SEC Staff Letter to Ernst & Young re: Audit-Related Fee Classification

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July 8, 2003

Mr. Ed Coulson, Partner Ernst & Young 5 Times Square New York, NY 10036-653

Dear Ed:

In the article that appeared in the Wall Street Journal on July 1, 2003 entitled "HealthSouth and Ernst Renew Their Flap Over Fee Disclosures," we noted, with concern, comments attributed to Mr. Donald Howarth of Ernst & Young.

The article discusses the classification of fees paid to your firm by HealthSouth for its services related to the potential acquisition of Oracle software and so-called "Pristine Audits," which appear to be operational audits related to compliance with internal cleanliness policies. The article quotes Mr. Howarth as saying "the audit-related category is not limited to services related to the financial statement audit per se," and that classification of the fees for this service as audit-related "was consistent with practice in 2001-2002" and would be acceptable practice today. He is also quoted as saying that "Under the new SEC rules adopted in response to the Sarbanes-Oxley Act, these fees are specifically mentioned as ones that should be included in audit-related fees."

As you know, the Commission's previous fee disclosure rules did not contain any discussion of the concept of fees for "audit-related" services. We understand that this sub-category of "all other fees" was initially proposed by auditors to their clients. One of the reasons the Commission's fee disclosure rules adopted in January 2003 created four categories and clearly defined the audit-related category was because of concerns about the manner in which certain services were being classified.

The Commission's current rules state that registrants are to "disclose, under the caption Audit-Related Fees , the aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the registrant's financial statements. " (emphasis added) It is clear from a reading of the release text and related rules that the Commission's intent is that only fees for services that are reasonably related to the performance of an audit or review of the financial statements and that traditionally have been performed by the independent accountant should be classified as audit-related.

Accordingly, not all attest services may be classified as audit-related. For example, since an evaluation of the potential acquisition of a software product or system cannot be related to the audit of the financial statements, the staff believes that classification of such fees as audit-related would not be in accordance with the Commission's rules as amended in January 2003. Similarly, it would be inappropriate under the current rules to classify fees related to non-financial operational audits as audit-related.

If you have any questions about this letter, please do not hesitate to contact me.

Sincerely,

Scott A. Taub Deputy Chief Accountant

cc: Randy G. Fletchall James S. Turley

http://www.sec.gov/info/accountants/staffletters/e-y070803.htm

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Modified: 07/08/2003