August 30, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Reference file No: S7-13-00
Re: SEC's Scope of Services Proposal
Dear SEC Regulators:
It has been brought to my attention that the SEC intends, among other
things, to curtail the ability of CPA firms to provide services other
than audit and tax services to SEC audit clients. I would like to share
with you my perspective on the issue, which is that of President of a
CPA firm which has the distinction of being the first firm in United
States to pass the AICPA - SEC Practice Section Peer Review in November
I have two comments to share with you based upon my experience that
audits are no longer profitable:
1) why audits are not profitable, and
2) how your proposed regulations will affect a small CPA firm such as
Why Audits Are Not Profitable:
1. The AICPA, in conjunction with the FASB and ASB, has dramatically
increased the amount of work required to complete an audit in accordance
with "professional standards." Unfortunately, as the workload has
increased and as "auditors' judgment" has been removed from the
equation, our clients, with the consent of their bankers, have been
unwilling to pay the additional costs involved. At this point only large
institutions and SEC registrants can afford such services. Every single
small business client we previously audited has been forced as a cost
saving measure to convert their audit to a "review" as a result of
standards overload, in most cases at our recommendation.
2. Less audit demand, more available CPAs, and more regulatory (AICPA
and SEC) compliance, all results in much less profitable audit work with
greater risk, particularly in the context of the litigious society in
which we operate.
How Will the SEC Proposal Affect Small CPA Firms?
1. One solution to the dilemma described above has been to "cross sell"
more profitable value added services and products along with attest
services, in effect subsidizing unprofitable audit work. For many CPA
firms, an audit has become what the retail industry refers to as a "loss
leader." This should not be a surprise to anyone. Your proposed
regulation regarding these services will thus change the current audit
service economic model.
2. It is critical to understand the effect of non-audit services both
upon independence and audit quality. When a small CPA firm, such as
ours, performs any of the ten enumerated categories of non-audit
services in accordance with existing standards, our understanding of our
audit client increases, our ability to shape audit tests and probe for
internal control weaknesses strengthens. However, if a separate
affiliate or department performs these services, then nothing may be
gained in terms of increased audit perspective. Accordingly, a one size
fits all regulation will not serve the interests of the general public
in assuring audit quality.
3. A CPA firm that can't offer these subsidizing services, particularly
the majority of small firms, will be unable to afford to bid on audit
work in the present business environment. Alternatively, the amount we
will be required to charge will have to increase.
4. However, subject to the concerns expressed above, eliminating cross
subsidizing of audits may very well strengthen an industry which has
regulated itself out of a once viable business service.
Thank you for your thoughtful consideration of this matter, it is
clearly a topic worthy of your analysis, and one which the AICPA has
ironically helped bring upon its own membership.
Very Truly Yours,
Dana Scott Beane, CPA