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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Opportunities for
Improving Quality

Remarks by

Lynn E. Turner

Chief Accountant
U.S. Securities & Exchange Commission

Before the Colorado Society of CPAs

December 15, 2000

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Mr. Turner and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff.


Thank you for that great introduction.

I'm thrilled to speak to you today. Some of you may recall that Eric Jacobsen and I participated in this program last year via videoconference. But we are especially pleased to be here in person this year.

And what a year it has been. Much like the recent election the country experienced, we have seen the U.S. Capital markets also experience unique events. For example, we have now lived in a period of unprecedented economic growth fueled in part by tremendous growth in our capital markets. Today, over 80 million investors participate in those markets, providing over 15,000 companies a source of capital, and generating approximately $16 trillion in wealth for the investors. In fact, we now see trading volumes in excess of 1 billion shares a day. What a success our markets have been.

And this success is in no small part due to the trust and confidence the investing public place in the financial information they receive and analyze. Trust and confidence built on a belief that management fulfills its responsibility to stockholders, the owners of the business, to accurately portray the results of the company in accordance with generally accepted accounting principles. Trust and confidence in the integrity and objectivity of the independent accountant, who ultimately must determine whether the numbers are deserving of his or her seal of approval. And finally, trust and confidence that investors are receiving high quality financial information as a result of robust oversight provided by an independent audit committee of the Board of Directors.

But it takes all three pillars of financial reporting, the financial executive, the independent auditor and the audit committee, to maintain the foundation upon which the success of our markets have been built. When one of the pillars crumbles to the pressures that can be exerted upon it, confidence in that foundation can also falter. And with that in mind, we would like to share with you some of the issues the staff continues to focus on, that we believe can impact the quality of financial information, and ultimately, investors.

Financial Executives: Where it Begins and Ends

The first, and ultimate, responsibility for the numbers rests squarely on the shoulders of the Chief Financial Officer (CFO). The CFO is the person who sets the tone and policies for the entire financial organization. It is the CFO who ensures the quality of the financial information provided to investors -- information that is high quality because it is accurate, and provides a complete and balanced picture to investors.

A key component of any quality financial reporting process is the establishment of internal controls that provide reasonable assurance that the financial statements have been prepared in accordance with generally accepted accounting principles. That is why the recently issued report of the Panel on Audit Effectiveness, commonly referred to as the "O'Malley Panel," recommended that audit committees obtain from management, a report on the effectiveness of the Company's internal controls. I strongly support that recommendation and encourage both CFO's and audit committees to implement it this year. It can serve as the basis for an in-depth discussion between the "Three Pillars" regarding the adequacy and effectiveness of a company's internal controls and policies.

Consistent with the O'Malley Panel's Report, I believe such a discussion, accompanied by a report by management to the audit committee, is important. The 1999 report of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on the topic of fraudulent financial reporting, highlighted that in over three quarters of the Commission's Enforcement cases the Committee reviewed, senior executives, including the CEO and CFO had circumvented the internal controls of the company. And such events now perhaps more often than ever before, are resulting in the end of a CFO's career. Perhaps the September edition of CFO magazine highlighted it best by listing 22 CFO's who had served time, are behind bars now, or are awaiting sentencing. Sentences already handed out involved time of up to 30 years. Additional data shows that the average prison sentence from SEC referrals to U.S Attorney's Offices is growing longer, from 10 months in 1992 to 49 months in 1998. And with the creation of the SEC's Financial Fraud Task Force this year, I suspect the number of referrals may increase. As Richard Walker, the SEC's Enforcement Division Director has stated. "We are moving toward turning the numbers game' into a game of Monopoly - that is, cook the books and you will go directly to jail without passing Go."

But my experience as a CFO leads me to believe that the majority of CFO's do the job right, with integrity and high ethical standards. But this group of CFO's is being tainted in the press by those who are presenting less than a complete picture to the very owners they serve. I am speaking in part of the CFO's who turn out what I call Everything But Bad Stuff or EBS press releases.

