SEC Office of the Chief Accountant staff letter: Letter from SEC Chief Accountant to Deloitte & Touche LLP, Concerning the Sale by its Member Firms Deloitte Consulting L.P., May 7, 2004

May 12, 2017

May 7, 2004

Deloitte & Touche LLP
Mr. Robert J. Kueppers
Ten Westport Road
Wilton, Connecticut 06897-0820

Dear Mr. Kueppers:

The staff has reviewed your letter on behalf of Deloitte & Touche LLP (D&T) of May 6, 2004 concerning the sale by its member firms Deloitte Consulting L.P., an affiliate of Deloitte & Touche USA LLP (together with D&T, "Deloitte"), of its controlling interest in Telispark, Inc. (Telispark"), a company operating a mobile field service software business, to Infowave Software, Inc. ("Infowave") a public Canadian corporation (together with Telispark "Telispark/Infowave"). For purposes of this letter, Deloitte, includes Deloitte Touche Tohmatsu, a Swiss Verein ("DTT"), DTT member firms, and its and their respective subsidiaries and any other firms conducting audit activities for SEC registrants under the name "Deloitte Touche Tohmatsu," "Deloitte Touche," "Tohmatsu," "Deloitte Consulting" and other combinations or derivations thereof. In your letter, you detail key terms of the transaction and conditions that Deloitte, including entities that have been considered part of Deloitte under Rule 2-01(f)(2) of Regulation S-X, have complied or will comply with in connection with the completion of the transaction. Your letter concludes that, based on its compliance with those terms and conditions, Deloitte should not be considered to have a "mutual or conflicting interest" or a "direct or material indirect business relationship" with, or a "direct financial interest or material indirect financial interest" in, any of its audit clients that are also clients of or enter into business relationships with or invest in Telispark/Infowave, or that are invested in by Telispark/Infowave or its employees.

As you are aware, the Sarbanes-Oxley Act of 2002 (the "Act") expressly prohibits any registered public accounting firm, or any associated person or entity of that firm, from providing certain non-audit services to its audit clients that are "issuers" as defined in the Act. The representations set forth in your letter indicate that Deloitte has already taken the following steps to divest Telispark: (1) Deloitte has sold all of its interest in Telispark in a private transaction to Infowave in exchange for common shares of Infowave. Deloitte will hold less than 20% of the outstanding Infowave shares. These shares of Infowave held by Deloitte will be sold, or otherwise redeemed ratably over a three year period by one-third on or before each anniversary of the First Tranche Closing Date, which was January 7, 2004; (2) Deloitte has no corporate governance, or management role in Telispark/Infowave or direct or indirect financial ties with Telispark/Infowave (other than Deloitte's temporary ownership of the aforementioned equity of Infowave and transition service arrangements); (3) Telispark/Infowave does not and will not, beyond a three year period as set forth in Deloitte's letter, use the Deloitte names unless there is a clear indication that they are separate firms; (4) Deloitte does not and will not receive from Telispark/Infowave any royalty, interest, dividend or other payments, and there is no revenue or profit sharing between Deloitte and Telispark/Infowave; (5) Deloitte and Telispark/Infowave are under no obligation to refer clients to one another and there will be no referral fees or other forms of compensation to each other for referrals; (6) for a period of five years from the First Tranche Closing Date under the Non-Compete Agreement, Deloitte agreed to not engage in the business of primarily selling stand-alone mobile field service software to end-users of the type previously provided by Telispark; (7) shared services between Deloitte and Telispark/Infowave are limited and transitional in nature and are for a period of three years; and (8) Telispark/Infowave has no obligation to Deloitte in connection with any retirement obligation and Deloitte has no obligation to Telispark/Infowave in connection with retirement benefits.

