United States Securities & Exchange Commission
Revision of the Commission's Auditor Independence Requirements
Comment File No. S7-13-00
Summary of Intended Testimony of Daniel J. Dustin
on behalf of the New York State Education Department
- The original intent of Congress when creating the Securities Act of 1933 and the Securities Exchange Act of 1934 was to instill public confidence in the reliability and accuracy of financial information.
- The system of regulation evolved with three major players: The American Institute of Certified Public Accountants (AICPA), the "Big 5" accounting firms, and the Securities and Exchange Commission. The purpose of the system was public protection. The inherent problems associated with the regulatory structure were first raised in 1976 in the U.S. Senate's Metcalf Report. Recent actions by participants in the regulatory partnership highlight the shortcomings of the current system, suggesting that Congress might need to revisit the issue.
- The regulatory system by Congress is limited to auditors of publicly traded companies. It does not override or supercede a state's rights to regulate a certified public accountant or public accountant.
- In New York, the Regents have reaffirmed the importance of independence in a rule that makes it unprofessional conduct for a CPA to be involved in a situation that results in the issuance of an audit opinion when independence is considered impaired. Independence could be impaired if a licensee or his or her immediate family has been involved in any situation creating a conflict of interest.
- The four principles enumerated in the Commissions' proposal by which an auditor's independence is measured are squarely consistent with the Regents Rule for unprofessional conduct.
- The primary purpose of regulation is public protection. The franchise of the public accountancy profession is the performance of attest services that require independence in fact and in appearance. Independence in fact and appearance is an unwavering and non-negotiable concept. It is the cornerstone of the profession and ensures the integrity of the profession.
- There are two problems with the trend toward increased non-audit services and multidisciplinary practice structures. Independent auditors become salesmen for more lucrative consulting services and the services are performed for the benefit of management, not the investing public.
- Recent communications issued by the AICPA suggest that all CPAs, not only auditors of publicly traded companies, might be subjected to the Commission's proposals. However, it is clear that the Commission's proposed rules apply only to auditors of publicly traded companies. The Commission's proposed rules do not prohibit the CPA or licensed public accountant from providing non-audit services to non-audit clients.
- The Commission's proposal modernizes the rules governing financial and employment relationships with audit clients. The modernization incorporates more liberal provisions that reduce the number of persons covered by the rule. We generally support the Commission's proposals but believe that some modification may be necessary.
- The modernized rules would require companies to describe specifically each professional service provided by its independent auditor and indicate whether the audit committee or board of directors approved the service and consider its effect on auditor independence. We support the proposal to require proxy statements to disclose the non-audit services provided by a company's auditors.