These releases put a spin on the numbers that sometimes seems to turn straw into gold. They reflect "pro-forma" numbers at the beginning of the release that set forth profits after basic expenses have been added back, such as costs for marketing or for starting up a new product line. Or the company gave ongoing operating profits a boost by adding in one-time nonrecurring gains without any explanation. I have also seen items added that clearly do not comply with the Commission's Regulation S-X as a means to increase revenues.

The press has appropriately identified and written about such press releases. I continue to believe that the vast majority of CFO's steer clear of such practices. But I would urge those who do it right and the financial executive organizations they represent to speak out on these abusive practices. In the meantime, we will continue to urge investors to be cautious and read the entire interim and annual reports filed with the Commission. And we will continue to ask audit committees to play a more active role to ensure investors receive a balanced, complete, transparent picture of the Company's financial condition and results.

Audit Committees

And I have every faith that audit committees will do just that. Beginning with the issuance of the now historic report of the Blue Ribbon Committee on Improving the Effectiveness of Audit Committees in 1999, we have seen audit committees taking a more proactive oversight role. I am encouraged that audit committees are asking the tough questions about the tough issues. They are delving into issues such as: How are revenues being reported? Has the company adjusted accruals just to make a consensus estimate? And do the relationships and services between an auditor and the company give rise to investor concerns about the auditor's independence?

The O'Malley Panel also had recommendations that every audit committee should consider. These included the recommendation on internal controls I have already mentioned. They also include guidance for audit committees regarding auditor's independence. For example, the Panel recommended that audit committees pre-approve non-audit services over a specified threshold and that the audit committee consider a list of ten factors in making those determinations.

I believe audit committees and their CFO's will find that guidance to be timely and useful as they consider the issue of auditor independence. And this is an important role. In the Commission's final rule on auditor independence, as many commenters from the accounting profession and business community recommended, the Commission looked to the self governance process and audit committee oversight to play an important role in maintaining investors' confidence. Audit committees asking the tough questions and making reasonable business judgments about the independence of the auditor is an objective and goal we should strive for. And while it is easy for one to merely put such non-audit services into a "good" bucket or a "bad" bucket, I believe that investors will be better served by an audit committee, using the reasoned guidance provided by the O'Malley Panel, asking pertinent questions and making sound, reasoned business judgments. Such a process will no doubt lead to decisions by some audit committees to approve certain non-audit services and by some not to approve those services. But it will be a private sector self-governance, self-regulatory approach that now has the necessary information to make informed decisions and is well equipped to serve investors' interests.

Enhancing Financial Disclosures

And speaking of serving the interests of investors, in 1991 the AICPA formed what became known as the Jenkins Committee. This Committee, under the leadership of Ed Jenkins who now serves as the Chairman of the Financial Accounting Standards Board

(FASB), issued a final report in 1994 that put forth ideas regarding how the business reporting model might be improved. Following the issuance of that report, the FASB with the support of the AICPA, undertook another project on the business reporting model and is expected to yield another report in the near future that recommends certain voluntary disclosures by companies. And in October of 1999, the Chairman of the SEC called upon the Dean of the Yale Business school, Jeff Garten, to spearhead a committee that would consider what types of information might assist investors in better understanding the critical success factors or drivers of value for a business.

Using the work of those committees as a starting point, I personally believe it is now time we find a way to provide investors additional and enhanced financial information that will give investors greater predictive capabilities regarding the performance of the businesses they have chosen to invest in. A possible approach to accomplishing this would be for a company to chose ten to twelve key performance indicators, and disclose this information to investors in a consistent, comparable fashion. If the company chose to change one of the indicators being disclosed, then they would explain the reason for the change. But a key to this approach, is that the company would be the party who chooses the indicators to be disclosed. I think this is necessary as key performance indicators vary from industry to industry and can vary from company to company, depending upon the business strategy set by management. For example, as a CFO of a semiconductor manufacturing company that had a fabrication plant, I looked to key performance indicators that were not the same as those for other semiconductor companies that chose a fab-less strategy.