Assuming that the representations set forth in your letter are and continue to be accurate, and further assuming that Deloitte continues to comply with each of the terms and conditions set forth in your letter, the Office of the Chief Accountant ("OCA" or the "staff") will not recommend an enforcement action asserting that Deloitte lacks independence as a result of non-audit services provided to Deloitte's audit clients by Telispark/Infowave or its employees. Of course, Deloitte otherwise remains fully subject to the Commission's independence requirements, as well as the provisions of the Act, with respect to matters not expressly covered by your letter and this response. OCA has taken this position based on the specific facts and circumstances represented in your letter. Deloitte will consent to any review deemed necessary by the staff, or an appropriate independent party designated by the Commission or the staff (such as the Public Company Accounting Oversight Board) to ascertain compliance. If the divestiture is found not to have satisfied the terms and conditions represented to the staff or if any of the remaining terms or conditions in your letter are not met, the staff's position will be vitiated, and the staff may recommend an enforcement action. Further, OCA has taken this position based on its evaluation of the relevant policy considerations and does not thereby adopt or endorse the analysis or conclusions set forth in your letter. This response expresses OCA's position only on these particular facts and circumstances and does not purport to express any legal conclusions on this or any other matter.

Sincerely,

Andrew D. Bailey, Jr.
Deputy Chief Accountant

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Incoming Letter:

May 6, 2004

Office of the Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Re:Deloitte Consulting L.P.-Telispark, Inc./Infowave Software, Inc.

Dear Sirs:

We hereby request that the Staff of the Office of the Chief Accountant (the "Staff") of the Securities and Exchange Commission (the "Commission" or "SEC") advise that, based upon and subject to the matters referred to herein, it will not recommend that the Commission take enforcement action against Deloitte & Touche LLP, a Delaware limited liability partnership (D&T), asserting that D&T is not "independent" based upon the attribution to D&T of the activities of Telispark, Inc. ("Telispark"), a Delaware corporation, or Infowave Software, Inc. ("Infowave") a corporation organized under the laws of Canada. Telispark sells stand-alone mobile field service software and, up until the closing of the transaction described herein, was controlled by Deloitte Consulting L.P., which is an affiliate of Deloitte & Touche USA LLP (together with D&T, "Deloitte"). For purposes of this letter, Deloitte, including Deloitte Touche Tohmatsu, a Swiss Verein ("DTT"), includes DTT member firms, and its and their respective subsidiaries and any other firms conducting audit activities for SEC registrants under the name "Deloitte Touche Tohmatsu," "Deloitte Touche," "Tohmatsu," "Deloitte Consulting" and other combinations or derivations thereof or otherwise as part of the Deloitte Touche Tohmatsu network of firms or "accounting firm,"1 or any other entity that would be subject to the Commission's independence rules as defined in Rule 2-01(f)(2) of Regulation S-X.

Pursuant to a private stock purchase agreement entered into on January 7, 2004, Deloitte has sold all of its shares in Telispark to Infowave for shares of Infowave common stock.2

We believe that the aforementioned transaction, and the conditions proposed herein, serve as a basis for the Staff to grant the relief requested.

Legal Analysis

The federal securities laws require that financial statements filed with the Commission by public companies, investment companies, broker-dealers, public utilities, investment advisers and others be certified (audited) by independent public accountants.3 The Commission has adopted Rule 2-01 of Regulation S-X regarding independence of accountants. The general standard set forth in Rule 2-01(b) provides that:

The Commission will not recognize an accountant as independent, with respect to an audit client, if the accountant is not, or a reasonable investor with knowledge of all relevant facts and circumstances would conclude that the accountant is not, capable of exercising objective and impartial judgment on all issues encompassed within the accountant's engagement.4

Rule 2-01(b) further provides that:

In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission.

The preliminary note to Rule 2-01 states that, in considering the standard set forth in Rule 2-01(b), the Commission looks to, among other criteria, whether the relationship or the provision of service "creates a mutual or conflicting interest between the accountant and the audit client."5 Rule 2-01(c) applies the standards set forth in Rule 2-01(b) to particular circumstances that are considered to impair an accountant's independence.6 For example, Rule 2-01(c)(1) provides that an accountant will not be considered independent if "the accountant has a direct financial interest or a material indirect financial interest in the accountant's audit client . . . ." In addition, Rule 2 01(c)(3) provides that:

An accountant is not independent if, at any point during the audit and professional engagement period, the accounting firm or any covered person in the firm has any direct or material indirect business relationship with an audit client, or with persons associated with the audit client in a decision-making capacity, such as the audit client's officers, directors or substantial stockholders.

