Oral Testimony of the New York State Society of Certified Public Accountants
Securities and Exchange Commission Public Hearings
Proposed Rulemaking on Auditor Independence
File No. S7-13-00
September 13, 2000
Pace University, New York, New York
Good morning and thank you, Commissioners. We are Nancy Newman-Limata, president-elect of the New York State Society of Certified Public Accountants, Jo Ann Golden, vice-president of the Society, William Stocker, chair of the Society's Auditing Standards and Procedures Committee, Robert Waxman, chair of the Society's SEC Practice Committee, and Allen Fetterman, chair of the Professional Ethics Committee. The technical committees these gentlemen chair have collaborated in discussions of the proposed rules.
Today, Jo Ann and I will be presenting the Society's comments regarding the SEC's proposed rulemaking on auditor independence, underscoring several essential points that recurred during the deliberations of these committees. The Society's comments reflect the various viewpoints of individuals participating in those discussions rather than the firms we each represent. These comments reflect the richness that is the Society's 33,000 members and its diversity.
We commend the Commission on their goal of enhancing investor confidence and protection of the public interest through the proposed rules. As the home of the "Trusted Professional" the New York State Society agrees with the goal, but has certain concerns about how these proposed rules will affect individual CPAs and their practices. We will limit our remarks today to certain overriding concerns that we believe most significantly impact our membership. We intend to send you our written comments by September 25 in which we will comment on specific provisions of the proposed rulemaking.
The first overriding concern is the use of the four "governing principles." When we have applied these principles, we have found that the guidance derived from them is too abstract for any practical usefulness and, therefore, may be counter-productive. It has proven difficult for committees to reach a consensus on how to assess compliance with the provisions of the proposed rules because these principles are open to broad interpretation. Let's explore "advocacy." I would contend that it is appropriate to be an advocate in certain situations when that interest is quality financial reporting. Isn't the requirement to provide a "preferability letter" an example of a SEC-mandated advocacy role? We must be careful in providing rules that are too "broad brush" and therefore open to differing interpretations. These governing principles would better serve accountants and registrants as "factors," tools to be used in analyzing an accountant's independence in a given situation and as a topic discussed with the audit committee.
Many of our members, including Jo Ann, don't even serve SEC registrants, yet our members are wary that these rules will establish as a "de facto" standard for the profession and have a harsh and chilling effect on the role of the accountant outside of the SEC registrant arena. Jo Ann, would you elaborate.
Our second concern regards the application of the proposed rules on non-audit services to smaller SEC registrants. Committee members have indicated that the financial accounting sophistication of some SEC clients is insufficient to completely satisfy the details of certain accounting standards and that these clients expect their accountants to advise them in these situations and provide some assistance. We recommend an exclusion for smaller SEC registrants that do not have the trained resources to navigate the complex SEC reporting and accounting standards without the assistance of their accountant. We are often the most knowledgeable participants in very complicated accounting transactions and must first educate and then guide our clients. Further, we agree with the position Dan Goldwasser expressed in his earlier testimony, that in the consulting area you ought "to look at the balance, because many consulting services actually improve the audit". In this way the accountant's navigational assistance keeps the small SEC registrant on course and actually improves financial reporting.
In a related concern, committee members discussed the potential unintended consequences these rules, especially the proposed prohibition of certain consulting services to audit clients, may have on other sectors, If so, all audit firms, regardless of size or sector of practice, would be impacted. Will other regulators, including state boards of accountancy, adopt similar rules to prohibit consulting services for audit clients? A "no" answer to this question will cause turmoil, confusion, and conflict. A "yes" answer causes other problems. What should be a "win-win" scenario is coming down to a "lose-lose" set-up for the audit profession and their clients, including SEC registrant. Limiting the provision of expert services that otherwise enhance financial statement quality could have a very damaging impact on the general performance of business and the economy, especially in communities where small practitioners often serve as business advisors to their clients and are often the sole resources in their community for IT and other consulting services.
A third recurring concern raised by committees has been the clear preference for the Independence Standards Board to be given implementation support and the necessary time to work effectively. Many believe that the reforms related to disclosures and audit committee requirements adopted by the Independence Standards Board, the stock exchanges, and the SEC are steps in the right direction. We believe strongly that standard setting is best done in the private sector and just when the ISB is making progress on a number of projects, the SEC steps in and proposes dramatic changes. We believe the ISB's efforts should continue to be supported. Also, as we have commented before the Public Oversight Board Panel on Audit Effectiveness and elsewhere, the Society wholeheartedly endorses a stronger relationship between the accountant and audit committee which is the first line of defense regarding auditor independence.
Another concern is the proposed fee disclosure requirements. The August 2000 CPA Journal includes a commentary on those requirements by Robert Waxman, which indicates how the level of detail required by the proposed rules may result in confusing information. Nonaudit services and the fee information now go to the audit committee under ISB #1. Perhaps it would be more meaningful to investors to know that the audit committee has reviewed the information and are satisfied and then disclose the audit and non-audit fees in an aggregate amount similar to the British approach.
Lastly, a very grave concern we all share is the net effect of the proposed rules on attracting students to the profession. As you are aware, we are having a problem attracting students to the profession now. By limiting the career opportunities firms will be able to provide, will we be damaging our ability to attract the best and the brightest? Will this eventually reduce the number of qualified accountants available to do audits?
While we have focused on our concerns today, Jo Ann and I would like to offer our personal appreciation for your proposals that reduce the number of circumstances in which client employment of family members is considered to impair independence. We both come from two career households and know the pressures that raising a family while meeting the demands of the accounting profession can create. Our experience is shared by a great number of accounting professionals, male and female. The arbitrary and inequitable nature of the unduly restrictive current rules in this area causes problems for families and inhibits the attraction and retention of high quality people for the profession without providing a corresponding benefit to the public interest.
The potential negative impact of the current rules in a small city with a single major employer is obvious. However, even in a city the size of Seattle the job market is dominated by two employers that are both audited by the same firm. For far too many families, normally happy events like admission to the partnership, promotions and successful audit proposals have required one of the spouses to resign from their position to resolve an imaginary independence issue.
The proposed rule puts the focus where it belongs - on employment positions that exercise significant influence over accounting records and financial reporting, and on positions in the audit firm which truly have the ability to influence the conduct of the employer's audit. We encourage you to move swiftly to adopt your family employment proposals to eliminate the injustice that the current rules unnecessarily impose on the men and women of this profession and their families