An initial first step to such an approach is to define the key performance indicators that would provide investors useful information, so as to ensure investors are provided with reliable, comparable information on a consistent basis for those indicators disclosed. Accordingly, I have asked the American Institute of Certified Public Accountants to undertake this project. The AICPA with its membership of accounting professionals in industry, consulting and public accounting, can assemble a team of knowledgeable professionals who can work with investors, analysts, standard setters and regulators to provide the necessary guidance on a timely basis.

Proper Disclosure of Changes in Accounting Estimates

Let me shift gears now and address in greater detail a number of more specific financial reporting and auditing issues that have the staff's attention.

Changes in the Numbers

Combating inappropriate earnings management abuses has been at the top of our radar screen. The initiatives undertaken by the stock exchanges, Auditing Standards Board (ASB) and Commission have all come together to create a cultural change in the way people consider this issue and the quality of financial reporting.

However, we have seen some innovative ways of playing the "numbers game" employed. For example, now we are starting to see some companies "moving" the numbers around by changing estimates and assumptions, when in fact, the economics don't seem to support the changes. I would urge companies and their auditors to carefully review such changes to ensure they are appropriate, timely and adequately supported with sufficient competent evidential matter. In addition, companies and their auditors need to be sure their disclosures fully comply with the requirements of Accounting Principles Board Opinion No. 20 (APB 20), Accounting Changes, regarding the need to disclose changes in accounting estimates. Paragraph 33 of APB 20 specifically requires registrants to disclose the effect on income and per share amounts for a change that affects several future periods. The staff expects strict compliance with the provisions of APB 20.

Similarly, as required by Item 303 of Regulation S-K, registrants should also disclose in Management's Discussion and Analysis (MD&A) changes in accounting estimates that have a material effect on the financial condition or results of operation of the company, or trends in earnings, or would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.

While I am on this topic, I want to emphasize the need to follow Staff Accounting Bulletin (SAB) 100's guidance with respect to accruals for loss contingencies. SAB 100 explains that Generally Accepted Accounting Principles (GAAP) requires that such accruals for loss contingencies must be reversed when they are no longer supportable. I direct you to SAB 32 on this matter as well. We will be looking at loss accruals very carefully for compliance with GAAP.

Circumstances Where Inventory May Be Stated at Above Cost

Another topic that appears to relate to management of earnings is one that affects the valuation of inventories.

Accounting Research Bulletin (ARB) No. 43, Restatement and Revision of Accounting Research Bulletins, provides guidance on the accounting for inventories. By way of background, let me remind you that the inventory pricing provisions included in ARB 431 allow that only in exceptional cases may inventories properly be stated at above cost. An example of an exceptional case provided in ARB 43 is precious metals having a fixed monetary value with no substantial cost of marketing. ARB 43 goes on to state that all other exceptions must be justifiable by an:

1) Inability to determine appropriate approximate costs;

2) Immediate marketability at quoted market price; and

3) The characteristic of unit interchangeability."

Whenever inventory is stated above cost, that fact must be fully disclosed.

ARB 43 states: "It is generally recognized that income accrues only at the time of sale, and that gains may not be anticipated by reflecting assets at their current sales prices." Accordingly, the staff believes that circumstances justifying stating inventories at above cost are exceptional today. For example, in today's economy, sophisticated cost accounting techniques supported by robust cost accounting software suggest that few, if any, registrants are unable to determine the appropriate approximate cost of inventory. Hence, the staff believes that only when all the criteria set forth in ARB 43 are met can inventories be valued at an amount in excess of cost.

Accordingly, the "immediately marketable" and "unit interchangeability" requirements of ARB 43 indicate that in-process inventories, not yet in final marketable form, do not meet the criteria for being carried at above cost. For example, it would inappropriate to value inventories of raw or unrefined ore at above cost until they have been refined to the state in which they are typically marketed.