For purposes of Rule 2-01, "accounting firm" means "an organization . . . that is engaged in the practice of public accounting . . . and all of that organization's departments, divisions, parents, subsidiaries, and associated entities, including those located outside the United States." 17 C.F.R. 210.2-01(f)(2) (emphasis added). Although not expressly defined by rule, the Commission has stated that it intends the phrase "associated entity" to:

reflect our staff's current practice of addressing these questions in light of all relevant facts and circumstances, looking to the factors identified in our staff's previous guidance on this subject. While the rules we adopt do not provide accounting firms with the certainty of our proposed rule, we are convinced that a more flexible approach is warranted as the types and nature of accounting firms' business arrangements continue to develop.

Revision of the Commission's Auditor Independence Requirements, 65 Fed. Reg. 76008, 76059 (Dec. 5, 2000) (footnote omitted). As part of this guidance, the Commission also cited numerous prior no-action letters that had been issued to address the separation of consulting businesses from accounting firms. Id. at 76059, n.491 (citing various no-action letters). In the prior no-action letters, the Staff has examined whether the firms are associated entities by considering such factors as whether: (1) the accounting firm has any ownership interest in the consulting firm; (2) there are restrictions on the use of the accounting firm's name by the consulting firm; (3) the firms' corporate governance structures are separate; (4) there is any revenue sharing between the firms; (5) there are any joint marketing agreements between the firms; and (6) there will be any on-going shared services between the firms.

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (''Sarbanes-Oxley Act'' or "the Act") became law. Title II of the Sarbanes-Oxley Act, entitled "Auditor Independence," required the Commission to issue final rules by January 26, 2003, under which certain non-audit services will be prohibited, conflict of interest standards will be strengthened, auditor partner rotation and second partner review requirements will be strengthened, and the relationship between the independent auditor and the audit committee will be clarified and enhanced. However, Congress left the definitions of "accounting firm" and "associated entity" untouched. In its final rulemaking to incorporate Title II of the Sarbanes-Oxley Act into the SEC's rules and regulations, the SEC also did not amend or modify its definitions of "accounting firm" or "associated entity." See 68 Fed. Reg. 6006 (February 5, 2003). Consequently, Rule 2-01 continues to direct firms to refer to the Staff's practice of addressing these questions in light of all relevant facts and circumstances, looking to the factors identified in the Staff's previous guidance on this subject.

The Commission's interpretations of Rule 2-01 are also collected in Section 600 of the Codification of Financial Reporting Policies (the "Codification"), entitled "Matters Relating to Independent Accountants."7 Section 602.02.e of the Codification addresses business relationships, such as joint ventures, limited partnership agreements, and investments, that may impair an auditor's independence. That section provides, in part, that:

Direct and material indirect business relationships . . . with a client . . . will adversely affect the accountant's independence with respect to that client. Such a mutuality or identity of interests with the client would cause the accountant to lose the appearance of objectivity and impartiality in the performance of his audit because the advancement of his interest would, to some extent, be dependent upon the client.

Deloitte desires to obtain assurance that, following the transaction described below, to the extent that Telispark/Infowave, or any partner, employee, or controlling shareholder of Telispark/Infowave provides services for, enters into business relationships with, or invests in or accepts investments from Deloitte audit clients, Deloitte's independence will not be deemed impaired pursuant to Rule 2-018 or rules that are promulgated thereunder or any other provisions of the Commission's independence rules.

Deloitte believes that under the conditions detailed in this letter, Telispark/Infowave would not be considered an associated entity of Deloitte under the terms and conditions governing this Transaction (as defined below), and that Deloitte would not have a "mutuality of interest" or a "direct or material indirect business relationship" with, or a "direct financial interest or material indirect financial interest" in any of its audit clients as a result of the activities of Telispark/Infowave, its partners, employees (which activities include, without limitation, providing services to, entering into business relationships with and making or receiving investments in or from third parties) or investors. This conclusion is based on the conditions detailed in this letter, which will, among other things: (1) explicitly limit at the outset, and within three years end, Deloitte's equity interest in Infowave; (2) impose limitations on the use of the "Deloitte" names by Telispark and Infowave; (3) require a strict separation of the corporate governance, management, and financial structures and interests between all entities included in the definition of Deloitte and Telispark/Infowave; (4) prohibit any revenue or profit sharing between any entity included in the definition of Deloitte and Telispark/Infowave; (5) prohibit any joint marketing between Deloitte and Telispark/Infowave; and (6) limit any services between Deloitte and Telispark/Infowave to those that are transitional in nature.

