Summary of Testimony
David A. Costello, CPA
NASBA President and CEO
Securities and Exchange Commission Hearings
September 13, 2000
Regarding Auditor Independence and the SEC's Proposal (File No. S7-13-00)
I am David Costello, President and CEO of the National Association of State Boards of Accountancy-NASBA. NASBA is the membership organization of the 54 boards of accountancy statutorily established by legislatures in 50 states, Puerto Rico, Virgin Islands, Guam, and Washington D.C. These boards of accountancy are responsible for the regulation of accountancy within their borders. One key component of that regulation, which is common to all boards, is that of upholding auditor independence. NASBA and its member boards realize that any significant changes to auditor independence rules by the SEC are certain to ultimately have an impact at the state level. That is why several representatives from boards of accountancy will appear before you and that is why I am here today.
I commend you for undertaking the monumental task of reassessing the relevancy, applicability, and equity of such a complex concept as auditor independence. And yet, auditor independence is much more than a mere concept. Independence is a statutory principle firmly embedded in the culture of auditing, the profession and its regulation and has influenced positively the public trust in CPAs and the audits they perform.
Our research, supported by independently conducted surveys, reflects that CPAs continue to rank at the top of the professions in respect to the public's trust and confidence. There is no mystery as to why this is true. CPAs are viewed as having integrity, being objective, and deriving conclusions based on their unique requirement of independence.
While I appreciate comments made to the SEC implying that the proposed independence rule changes do not adequately take into consideration the complexity of global markets, the difficulty in attracting talented professionals to firms, and the need for firms to be full-service providers, nonetheless, I respect even more the public's continued trust and confidence in the audits performed. And I think it's time to resolve matters of doubt about independence in the public's favor and not in that of the vested interests who may protest the most frequently and loudest. I would even offer the counter argument that, because of the rapid changes in technology, globalization of the economy, and investment opportunities, we dare not chip away at the cornerstone of credibility for the public -- trust in and reliance on the independent auditor. We do need something that is rock-solid amidst all the changes. We need independence in fact and appearance that withstands all the arguments of change and complexity.
I believe your approach in laying out the four guiding principles, which provide the framework for considering whether certain relationships between auditor and client impair independence, is a sound approach. Two of the four principles-(ii) audits the accountant's own work and (iii) functions as management or an employee of the audit client-are clearly bedrock issues for assessing independence. The other two-(i) has a mutual or conflicting interest with the audit client and (iv) acts as an advocate for the audit client-are likewise significant independence factors but are not as immutable and clear-cut as (ii) and (iii). However critical one may be of any or all of the four principles, I do believe that in their totality these guidelines provide a necessary direction for assessing auditor/client relationships and their impact on independence.
I do want to address briefly the matter of non-audit services provided by the auditor to his client. There seems to me to be two extremes as to what might be done: (1) allow the auditor to only provide audit services to his client and nothing else, or (2) continue the current and accelerating practice of auditors providing a multiplicity of non-audit services. The first extreme is simple to administer, much easier for the public to understand, and diminishes the debate on the stickier independence issue of mutuality of interests. The second extreme-what we're doing today-will, if completely unchecked, erode the public's confidence and trust in the auditor and the audit. It may be beneficial short-term to our profession, but with diminishing public trust, the long-term reality will be grim for regulators and the profession alike. However, we don't have to accept either extreme.
In this matter of non-audit services, I believe we need to proceed cautiously. Our regulated profession has evolved over a number of years and non-audit services, while proliferating, are not a new phenomenon and haven't just recently created an independence problem. Those non-audit services that are deemed highly questionable for auditors to render without impairing their independence, I believe should be studied by the Independence Standards Board (ISB) and reported on to the SEC. In the meantime, full disclosure of audit and consulting fees and the nature of the services performed should be required of auditors who are rendering non-audit services. As the ISB studies and reports on non-audit services and there is full disclosure of audit and non-audit fees, the profession and its regulators will be able to "take a breath" and periodically reassess the situation and the public's reaction. Of course, if our research finds evidence that more extreme measures are required, then such could be enacted -- and with much more objective support.
Thank you for this opportunity to present my views on your very important proposed rule.