Registrants should ensure that their accounting policies for in-process inventory conform to the guidance in ARB 43. In considering the appropriateness of their accounting policies, registrants are reminded that authoritative literature takes precedence over industry practice that is contrary to generally accepted accounting principles.2

Cross Payment Arrangements

In today's markets, the revenues companies report sometimes drive their market capitalization. As a result, there is increased focus and attention on how revenue transactions are measured and classified in the financial statements. At the same time, companies are increasingly entering into strategic alliances, joint ventures, cross licensing and cross ownership agreements. Often more than one type of these agreements are negotiated and entered into simultaneously. As such, the agreements are complex, and it may be difficult, if not impossible to distinguish and reliably measure the fair values of the separate elements of the contracts.

For example, a company may simultaneously negotiate and enter into an agreement to:

  • Pay an upfront technology fee to obtain technology and related services from another entity for an extended period of time,

  • Provide the other entity access to its technology through an annual licensing arrangement with a term of several years, and

  • Permit access to each respective company's membership base, based on a per member click or usage fee.

In such situations, the company and its auditor should consider whether it is appropriate to report the related cash flows, revenues and costs on a gross or net basis. In order to report these types of multiple element arrangements on a gross basis, there must be sufficient, competent and verifiable evidence of the fair value of the separate elements. When an entity would not have entered into one of the separate contracts, without all the contracts being negotiated and agreed to as a "package", it will often be difficult to determine reliable and verifiable fair values for each element. In those instances, the facts and circumstances will often dictate that the cash inflows and outflows be reported as a net revenue amount, in the appropriate periods. I would encourage registrants to consider discussing such highly unusual and complex transactions with the staff on a pre-filing basis.

Audit-Related Matters

The performance of audits and their effectiveness is another issue that has received a great deal of attention in the past year, in large part as a result of the work of the O'Malley Panel. And we expect to closely monitor the profession as it begins to consider and implement the Panel's more than 200 recommendations.

In connection with the Panel's study, the Panel analyzed certain SEC Accounting and Auditing Enforcement Releases (AAERs).3 The Panel reviewed the AAERs to obtain additional insights regarding the characteristics that frequently were present in actual or alleged instances of fraudulent financial reporting and audit failures, as well as insights regarding the auditors' work that either resulted in detecting or not detecting material misstatements. The Panel's analysis, consistent with observations of the SEC staff, indicate that all too often the auditor fails to detect non-standard journal entries that result in material entries in the financial statements that are at variance with GAAP. In addition, the SEC's enforcement cases have also highlighted that auditors often identify improper financial reporting and confront the client with the issue. However, management then provides an explanation that the auditor accepts without obtaining appropriate verifiable evidence.

Given the observations of the Panel and SEC staff, auditors should be aware of these and other techniques to materially misstate financial statements. Generally Accepted Auditing Standards (GAAS) require an auditor to obtain sufficient competent evidential matter to form a basis for his or her conclusions about the fair presentation of the financial statements. For example, the staff expects that in performing appropriate audit procedures, the auditor will gain an understanding of the nature and volume of non-standard journal entries, how non-standard journal entries are processed, what controls exist that are effective in ensuring that non-standard journal entries are properly recorded, and to what extent there is adequate segregation of duties and supervision. The auditor should ensure that sufficient, competent, verifiable evidential matter is obtained to support the auditor's conclusion that the non-standard journal entries selected for testing are properly recorded. Auditors would also be well served to consider the Panel's observations in assessing the risk of material misstatement arising from fraudulent financial reporting in connection with the performance of procedures required by Statement on Auditing Standards (SAS) No. 82, Consideration of Fraud in a Financial Statement Audit. Finally, in connection with the performance of substantive procedures, auditors should:

  • Ensure that appropriate substantive procedures are tailored to test for modifications to information technology.

  • Thoroughly understand an entity's internal controls to identify areas for potential management override and perform appropriate substantive procedures to detect such overrides.

  • Obtain sufficient, competent, and verifiable evidence to support a conclusion that explanations obtained from management during the audit are reasonable. A representation from management in the management representation letter does not, in and of itself, constitute sufficient evidence.

