SUMMARY OF TESTIMONY FOR KPMG LLP
- The Commission's proposed auditor independence rulemaking regarding the scope of services is very broad. It is lengthy, complex and far-reaching. It requires very careful consideration and informed comment from all quarters.
- As an initial matter, we are concerned with the hurried process by which the Commission is undertaking this rulemaking initiative. There is no crisis in auditing or any other reason to rush into this regulation.
- For more than 100 years, the accounting profession has remained committed to the highest ethical standards. The profession is committed to maintaining independence and to improving the quality of audits in response to the changing needs of investors. The reputation for accurate, reliable, top quality audits is essential to the success of any accounting firm. These factors all facilitate the profession's historically and consistently low rate of audit failure.
- The proposed rule is the classic case of a solution in search of a problem. The Commission's proposal is based on the premise that an auditor lacks independence if his or her firm, or an affiliate of his or her firm, provides non-audit services to the audit client. But the proposal cites no evidence that non-audit services either diminish auditor independence or impair audit effectiveness. Indeed, decades of studies considering auditor independence have concluded unanimously that there is no evidence that the provision of non-audit services has ever had a negative impact on audit effectiveness. Just last month, the POB Panel on Audit Effectiveness (the "O'Malley Panel"), which the SEC has endorsed and which includes former SEC commissioners, concluded - after careful empirical analysis of audit data and consideration of past studies - that "both the profession and the quality of audits are fundamentally sound." The Panel stated that "it is not aware of any instances of non-audit services having caused or contributed to an audit failure or the actual loss of auditor independence."
- There is also no evidence that investors perceive there to be a problem with auditor independence. The generalized studies cited in the proposal do not stand for the proposition that investors have concerns about the reliability of the financial data they receive because the auditing firm, or an affiliate of the auditing firm, provides some unrelated services to the company. If investors considered audits that include non-audit services to be less reliable, they would assess a cost for that increased risk. But the market does not impose a higher cost of capital on companies that receive non-audit services from their auditors than on companies whose auditors do not provide such services. To the contrary, investors in the New Economy need accounting firms with a broad range of skills and technological expertise to enable accurate and effective audits responsive to new technologies and business models. The needs of investors in the New Economy require further study by Congress before the SEC imposes a regulatory restriction on accounting firms' scope of practice.
- The SEC's proposed rule could result in lower quality audits and harm to investors. The more an auditing firm knows about its clients, the better the audit, the more corrections are made to financial statements, and the more suggestions are made to improve internal quality controls. To perform an effective audit on a complex client today, the auditor needs to employ a broad range of skills. To this end, the O'Malley Panel found that non-audit services improved audit quality in about a quarter of all audits in which both services were provided.
- In addition, a broad scope of practice enables accounting firms to attract and retain the high quality personnel necessary to perform top quality audits in the New Economy. In order to recruit world-class professionals, accounting firms must offer a variety of challenging opportunities on the cutting edge. The best and the brightest will not be drawn to either a specialized audit-only firm or a firm that can only serve 60% of the market in the same way they are drawn to a multi-practice cutting-edge firm that provides a broad range of services and career opportunities.
- At the end of the day, the proposal relies on the Commission's perception of "common sense" as the basis for the proposed rule. But common sense is not a legitimate basis for such a restrictive and inflexible government regulation - a regulation that will likely lead to a
significant restructuring of the accounting profession and impose hundreds of millions, or even billions, of dollars in costs on our economy.
- The proposed rule is, under any circumstances, premature. The accounting profession over the last 18 months has embraced substantial new measures to enhance disclosure and protect independence. The Independence Standards Board ("ISB") Standard No. 1 now requires accountants to inform corporate audit committees of any relationship that could conceivably affect independence. And the SEC, the NYSE, the NASD, and the American Stock Exchange have all adopted new proxy statement and disclosure requirements that complement the ISB standard. These auditor independence initiatives should not be preempted or undermined by the SEC's inflexible regulatory restriction - the SEC should give audit committees a chance to do their job and give the current audit committee and disclosure initiatives a chance to work.
- We look forward to testifying again in September, when we have had the opportunity to analyze the rule proposal in greater detail.