?intentional?,
     
     
?knowing? or ?reckless? violations of professional standards.  Subpart (B)
     
     
would provide that improper professional conduct occurs where there are
     
     
?repeated, unreasonable violations of applicable professional standards
     
     
that demonstrate that the accountant lacks competence.?  Again, we commend
     
     
the effort to provide guidance, but, once again, the proposed language
     
     
falls short.  We agree that Rule 102(e) should not be triggered simply
     
     
where there is a violation of professional standards, but it is unclear
     
     
what in the Commission?s mind ? or more particularly, the mind of its
     
     
professional staff ? will constitute ?repeated unreasonable violations.?  A
     
     
situation that regularly arises in accounting and auditing practice is that
     
     
a judgment about the interpretation or application of the same accounting
     
     
principle or the same auditing standard is repeated in the recurring audits
     
     
of the financial statements of a client for successive years.  The
     
     
Commission?s statement accompanying the announcement of the proposed
     
     
amendment does not specifically address the situation, but it gives no
     
     
comfort that the Commission?s staff would not consider such a situation to
     
     
present ?repeated? conduct.  We submit that language requiring ?a course or
     
     
pattern of unreasonable conduct showing repeated failure to conform to GAAP
     
     
or GAAS or the Commission?s rules and regulations relating to financial
     
     
reporting? better captures what should be the Commission?s legitimate
     
     
objective.
     
     
     5.   Similarly, the phrase ?lacks competence? in Subpart (B) is also
     
     
vague.  We submit that where an accountant is subject to Rule 102(e)
     
     
because of his incompetence, the Commission should be required to
     
     
demonstrate that the respondent accountant is so lacking in competence that
     
     
continued practice before the Commission represents a future threat to the
     
     
Commission?s ?system of securities regulation?, which is the stated
     
     
objective in the Commission?s statement accompanying the proposed
     
     
amendment.
     
     
     6.   Subpart (B) of the proposed new definition also provides that
     
     
improper professional conduct would include ?an unreasonable violation of
     
     
applicable professional standards that presents a substantial risk, which
     
     
is either known or should have been known, of making a document prepared
     
     
pursuant to the federal securities laws materially misleading . . . .?
     
     
This language allows so much leeway that it virtually swallows any other
     
     
more limiting language in the proposed amendment.  To require a showing of
     
     
?an unreasonable violation? fails to set a clear limit.  Nor does the
     
     
limitation requiring ?a substantial risk . . . of making a document
     
     
prepared pursuant to the federal securities laws materially mislead? add
     
     
significant limits. Moreover, the proposed language does not even require a
     
     
showing that the respondent accountant actually knew of the risk; it is
     
     
sufficient if there is a finding that the accountant ?should have known.?
     
     
We can easily envision the Commission?s staff arguing that such a risk is
     
     
almost always present when there is any arguable departure from
     
     
professional standards.  Indeed, we believe that a threshold requirement
     
     
for any finding of ?improper professional conduct? should include a
     
     
determination that there has been a materially false or misleading
     
     
statement in a document filed as required by law with the Commission.  The
     
     
inclusion of the proposed language in Subpart (B) prevents the proposal
     
     
from achieving significantly more in the way of clarity than is present
     
     
under the current Rule that has been so severely criticized by federal
     
     
courts.
     
     
     7.   When the Commission considers the whole subject of Rule 102(e),
     
     
it is important to keep in mind that both generally accepted accounting
     
     
principles and generally accepted auditing standards are not like cookbook
     
     
recipes, where reading words and following directions results in a uniform
     
     
outcome.  Resolution of many auditing and accounting issues requires
     
     
judgment.  Even where there is written guidance, there is often ambiguity.
     
     
The accountant must attempt to synthesize practice and different
     
     
pronouncements that may speak ambiguously or indirectly to the issue and
     
     
that may have changed over time.  What the proposed amendment labels as a
     
     
?violation of professional standards? is apt to be, in practice, a
     
     
difference of opinion between the Commission?s staff and the respondent
     
     
accountant over how a particular pronouncement or pronouncements should be
     
     
applied.
     
     
     8.   With the foregoing principles in mind we suggest that the
     
     
Commission substitute for its proposed amendment the following definition
     
     
of ?improper professional conduct?:
     
     
(a)  conduct which is an intentional or knowing violation, including an 
equivalent reckless violation, of GAAP or GAAS and the Commission?s rules 
and regulations relating to financial reporting;
(b)  a course or pattern of unreasonable conduct showing repeated failure 
to conform to GAAP or GAAS or the Commission?s rules and regulations 
relating to financial reporting which demonstrates that the accountant 
lacks competence to practice before the Commission and where such lack of 
competence constitutes a future threat to the integrity of the Commission?s 
processes and to its administration of the federal securities laws; or
(c)  highly unreasonable conduct violating GAAP or GAAS or the Commission?s 
rules and regulations relating to financial reporting which demonstrates 
that the accountant lacks competence to practice before the Commission, 
where the conduct has resulted in a material misstatement of  financial 
statements of a registrant and where such lack of competence constitutes a 
future threat to the integrity of the Commission?s processes and to its 
administration of the federal securities laws.
     9.   The proposed amendment should also provide that the phrase
     
     
?highly unreasonable conduct? requires proof by clear and convincing
     
     
evidence that the accountant failed to perform a clearly mandated auditing
     
     
standard or that the financial statements with which he or she is
     
     
associated failed to follow a clearly mandated accounting principle. We
     
     
suggest that the proposed rule also direct that, in determining whether
     
     
conduct was highly unreasonable, evidence that the accountant reviewed
     
     
relevant professional literature and utilized available procedures for
     
     
consulting with others within the accountant?s firm, under circumstances
     
     
where the accountant knew that the matter under consideration warranted
     
     
heightened scrutiny, would militate against a finding that the accountant?s
     
     
judgment was highly unreasonable.  We also believe that, in the statement
     
     
accompanying any proposed rule, the Commission should make absolutely clear
     
     
that in applying all aspects of the Rule, conduct should be judged on the
     
     
basis of information available to the accountant at the time the accountant
     
     
acted, and not on the basis of hindsight.
   
     
We appreciate the opportunity to submit these comments and would be glad to
     
     
answer any questions the Commission or its professional staff may have
     
     
about them.
     
     
                         Respectfully,
     
     
     
                         PricewaterhouseCoopers LLP