It is of utmost importance to keep in mind that the Statements on Auditing Standards require the auditor to obtain sufficient competent evidential matter. I also want to emphasize that I do not see how an audit can be considered to be a GAAS audit if the auditor has not looked at non-standard journal entries that individually OR in the aggregate, are material to the financial statements.

Auditing Loss Accruals

Another important audit step relates to the examination of loss accruals.

On December 9, 1999, I sent a letter to the ASB reiterating our request for more in-depth guidance in auditing standards and other ASB literature on auditing loss accruals. We believe that more detailed guidance is essential.

A review of enforcement cases, as well as restatements of financial statements filed with the Commission, indicates that some corrections in the financial statements related to liabilities such as contingent liabilities, restructuring accruals, and other types of loss accruals, are not the result of system-based errors. Rather, these corrections are due to adjustments originally made by, or under the supervision of, senior financial reporting personnel.

In these situations, we have seen the following audit deficiencies:

1. Concluding that because the loss accrual balance in the current period is the same, or nearly the same, as in the prior period, no further audit work was required to be performed,

2. Not clearly understanding the activity in the loss accrual account and the impact on the financial statements,

3. A lack of understanding of the basis for the accrual and the necessary supporting evidence,

4. Testing the loss accrual balance through poorly designed or implemented analytical procedures,

5. Applying analytical procedures to subjective audit areas incapable of being audited through analytical procedures,

6. Only testing a loss accrual to ensure that the balance is not understated,

7. Failure to evaluate the impact of missing disclosures that are mandated by GAAP,

8. A lack of testing of the proper classification of costs, and

9. Failure to recognize that assets, such as inventory, for which a write down at a previous year end established a new cost basis, as noted in ARB 43 and SAB 100, were improperly adjusted upward through the adjustment of loss accruals.

Consequently, we believe that it is important for auditors to:

1. Carefully consider all the risk factors set forth in SAS 82, and consider how, for a particular client, the existing risk factors should be assessed and related to the specific determination of the nature, timing and extent of the audit tests;

2. In light of the business, industry, and control risks affecting the company, as well as the subjective nature of the particular types of estimates being examined, consider the type of sufficient, verifiable, objective evidence that is required to support the account balances. SAB 100 discusses the need for appropriate documentation as well as internal accounting controls; and,

3. Test not only the ending balances, but also the propriety and classification of activity in the accounts during the periods presented. The testing should not be limited to merely determining if the liability is understated, but rather whether it is properly stated such that the financial statements are fairly presented in all material respects.

The staff appreciates the judgment involved in estimating and auditing certain liabilities, and that a range of probable losses may exist. However, we have challenged loss accruals that are either materially understated or overstated, including when understated or excess liabilities are used to manage earnings.

Registrants and their independent auditors are also reminded of the accounting and financial statement disclosure requirements of Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies. If no accrual is made for a loss contingency, or if an exposure to loss exists in excess of the amount accrued, paragraph 10 of SFAS 5 requires that disclosure of a contingency be made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. Furthermore, paragraph 14 of SFAS 5 prohibits the accrual of losses for "general or unspecified business risks."

Auditors are reminded of the guidance in SAB 100, which notes that GAAP requires unused or excess liabilities to be reversed when the loss accrual is no longer appropriate through the same income statement line item that was used when the liability was initially recorded.

"Iron Curtains and Rollovers"

Let me now turn to a step every auditor performs at the conclusion of each and every audit, the assessment of the materiality of the entries on the score sheet. The pertinent guidance for this assessment is in SAS 47, Audit Risk and Materiality in Conducting an Audit, which permits the use of either the "iron-curtain" or "rollover" method in evaluating audit differences.

