Summary Of Intended Testimony Of Joseph F. Berardino

1. On July 12, 2000, the SEC published in the Federal Register a broad new regulatory proposal that would permit the SEC to engage in the direct regulation of the accounting profession.

2. Although we have not had time to consider the complex proposal in detail, to address the 400-p1us questions asked in the proposal, or to evaluate closely the multiple alternatives, we can firmly state that we are deeply troubled about the proposed rule to limit the scope of services that accounting firms may offer their audit clients. That proposal is radical, unnecessary, and potentially very damaging to the American economy.

3. Accounting firms have provided investors with reliable, accurate quality assurances for the past century, enabling the U.S. economy to benefit from the most liquid, deep, and transparent capital markets in the world. Throughout this one hundred-plus year period, accounting firms have provided needed consulting and other non-audit services to their audit clients. To provide audit and assurance in the New Economy, it will be more important than ever that we have a broad set of skills and deep competencies. We should be re-engineering the rules for the 21^st Century, not looking backwards to a bygone era.

4. The proposed rules would, for the first time, ban auditors from providing non-audit services in areas where auditors have long been permitted to add value and enhance their client knowledge and their ability to conduct quality audits. These include systems design and implementation work and extended audit services. The proposed rules also would prohibit audit firms from providing assistance in areas such as tax, valuation service!; and human resource consulting - areas where there already are accepted practices governing scope of services, and where there is no evidence to suggest that auditor independence has been compromised. Audit qua1ity will suffer, we believe, if this proposal is adopted.

5. The Commission's proposal is inconsistent with the findings of the Panel on Audit Effectiveness, which is the most recent body to examine audit quality and the provision of consulting services. After extensive study, the Panel concluded that it was "not aware of any instances of non-audit services having caused or contributed to an audit failure or the actual loss of auditor independence." It is striking, particularly in light of the SEC's proposed rulemaking, that the Panel's analysis of many public company audit engagements "did not identify any instances in which providing non-audit services had a negative effect on audit effectiveness." Further, in a quarter of the audits reviewed, the Panel found "a positive impact on the effectiveness of the audit." Absent the SEC's proposal, that percentage wi11 increase as we practice in the New Economy, as it should in order to provide the highest quality audits and maximum protection for shareholders.

6. It is important to improve our current measurement and reporting system, both internal and external to the organization, because it misclassifies or overlooks entirely significant sources of . value. Ironically, at precisely the moment when we need to be developing specialized competencies and new ways to systematically account for emerging sources of value in a rapidly changing world, this proposal would, if adopted, prevent us from doing just that

7. The proposal also ignores significant new measures that have recently been instituted to bring more audit committee scrutiny to scope of practice matters. ISB Standard No. 1 now requires auditor disclosure and discussion with audit committees. New proxy statement and Stock Exchange disclosures complement the ISB Standard. We agree with Chief Accountant Lynn Turner's statement in January 2000 that: "Taken together, the ISB Standard and the Commission's audit committee disclosure requirement should bring independence issues to audit committees' attention and stimulate their participation in identifying and resolving independence issues." We agree with the view of those members of the Panel on Audit Effectiveness who concluded that audit committees should be afforded an opportunity to do their job, and that the current audit committee and disclosure initiatives should be given a chance to work.

8. This proposal will prove the law of unintended consequences. Among other things, this proposal puts the government in the position of dictating business models and, in effect, of picking winners and losers. As James Emerson wrote in a recent article in Emerson's Professional Services Review (July/August 2000): "The government will then be faced with a dilemma of how to fix the imbalance or allow the market to fix it. If the market fixes the problem, it would likely use a merger to do it. Does [the SEC] reaily want to reduce competition among the Big Five by forcing a merger?" Even without the consolidation that Emerson predicts, a public company that uses two or three accounting finns for non-audit services will have a considerably restricted choice for audit services.

9. The proposed rule will impose tremendous costs on accounting firms, public companies, and the investing public. Public companies will be forced to go through the cost and distraction of choosing new vendors for services. The proposal is incorrect in assuming that there will simply be a reshuffling of consulting services across accounting firms.

10. These are just some possible negative results of the proposed rule. All of these possibilities, and many others, deserve careful study and analysis, which is possible only if the comment period is extended beyond the 75 days that the Commission has currently allocated.