Oral Testimony of Dom Esposito,
Chief Executive Officer, Grant Thornton LLP

Securities and Exchange Commission Hearing on Auditor Independence
September 13, 2000


Good afternoon. My name is Dom Esposito and I am chief executive officer of Grant Thornton LLP.

Grant Thornton is the largest accounting, tax and management consulting services firm whose principal strategic focus is serving middle-market, entrepreneurial companies. Our audit clients include more than 400 Securities and Exchange Commission registrants.

We appreciate the opportunity to comment today because the market that we serve has very different needs from the principal market served by the Big Five.

The owners and executives who run middle-market companies exemplify the American entrepreneurial spirit. Many have founded the companies they lead and maintain significant interests in those companies.

What these entrepreneurs have in common is their drive to grow businesses that are, in reality, extensions of themselves. They want their companies to prosper so that current stakeholders can benefit from the fruits of their hard labor. However, most middle-market companies do not have the internal resources to keep up with complex financial reporting and tax requirements and strategic business issues for either growing their business or moving into new areas, such as e-commerce.

Consequently, middle-market companies turn to their independent accountants for help. They view us as valued business advisers, in large part because of the broad institutional knowledge that we develop by performing the annual audit. As auditors, we have no learning curve to climb, and thus can render objective, impartial advice more economically and more efficiently than third parties. Moreover, by providing advice in these areas, we enhance our knowledge and understanding of our clients' businesses, which, in turn, enables us to conduct more effective audits.

Grant Thornton's Views

In our formal letter to the Commission, we will offer comments on all the major areas addressed in the proposed independence rule. Today, I will limit my comments to two areas, one where we agree with the SEC's position and one where we urge the Commission to reconsider the position in the proposed rule.

We agree that there is an urgent need for the Commission to deal with antiquated rules concerning financial and employment relationships. The current rules on financial and employment relationships do not serve to protect the public. They only hinder the auditor's effectiveness and create undue anxiety about the integrity of the profession.

However, we do not agree that there is the same urgency to deal with the scope of services issue. We strongly urge the Commission to maintain public commitment to the Independence Standards Board by allowing the ISB to consider the scope of services issue. The ISB should address this issue after it completes its proposed principles-based independence framework, which identifies the threats and mitigating safeguards to consider in determining what services should not be provided by an independent auditor.

The proposed limitation of non-audit services is not a modernization of the independence rules. It is merely a codification of views on auditor independence that are either outdated or unsubstantiated.

At first glance, the four governing principles for determining when an auditor is not independent appear to be irrefutable. However, the proposed rule applies these principles without considering safeguards that are or could be designed to prevent non-audit services from impairing am auditor's independence. Consequently, there are two reasons that we urge the Commission to reconsider the proposed limitation of non-audit services. First, such application allows the arbitrary proscription of non-audit services. Second, such application will eventually lead to an expansion of the proscribed services. Indeed, the independent auditor could ultimately be precluded from providing many of the services that middle-market companies need and demand, putting those companies at a severe competitive and economic disadvantage compared to their larger competitors.

Examples of specific advisory services, which either are or could be precluded by the proposed independence rule, include the following:


Grant Thornton has served middle-market companies for more than 75 years. We believe that our reputation for independence, integrity and objectivity is the foundation for delivering value to our clients. They are our principal focus, and the single-most important reason my partners and I go to work every morning. In our experience, these companies require many more advisory services than their larger competitors. And they want to receive these services from their independent accountants, who know them so well because of the knowledge they have gained through the annual audit and quarterly reviews.

In closing, I would like to express my concern, however, over the widening rift between the accounting profession and the SEC.

Auditor independence has been the subject of a public debate in the national press over the past several weeks. Unfortunately, many of these reports have been filled with self-serving rhetoric. This acrimonious public debate has served only to obscure our shared interest and responsibility - the protection of the investing public.

Moreover, we are concerned that issuance of new rules governing auditor independence will create a public perception that the SEC has supplanted the ISB as the source for such change.

Supplanting the ISB will serve only to widen the rift further, and that is not in the public's best interest. We urge the Commission to take the steps necessary to build a bridge of cooperation between the accounting profession and the SEC.

The Commission can take two important steps to build this bridge of cooperation:

Thank you very much for the opportunity to offer these comments today. I would be happy to answer any questions you may have.