September 16, 2000
Steven E. Silva, CPA
649 Perrin Avenue
Lafayette, IN 47904
Mr. Arthur Levitt, Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
|RE:|| File No. S7-13-00
Securities and Exchange Commission, revision of the Commission's Auditor Independence Requirements; Proposed Rule
Dear Mr. Levitt:
I am a Certified Public Accountant who has provided audit and consulting services to clients in various industries for nearly twenty years.
The concerns of the SEC regarding audit quality are an issue I can understand. I too am concerned about the quality of audits and auditor independence. My concern for audit quality has motivated me to volunteer a substantial amount of time toward this end. I have been an active member of the Indiana CPA Society Peer Review Committee for the past six years and have participated in the design and implementation of my firm's quality control program.
I am not paid for this time. I could abandon these commitments and spend that time providing valuable billable consulting services for my clients. I continue to support the AICPA and its commitment to quality through self-regulation, not only in word but also in action as a volunteer.
The proposed rule cited above and its related implications will have a far-reaching impact on the accounting and auditing profession, the clients we serve, and the general public.
- My audit practice includes audits performed under governmental auditing standards and audits of entities subject to ERISA and Department of Labor Regulations. These standards are presently more restrictive than the SEC rules on independence but do not limit the services auditors may provide to the extent of the proposed SEC rule. If the proposed SEC rule is adopted, other government agencies will adopt similar rules and eventually the state and territories with regulatory control over Certified Public Accountants will follow suit. The result will be that the proposed rule will affect all entities that have financial statement audits.
- The effect will not be a positive one, experienced auditors who are involved in providing consulting and other services for their audit clients will abandon auditing in favor of the broader, more interesting and more profitable consulting services. Auditing will become the arena of less experienced, less talented and less informed CPAs. How can this be beneficial to audit clients or the general public?
- Who will then be available to provide the peer review services and oversight that is the basis of ensuring the quality of auditing? Volunteers like myself who do this because they are committed to quality may suddenly become very busy helping start-up companies or established corporations improve their bottom line, increase their market share, or increase their market capitalization. These services have are much higher perceived benefit and are therefore more profitable.
- Currently the CPA profession is self-regulated by experienced auditors. Peer review personnel are required to be owners and managers who have recent audit and accounting experience relevant to the firms they review. In my six years of experience with the Peer Review Committee of the Indiana CPA Society, I have seen the system of self-regulation work to improve the quality of audits in Indiana. My colleagues who have volunteered their time to serve on Peer Review Committees throughout the country are intelligent forward thinking individuals with a broad base of business knowledge. If they are forced to choose between "audit only" or more interesting and more lucrative consulting type services, how many will abandon audit practice? In abandoning audit practice they must walk away from their voluntary commitment to improving audit quality. Who then will oversight the audit profession? SEC Staff? Single-minded, under compensated audit professionals? Is this what the SEC wants? More importantly, is what the public wants?
- I want the best and brightest individuals possible reviewing my quality controls over the audits I am involved in and will not settle for less. If that means I have to limit my practice to business valuations, and consulting services, the audit profession loses. My audit clients lose. The self-regulation process loses. The American public loses.
- If the rule is adopted, there will be a negative effect on recruiting and retention of the best talent. The best audit professionals will not want to be at a firm where 25% - 40% of the market is "off-limits," and the same is true for the best non-audit professionals. Similarly, the best and brightest students will not be drawn to firms with a limit on upward opportunities. The "audit-only" firms endorsed by the proposal will have difficulty attracting the necessary talent both from accounting programs and from information technology programs, because the best talent will be drawn toward industries with broader career opportunities.
In addition to the detrimental effects I believe the proposed rule will have on my career, my client's businesses, and the public interest, I believe that the following points demonstrate that the SEC is reacting very strongly to a situation which has no basis in reality:
- The SEC has based its decision to move forward with this rule prohibiting non-audit services without facts or evidence. Even the SEC admits that there is no empirical evidence that non-audit services have compromised audit quality or auditor independence, nor ever caused an audit failure. None of the studies or reports cited by the SEC concluded that the scope of services impaired audit effectiveness, or that an exclusionary ban was necessary or appropriate. The SEC's proposed rule is a solution in search of a problem.
- The SEC ignored the conclusion of the current Panel on Audit Effectiveness of the Public Oversight Board, a panel that was formed at the request of the SEC. The panel concluded that, "both the profession and the quality of audits are fundamentally sound." The panel said it could find no evidence that the provision of non-audit services has hurt audit quality. On the contrary, it concluded that in numerous instances non-audit services contributed to a more effective audit.