Factual Background

On January 7, 2004, Deloitte initiated the sale of its shares of capital stock in Telispark to Infowave, a company which develops and markets wireless software solutions for mobile operators, and which is not an audit client of Deloitte. Pursuant to the terms of a Stock Exchange Agreement (the "Stock Exchange Agreement"), and other agreements specified therein (together with the Stock Exchange Agreement, the "Agreements"), Deloitte and all other Telispark equity holders have agreed to exchange all issued and outstanding shares of Telispark for shares of Infowave common stock. This equity exchange occurred in two tranches: the first exchange of equity occurred at the closing date of the First Tranche, which was January 7, 2004, and the remainder of the exchange occurred at the close of the Second Tranche, which was April 6, 2004. On and after January 7, 2004, Deloitte and its partners and principals hold less than 20% of the issued and outstanding common shares of Infowave. In addition, neither Infowave nor the other investors involved in the Transaction owns any equity interest in Deloitte or DTT.

The above described sale of Telispark capital stock and Agreements, together with the Conditions to No-Action Confirmation listed below, are referred to collectively as the "Transaction."

Other key terms of the Transaction are:

1. The Non-Competition Agreement entered into by Deloitte and Telispark/Infowave prohibits Deloitte from competing against Telispark/Infowave for certain services for a period of five (5) years. DTT will effectively be bound by the Non-Competition provision.
2. There is presently and will be no corporate governance, management or direct or indirect financial ties between any entity included in the definition of DTT and Telispark/Infowave (other than payments relating to the Transaction, Deloitte's ownership of the aforementioned equity of Infowave and the transition services arrangement described below).
3. As of January 7, 2004, the shares of Infowave capital stock held by Deloitte and its partners and principals as a result of the Transaction represent less than 20% of Infowave's issued and outstanding common shares, and in all subsequent periods will continue to represent less than 20% of Infowave's capital stock.

Conditions to No-Action Confirmation

Deloitte requests that, subject to compliance with the following conditions, the Staff not recommend enforcement action to the Commission based upon the attribution to Deloitte of the activities of Telispark/Infowave since January 7, 2004, and thereafter:

Telispark's rights and obligations under an office lease have been assigned to Deloitte. Deloitte and Telispark will enter into a license arrangement for this office space. Under this arrangement, Telispark will license a portion of the office space from Deloitte at the rate of $20,000 per month for a period not to exceed (90) days from January 7, 2004. At the conclusion of the (90) days, Telispark may continue to license the office space from Deloitte on a month-to-month basis for a period of time not to exceed three (3) additional months. With respect to new leases for office space, Deloitte and Telispark individually will enter directly into such leases with a landlord and will not enter into new licenses with each other for office space.

