September 25, 2000
TO: Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20449-0609
FROM: Harvey Hendrickson, Professor
School of Accounting
Florida International University
Miami, FL 33199
SUBJECT: Proposed Rule--File No. S7-13-00
I have devoted the thirty-seven years since earning a Doctorate to researching, teaching, and writing about financial accounting and reporting; two and one-fourth of these years were with the AICPA (as Assistant Director of Examinations) and one year was with the SEC (as an Academic Fellow in the Office of Chief accountant). During this time I have become increasingly disappointed that the accounting profession and the AICPA appear to have regressed from having a primary commitment to the public interest and professionalism to having a major concern for the private interest and the business of public accounting and auditing. The AICPA's many attempts at self-regulation appear to have failed, and the profession appears increasingly to deny that anything seriously is wrong and to insist that only minor changes might be useful to perfect the system. Evidence of this is that the AICPA and three of the five major accounting firms are vigorously attempting to prevent the adoption of this proposed revision of rules on auditor independence.
One very notable exception is Accounting Hall of Fame Member J. Michael Cook, long-time outstanding leader in the accounting profession and managing partner or chairman and chief executive officer for fifteen years of one the largest firms, who was the lone practitioner to come forward at the Public Hearing on July 26, 2000 to testify in support of the SEC proposal, while his former firm is among those in opposition. His leadership is reminiscent of that of John C. Biegler and Joseph E. Connor former chairmen of Price Waterhouse who took unpopular positions for greater SEC regulation of accounting in the 1970's and 1980's.
I strongly support the SEC's proposed rules because they would strengthen auditor independence and begin the process of convincing the accounting profession that its primary responsibility is to the public interest. Increasingly the accounting profession seems to have succumbed to GREED and to enhancing its own (short-term) self interest. This is a direction that can lead to only one end: the downfall of accounting and auditing as a viable, credible, respected profession. Obvious evidence of this is found in the five Core values of The CPA Vision Project: the fourth is to be "Attuned to Broad Business Issues," but not one implies or makes any commitment to the CPA's responsibility to the public interest.
I believe that the proposed rules could be made even stronger in several areas, but I also recognize that the SEC is involved in a political process in which progress often may be achievable only with compromises. The areas that should be considered for strengthening include:
1. Partners should not be permitted to hold investments in any if the firm's audit clients since all share in the income of the partnership.
2. Restrictions seem to be needed for tax services that go well beyond the basic reporting; these would include services that involve tax planning or avoidance programs, e.g., tax shelter programs and schemes such as those that were illegal or close but were marketed by major accounting firms and that recently received much bad publicity for the profession.
3. Additional restrictions and/or caveats should be placed on the likely impairment of independence that can occur in dealings with former partners and staff who join clients because of from undue trust that auditors may place on former colleagues who now have new allegiances.
4. Restrictions or warnings should be added to recognize the impairment of independence that follows when the audit firm becomes a customer for major products and/or services of the client, e.g., information systems.
In summary, the Commission and its Chairman and staff are to be applauded for persisting in their efforts to "encourage" the accounting profession to reform itself and prevent the demise that is likely to occur unless it again recognizes that its primary responsibility is to the public interest--to provide the relevant and reliable financial reports that are essential to the effective functioning of the capital markets. The increasing concern of the AICPA and the accounting profession for the self interest of their members (and the administrators of the AICPA) is likely to render them as obsolete and unneeded!