Commission Open Meeting on Market Structure
Initiatives in the Options and Equities Markets,
and Rules Governing Auditor Independence
by Lynn E. Turner
U.S. Securities & Exchange Commission
November 15, 2000
Thank you, Chairman Levitt.
I appreciate the tremendous support that the Chairman and Commissioners Hunt, Carey and Unger have shown in the development of this final rule for auditor independence, as well as the thoughtful manner in which each of your staff’s have worked with the Office of the Chief Accountant.
I want to express my thanks to Paul Roye, Barry Miller and John Capone of our Division of Investment Management, who contributed greatly to that portion of the rule concerning investment companies. I would also like to thank the staff of the General Counsel and the Chief Economist. And finally, let me extend my special thanks to John Morrissey, Sam Burke, and especially Bob Burns, who has really been the beacon of light and steady guiding hand on the wheel of this ship.
Today’s public accounting firms have undergone dramatic changes in the last 25 years. Based on the amounts reported in the Public Accounting Report, last year audit fees for the top seven accounting firms were approximately $9.5 billion. These accounting firms audited over 80% of all registrants, and virtually every company with a large market capitalization. What’s more, the audit and accounting fees of the largest accounting firms, as a percentage of their revenue, has decreased significantly from 70% of total revenue in 1976 for the Big Eight to 34% of total revenue for the same firms in 1998.
Just as the macro-structure of the accounting profession has changed, so has the micro-structure of the product mix within the firms. In 1981, management advisory services for traditional audit firms represented approximately 15% of accounting firms' total revenue; today this number is 40 percent to 50 percent.
In the 1970's, the largest firms were considered national practices. Today, however, they are internationally branded names. And coupled with geographical expansion has been an explosion in the services these firms offer, ranging from broker/dealer services, to outsourcing of most corporate office functions, to transactional structuring advice, to strategic business planning, to business process restructuring, to asset management, and many more. Today it’s rare for public accounting firms to advertise themselves as auditing firms, but rather, as one-stop financial service firms that offer a broad array of financial services.
As the accounting profession has evolved, so has the American workplace. Dual career families and increased mobility among employers is commonplace, and half of all Americans today invest in the U.S. markets.
The rule proposal before us today is, in my view, a balanced, practical and necessary response to the far reaching changes affecting the profession. It is long overdue modernization of the rules that ensure independence for America’s auditors in any economy, old or new. It reinforces the importance of the role the audit committee plays in ensuring investors receive quality information, that has been thoroughly examined by an independent auditor, whose judgment is unquestionably unbiased.
The common thread that has woven together all of our efforts in this rulemaking endeavor is a steadfast belief that, with respect to our financial reporting process, investor protection is paramount in everything we do. Investors rely on the integrity of the numbers to make their investment decisions, and the sanctity of these numbers forms the very foundation on which confidence in America’s markets is built.
Enduring public confidence begins with the auditor. The auditor serves as an objective and rigorous third party who performs independent examinations that give financial statements credibility, and who is accountable to independent audit committees and shareholders. The CPA must be perceived to be independent, both in fact and appearance, from the management team who prepares the financial statements, and works under the diligent oversight of today’s audit committees, whose own role was enhanced with the adoption last year of the Commission’s rules in this area.
If the public confidence in this country’s auditors is ever lost, we risk nothing less than public confidence in America’s markets, and the steadfast trust that sustains them. The CPA must never forget that the "P" in CPA stands for Public – serving the Public, and maintaining their trust. And throughout the twenty-five years I have been in this profession, I have found the auditors in the field, from the partner to the newest recruit, take immense pride in serving the investing public, and their credential as a CPA.
I’d now like to turn it over to David Becker, our General Counsel, to talk in greater detail about the rule.