Before I continue, let me provide some background. Under the iron curtain method, the auditor compares all misstatements, regardless of the period for which the misstatement relates, against current year results of operations, balance sheet, and cash flows. Under the rollover method, the auditor only compares the misstatements that affect the current year against current year operations. Let me provide an illustration. Assume, for example, that a client's finished goods inventory was overstated by $100 in the year 1999 and no adjustment was made by the client in 1999 to fix the misstatement. Further assume that in the year 2000, the client's inventory is now overstated by $150. For the year 2000 under the iron curtain method, the auditor would record $150 against current year cost of sales. Under the rollover method, only $50 would be recorded against current year cost of sales.

As I noted above, SAS 47 permits, when appropriately applied, the auditor to use either the iron curtain or rollover method to dispose of audit differences. The staff believes the iron curtain method, which compares all misstatements, regardless of the period for which the misstatement relates, against current year results of operations, balance sheet, and cash flows, is the preferable method for disposing of audit differences and the staff would challenge any change from the iron curtain method to the rollover approach.

The staff believes that the method the auditor chooses to dispose of audit differences should be applied consistently for all accounts and for all audit periods. The staff has taken exception to situations where the audit work papers document the use of the iron curtain method in one year and then a change to the roll over method in the subsequent year when difficult accounting issues arise. Similarly, the staff takes exception to auditors using the iron curtain method except for specific accounts for which the rollover method is used.

Additionally I should note that both SAB 99 and SAB 32 provide the appropriate guidance with respect to adjustments that may be immaterial in one period, but are material in a future period.

Required auditor communications with audit committees are set forth in SAS 61. One such communication requires the auditor to inform the audit committee about uncorrected misstatements aggregated by the auditor during the current engagement that were determined by management to be immaterial, both individually and in the aggregate, to the financial statements taken as a whole. The staff believes that best practices would result in this communication including a discussion of the methodology (iron curtain or rollover) used by the auditor to dispose of audit differences. If the rollover method is used, the auditor should inform the audit committee of any risks associated with the use of that methodology.

International Concept Release

I would like to turn now to the international arena. The SEC's Concept Release on International Accounting Standards was issued on February 16, 2000. It requested comment on numerous issues relating to the international accounting standards developed by the International Accounting Standards Committee (IASC), and on other aspects of international reporting and auditing. Over the ensuing months, we've received 93 comment letters. The letters came from a wide variety of interested parties in the U.S. and in other countries.

The responses to this release show that people have strongly-held and far from uniform views. On the issues of whether or not IAS are now of sufficiently high quality and whether the SEC should accept IAS without reconciliation to U.S. GAAP, most Europeans say "yes, definitely" while most U.S. respondents say "not yet."

Inside the U.S., the Business Roundtable and several large and prominent U.S. registrants cited the strength of the U.S. capital markets and the importance of high quality information in preserving investor confidence. They reiterated the need to maintain high quality standards to ensure the success of our markets, and said that international accounting standards have improved, but are "not there yet." They urged that the existing requirements for reconciliation be continued until the international accounting standards - and the necessary interpretation and auditing infrastructure - reach a higher level of quality.

The AICPA's comment letter stated that the organization fully supports the development of a single set of high quality accounting standards to be used in the preparation of transparent and comparable financial reports throughout the world. The AICPA notes that it was a founding member of the International Accounting Standards Committee, and has supported the IASC's work since 1973. But the comment letter also notes concerns about the current body of IAS and interpretations, and calls for reconciliation to continue as an interim measure.

You can get an excellent picture of the diversity of the responses we received by looking through the comment letters that are on the SEC's website at www.sec.gov.

So where does that leave the SEC? Right now the staff is hard at work, as we consider the views expressed in comment letters and related research. We're formulating possible approaches, and evaluating the alternatives for action. What is the SEC likely to do? SEC action could include rulemaking to modify the existing reconciliation requirements, or making other changes to modify the process for foreign issuers that are using IAS. Alternatively, the Commission could decide to continue present requirements and take other actions besides rulemaking. In other words, stay tuned.

The SEC, as you may know, is a member of IOSCO, the International Organization of Securities Commissions. Earlier this year, IOSCO completed a comprehensive assessment of 30 core IASC standards, and recommended that IOSCO members accept cross-border filings in IAS, subject to three supplemental treatments: reconciliation, interpretation, and disclosure, where needed to meet national requirements. The SEC already accepts IAS with reconciliation to U.S. GAAP, which is consistent with IOSCO's recommendation.