1. Deloitte will not hold any equity in Infowave for a period of more than three (3) years from the First Tranche Closing Date. Deloitte has owned less than 20% of Infowave's issued and outstanding common stock since January 7, 2004, and will reduce its holdings ratably by one-third on or before each anniversary of the First Tranche Closing Date.
2. As of January 7, 2004, neither Telispark nor Infowave (nor any of their subsidiaries) will use any variant of the "Deloitte," "Touche," "Deloitte Consulting," and "Deloitte & Touche" names. Neither Telispark nor Infowave will use any variation of these "Deloitte" names in any publication, advertisement, press release, name plate, office signage, business card or other similar materials. Specifically, Telispark/Infowave will have the right to request consent from Deloitte to use a variant of the "Deloitte" name (e.g., "Deloitte Consulting"), including in conjunction with its rebranding (e.g., "Telispark, formerly Deloitte Consulting") for a short transitional period, but in no event to exceed the three year time period set forth in the prior letters, as long as:
   1. All publications, letterhead and stationery, name plates, office signage, business cards and similar materials that use the "Deloitte" name clearly designate that Telispark is not owned by DTT (e.g., "an independent consulting firm");
   2. DTT does not represent in any publication, advertisement, press release, name plates, office signage, business cards or other similar material that it is the same firm, or controls, manages, governs or is affiliated with Telispark/Infowave, or any affiliate, subsidiary or division of Telispark/Infowave; and
   3. Telispark/Infowave does not represent in any publication, advertisement, press release, name plates, office signage, business cards or other similar material that it is the same firm, or controls, manages, governs or is affiliated with DTT, or any affiliate, subsidiary or division of DTT.
3. Deloitte and Telispark/Infowave have maintained, and will maintain, separate corporate governance, management, and financial structures and interests including: separate boards of directors (including no contractual right of Deloitte or DTT to representation on the board of directors or governing body of Infowave), executives, employees, capital, credit lines or facilities, client bases, governing documents, operating policies, financial operations and financial and accounting policies. Infowave will not appoint any officers or directors that are partners, principals, or employees of Deloitte for a period of five (5) years from the closing date of the Transaction. Deloitte and Infowave will not exert financial or other influence over the other party's corporate governance, management, and financial structures or interests.
4. Deloitte does not and will not (other than with respect to services specified in the last sentence of this paragraph 4) accrue, pay to or receive from Telispark/Infowave any royalty, interest, dividend or other payment, whether or not tied to the performance of Telispark/Infowave (other than with respect to the services specified in the last sentence of this paragraph 4). Accordingly, Deloitte and Telispark/Infowave will not share profits or revenues from consulting or any other engagements or agreements. From January 7, 2004 until the date that Telispark and Deloitte cease to occupy shared lease space (as described in paragraph 7 below), Deloitte and Telispark/Infowave have not entered, and will not enter, into any prime/subcontractor relationship to provide professional services to the same client, except that existing prime/subcontractor relationships may be completed in accordance with their existing terms; however, in no event will Deloitte be able to provide prohibited services under these relationships beyond May 6, 2004 and all other relationships will not extend beyond 18 months following issuance of the SEC's no-action letter.
5. Deloitte and Telispark/Infowave may, but will be under no obligation to, refer clients to one another. Deloitte does not and will not designate Telispark/Infowave as a preferred provider of services, and Deloitte and Telispark/Infowave do not and may not pay referral fees or other compensation to each other for referrals to each other nor to any subsidiary, affiliate, employee or agent of the other. Deloitte and Telispark/Infowave have not and may not enter into any co- or joint-marketing, advertising or similar agreements or arrangements with the other that are inconsistent with this paragraph 5 or paragraphs 2 or 4 or that do not clearly state that Deloitte and Telispark/Infowave are separate firms.
6. Subject to the Non-Competition Agreement referred to in paragraph 9 below, Deloitte may continue to provide services to clients and investors of Telispark/Infowave under separate engagements with such clients and investors, and Telispark/Infowave may continue to provide services to clients of Deloitte under separate engagements between Telispark/Infowave and such clients.
7. Deloitte and Telispark/Infowave have entered into an Information License Agreement, whereby Deloitte has granted Telispark a limited, non-exclusive, non-transferable, royalty-free, fully paid, worldwide, and perpetual license to use internally proprietary information and "know how" known as "Value and Industry Prints." Deloitte will not make a profit on the license provided to Telispark under the Information License Agreement.
8. Deloitte will consent to any necessary reviews by the Staff or an appropriate independent party designated by the Commission or the Staff (such as the Public Company Accounting Oversight Board) to ascertain that Deloitte is complying with the conditions herein provided.
9. In connection with the completion of the Transaction, Deloitte will be bound by the Non-Competition Agreement that will extend for a period of five (5) years from January 7, 2004. Notwithstanding the previous sentence, Deloitte may, after expiration of the Non-Competition, provide services otherwise restricted under the Non-Competition Agreement, including providing such services to audit clients that file reports with the SEC to the extent permitted by the SEC independence requirements and professional standards at such time.
10. Telispark/Infowave has, and will have, no obligations to Deloitte in connection with any retirement benefits to continuing or former partners or employees of Deloitte. Deloitte has, and will have, no obligations to Telispark/Infowave in connection with any retirement benefits to continuing or former partners or employees of Telispark/Infowave.
11. In accordance with the terms set forth in this letter, on the date that Deloitte no longer licenses office space to Telispark, Deloitte and Telispark/Infowave will be free to contract and enter into business relationships with one another as would any other independent entities.