- Most dangerous for the accounting profession is the likely prospect that the proposed rule would set a precedent for other regulators. Even accounting firms that do not audit SEC registrants could be impacted by these new rules. The proposed SEC rule would be viewed as the new model by state boards of accountancy, as well as federal (e.g., banking and ERISA) and other regulators. These new proposed SEC rules could influence the regulatory approach to auditor independence outside the United States as well.
- The SEC proposal is bad news for CPAs working in industry, since it would restrict public companies' freedom of choice when seeking outside professional services. The SEC would force public companies to constantly choose whether to hire a firm solely as its auditor or solely as a provider of other services. In fact, under the proposed new rules, a public company might be compelled to dismiss an audit firm that has done consistently outstanding work in order to obtain services from the auditor's non-audit colleagues.
- The SEC claims its proposed rule "would not affect tax-related services" to audit clients. However, it would ban acting as an advocate for an audit client, or providing expert services in administrative proceedings, thus (except in preparing returns) potentially prohibiting CPAs from representing audit clients before the IRS.
- The proposed rule would impute to an accounting firm the activities of virtually any entity with which the accounting firm has a commercially valuable business relationship by viewing such an entity as an "affiliate of the accounting firm."
- Accounting firms effectively would be precluded from entering into almost any joint venture or partnership, since the accounting firm's independence could be impaired as a result of the activities of other parties in which it may have only an immaterial investment, or with which it may be associated in only limited respects, but does not control.
- Regional alliances or cooperative agreements between accounting firms could result in each firm being required to be independent of each other firm's attest clients. Moreover, the restrictions would extend to any alliance or cooperative agreement with overseas accounting and other firms (such as legal service providers).
- In a rush to regulate, the SEC has:
- Adopted a schedule designed to avoid Congressional oversight and preclude meaningful public participation.
- Waited until the eleventh hour of the Clinton Administration to push through a radical rule to restructure the accounting profession, without permitting informed oversight, or policy participation, by Congress or the new Administration. In each of the last 10 annual reports to Congress, the SEC has not mentioned any concerns about the scope of services issue.
- Limited to 75 days the period for commenting on a far-reaching and highly complex proposal, including responding to more than 400 questions, collecting and analyzing a great deal of data and considering alternative concepts for regulating auditor independence.
- Pre-empted the work of the ISB, set up three years ago at the initiative of the SEC to develop a new conceptual framework for auditor independence and appropriate implementing standards.
- Not allowed time for important recent reforms to work, including new disclosure and audit committee requirements adopted by the ISB, the NYSE, the NASD, the American Stock Exchange and the SEC.
- The SEC has needlessly tied its popular and long-overdue modernization of family disqualification rules-depression-era rules that discriminate against working women and two-career families-to its far more controversial scope of services initiative. Modernization of the financial-interest standards can and should occur on an expedited basis, independent of the scope of services initiative. The scope of services initiative requires more time for fact-finding and analysis than provided by the SEC's time frame.
- The SEC lacks authority for its sweeping scope of services rule. The statutory provisions cited by the SEC in the proposed rule pertain to public companies' filing of financial statements that have been audited by independent accountants and do not expressly authorize the SEC to make rules governing or regulating directly the accounting profession itself. The proposed rule is based primarily, if not entirely, on alleged concerns relating to the "appearance of independence" - but not independence in fact. The SEC does not have statutory authority to impose restrictions because of possible perceptions about independence.
- Broad restrictions on non-audit services will likely have the perverse effect of undermining auditor independence by making audit firms overly or exclusively dependent on auditing fees, which would certainly be contrary to the public interest. Such restrictions will also harm the recruitment and retention of the most qualified personnel, causing a possible degradation in audit quality.
- In conclusion, the SEC's proposal to restrict the services offered by accounting firms represents a fundamental restructuring of a profession that has successfully given investors the reliable, independent data they need for the past century. A decision by a government agency to tell some business organizations what services they may offer and to tell other businesses from whom they can buy services is an extraordinary economic intervention without any empirical or other basis. We think most Americans would find this a curious public policy position for their government to take.
- This scope of services rule must not be allowed to go forward.
Steven E. Silva
Certified Public Accountant
Member of the American Institute of Public Accountants
Member of the Indiana CPA Society
Member of the Institute of Business Appraisers
Member of the Venture Club of Indiana
Member of the American Management Association
Member of the Construction Financial Management Association
Volunteer to the Indiana CPA Society Peer Review Committee
Volunteer to the Indiana CPA Society Leadership Cabinet