There is a strong interest in recognizing and supporting the work of the IASC, while maintaining the high level of investor protection that has made our U.S. markets so strong. And we also want to continue to recognize and support the work of FASB, AcSEC and the EITF, who have done so much to provide the transparency in financial reporting that is an essential underpinning of investor confidence.

As the staff evaluates the best course of action, the key elements the Commission originally established for further acceptance of IAS will guide us:

  • The standards must constitute a comprehensive, generally accepted basis of accounting

  • The standards must be of high quality - they must result in comparability and transparency, and they must provide for full disclosure; and

  • The standards must be rigorously interpreted and applied.

Convergence on the highest quality standards - a "best of breed" approach to accounting - is a goal that I believe should be achieved. We will be looking for the world's private sector standard-setters to provide leadership in making this happen. In fact, we believe that the one way to deal with the reconciling items we commonly see today is for the IASC to set an initial agenda in cooperation with the national standard-setting bodies, which would result in the identification of the reconciling items which are most common and for which the greatest diversity exists, and then the IASC and national standard setters converge on the highest possible standard. That would in and of itself eliminate some of the items requiring reconciliation today. In the meantime, the SEC will continue to take a keen interest in monitoring and supporting this work.

International Auditing Standards

But regardless of the quality of international accounting standards that have been or will be developed in the future, they are of little value if they are not appropriately interpreted, implemented and enforced. And to accomplish that objective, the accounting profession must make significant improvements to enhance and upgrade the quality of audits on a global basis. Until that is accomplished, I believe the Commission should continue to require full compliance with U.S. auditing and independence standards.

At the urging of the World Bank, the U.N., ourselves and others, the international accounting profession has begun to consider what steps it should take to improve the quality of its auditing and quality control standards and self governance mechanism. In that regard, the International Auditing Practices Committee (IAPC) of the International Federation of Accountants (IFAC), in its role of a standard setter of international auditing standards, must work vigorously towards the creation of a set of high quality auditing standards that can be accepted globally - standards that will outline what is required for completion of a high quality audit. Only then can the IAPC's auditing standards gain global acceptance. The international auditing recommendations in O'Malley Panel Report are an important starting point for the IAPC to reference in planning its work, and set an appropriate benchmark from which to measure IAPC achievements. As noted in the Panel report, international auditing standards should be "comprehensive and sufficiently specific and rigorous so that they serve as appropriate benchmarks to judge the work of auditors." In addition, the IAPC should conduct its meetings in the public eye. Transparency in the setting of standards will add legitimacy to the process by which standards are created.

With respect to self-regulation and self-governance, I understand an international public oversight board is being considered. The proposed board will not gain the legitimacy it needs, however, unless its mission is serving the public interest, its members are drawn from the public, those members will be granted an independent oversight role over international audit and quality control standard setting and the self-disciplinary process, receives "no strings attached" funding, and is established through a public process that operates in the sunshine.


I'd like to close by saying again what a pleasure it has been to speak to you today, here in Colorado. You know, I really enjoy being the Chief Accountant, and when I am in my office in Washington, D.C., I sometimes look for guidance from our Colorado State Motto: "Nil Sine Numine," which I am told is Latin for "Nothing without Providence." For in working with so many different constituencies, from standard-setters to practitioners, from registrants to analysts, from regulators and legislators to prognosticators and investors, we look for inspiration, and work to help effect what will benefit the public, first and foremost.

I appreciate your inviting me here to address the Colorado Society of CPA's today, and wish you all an enjoyable conference and Happy Holiday season.

Thank you.

1 See ARB 43, Chapter 4, Inventory Pricing, Statement 9.2 See Staff Accounting Bulletin (SAB) 99: Materiality.

3 See Appendix F of the Panel on Audit Effectiveness' Report and Recommendations (August 31, 2000).