Certain Confirmations

In connection with its request herein, each of Deloitte and Telispark/Infowave, insofar as each item below relates to it, hereby confirms to the Staff that:

1. After the effective date of the Transaction, Deloitte will continue to be subject to the independence requirements of the securities laws and the SEC's independence rules and interpretations issued thereunder to the same extent as they were so subject prior to the closing date of the Transaction.
2. Deloitte agrees to the above conditions and has furnished a copy of this letter (and will forward any no-action letter on this subject) to Telispark/Infowave. Telispark/Infowave will expressly acknowledge that it has been furnished a copy of this letter. Deloitte further represents to the Staff that it is not aware of any provisions of the agreements described herein or any agreement or instrument referred to therein that is inconsistent with this request.
3. Deloitte has furnished the Staff with a copy of the final versions of the Agreements (including without limitation the schedules, exhibits and annexes thereto) and hereby represents to the Staff that the final executed versions of such documents do not differ in any respect material to the matters referred to in this letter from the versions so furnished.

Confirmation Requested

Based upon the representations contained herein and in the materials provided herewith, and subject to continued compliance with the foregoing conditions, we hereby request that the Staff advise that the Office of the Chief Accountant will not assert or recommend enforcement action that asserts that Deloitte's independence has been impaired to the extent Telispark/Infowave or any of their partners or employees provides services for, enters into business relationships with, or invests in or accepts investments from, Deloitte audit clients. We fully understand that if the Staff takes a no-action position, that position will be based on the representations and undertakings set forth in this letter and continued compliance with the material terms of the related executory contracts. We further understand that failure to comply with any of these conditions would invalidate the relief granted by the Staff in response to this request as of the date the Staff's relief was communicated to Deloitte.

Certain matters described above have not yet been publicly announced. Accordingly, pursuant to 17 C.F.R. § 200.81(b), we hereby request confidential treatment of the contents of our communications with the Staff with respect to all issues relating to this letter (the "Confidential Material") until a date 120 days after release of your response to us, or such earlier date as the Staff is advised by us that all of the information contained in the Confidential Material has been made public. However, when the Staff determines to grant the no-action relief requested herein, we understand and agree that the letter itself and the text of your response to the letter may be made public immediately. In addition to this request for confidential treatment, we will request, under separate cover, confidential treatment for the transaction documentation and the other materials furnished to you in connection with this letter pursuant to the provisions of 17 C.F.R. § 200.83.

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If for any reason you do not concur with the views expressed in this letter, we respectfully request an opportunity to discuss this matter with the Staff prior to any written response to our letter. If you have any questions or need any additional information concerning the foregoing, please do not hesitate to call Scott Bayless of Deloitte & Touche SEC Services at 202-879-5315, or Douglas R. Cox of Gibson, Dunn & Crutcher LLP at 202-887-3531.

Sincerely,

Robert J. Kueppers
Deloitte & Touche LLP

cc:	W. Scott Bayless - Deloitte & Touche LLP Douglas R. Cox - Gibson, Dunn & Crutcher LLP

Endnotes

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1 As such term is defined pursuant to Rule 2-01(f)(2) of Regulation S-X.

2 All other private shareholders of Telispark also have exchanged all of their shares of Telispark stock for those of Infowave.

3 See, e.g., 15 U.S.C. §§ 77aa(25), (26); 15 U.S.C. §§ 781, 78q, and 78m; 15 U.S.C. §§ 79e(b), 79j, 79n; 15 U.S.C. §§ 80a-8, 80a-29; 15 U.S.C. §§ 80b-3(c)(1).

4 17 C.F.R. § 210.2-01(b) (2001). Under Rule 2-01, the term "accountant" includes "any accounting firm with which the certified public accountant or public accountant is affiliated." Id. § 210.2-01(f).

5 Id. § 2.10.2-01 (para. 2 of Preliminary Note).

6 See id.

7 Codification of Financial Reporting Policies, Section 600-Matters Relating to Independent Accountants, reprinted in Fed. Sec. L. Rep. (CCH) ¶ 73,251, et seq.

8 Rule 2-01(f)(6) of Regulation S-X.

Last Reviewed or Updated: May 12, 2004