Chairman Arthur Levitt at Open Commission Meeting
October 6, 1999
Good morning. The Commission meets today to propose steps to improve and augment the oversight of the financial reporting process.
The dynamic nature of today’s capital markets often creates issues that increasingly move beyond the bright line of right and wrong. More often, financial market participants grapple with questions in a gray area where there are no easy answers. It is in this realm where judgment and integrity are indispensable to high-quality and transparent financial reporting.
I believe that the effective oversight of the financial reporting process largely depends on strong audit committees. Qualified, committed, independent and tough-minded audit committees represent the most reliable guardians of the public interest.
Sadly, stories abound of committees whose members lack expertise in the basic principles of financial reporting as well as the mandate to ask probing questions. There is no reason why every public company in America shouldn’t have an audit committee made up of the right people, doing the right things, and asking the right questions.
Eight months ago, a group of leaders from the business community, the accounting profession, the legal profession, and Wall Street -- led by John Whitehead and Ira Millstein --issued recommendations to effect "pragmatic, progressive changes in the functions and expectations" placed on boards, audit committees and financial management.
I believe that the recommendations outlined in the panel’s report give the principal actors involved in sound financial reporting the tools they need to make strong and independent audit committees the rule rather than the exception. The recommendations are aimed at strengthening the independence of the committee. They seek to make audit committees more effective. They enhance accountability of the board, the outside auditors, and management.
Improving the function and practice of audit committees are areas that cry out for level-headed thinking and practical solutions. If we don’t give boards and audit committees a realistic and effective roadmap of how to instill a process that reinforces oversight instead of one that circumvents it, the notion of meaningful, active, and effective corporate governance will forever be just that -- a notion.
The Commission’s proposals today -- along with steps already taken by the NYSE, NASD, and the profession -- will transform these recommendations into reality.
Now all along, we have recognized the need to balance liability concerns with the imperative for strong, assertive audit committees. I believe that the staff’s modifications to the rules we are proposing today strike such a balance. Our proposals do not require audit committees to make any certification about the technical rules of accounting. But they do increase the level of disclosure about the interaction between auditors, board members, and management. And, they do give auditors and the audit committee members the tools to better fulfill their mandate to protect the public interest.
Nearly thirty years ago, a broad-based dialogue began on corporate governance between the Commission, academia, the legal community, and issuers. Through the years, it’s been a discussion that has moved forward through fits and starts. In most cases, unfortunately, scandal and failure have been the prime motivating factors on the road to greater corporate accountability.
Through the efforts of the Blue Ribbon panel, the exchanges, the profession, and the staff of the Commission, we have an opportunity in this time of relative prosperity and stability to enact a practical framework to help ensure our companies remain the most innovative, vibrant, and trustworthy in the world. We can’t afford to waste it. The time is now to do what’s necessary to help keep America’s capital markets the deepest, most liquid in the world. And, the time is now to do what’s right for investors.