OUTLINE OF TESTIMONY OF WANDA L. LORENZ
Public Hearing, Washington, D.C., September 20, 2000
Concerning the SEC Proposed Revision of the Auditor Independence Requirements
Comment File No. S7-13-00
A CHANGING PROFESSION, OR A PROFESSION IN TROUBLE?
- I am honored to have the opportunity to attend this hearing and express my views. I would like to compliment the Commission on taking this bold step.
- I have worked in public accounting for over thirty-five years. Beginning in 1983 I became involved in working with the profession. I was the first woman appointed to the Auditing Standards Board. I have served as Chair of the Accounting and Review Services Committee; as a member of the Board of Examiners and its audit and financial reporting subcommittees; and I will start my second term on AICPA Council this October. I have also served a 6-year term on the Texas State Board of Public Accountancy, and I still remain on its enforcement and rules committees. My firm is a single-office local CPA firm in Dallas, Texas, with over 100 people. I was the Managing Partner of the firm for the past 10 years and stepped down on January 1.
- I practice in litigation consulting on cases that involve GAAS or GAAP-contract disputes, securities litigation, and some professional liability cases, primarily for the plaintiffs. Because I take seriously my work that involves another accounting firm, I have a threshold test. I want to see the complaint and some workpapers. Then I decide whether or not I could defend the case, if asked. I have turned cases down, but not as many as I would like. And, I certainly have experience as to why there is a need for rulemaking.
- My remarks today represent my personal views and not those of my firm or any professional entities on which I serve.
- Our profession is in the headlines frequently, but the news is seldom complimentary. We became the most trusted advisors because we were known to be independent and objective, and advocates of no one. Our focus was always "in the public interest." I am not opposed to change, but change has diverted that focus. The present dilemma should not have happened. We know full well when there is conflict and when we should make choices on which service to render. We are a profession in need of some anchors-we need some rules that are enforced.
- The Four Basic Principles:
I agree with the four stated principles, but I feel that, if they are to be effective, they need to be expanded. They are not articulated in sufficient detail to provide a solid foundation for interpretation and enforcement. For example:
- The first principle-mutual or conflicting interests with audit clients should clarify that this condition only exists when these mutual or conflicting interests could cause the accountant to render an audit opinion inconsistent with the sufficient competent evidential matter he has gathered.
- The second principle-audits his or her own work should clarify that the prohibition would exist with respect to services which would cause the accountant to be acting "equivalent to management" and for which the
client cannot take responsibility because of lack of knowledge or refusal to do so.
- The third principle-functions as man agemen t or an employee of the audit client should show a list (not necessarily all-inclusive) of actions that are considered "equivalent to management."
- The fourth principle-acting as an advocate should exclude the traditional tax services and client representation before taxing authorities.
- Other Financial Interests:
- Item (F) Insurance Products may be worded so broadly that it becomes difficult to interpret. When yoo say "any individual policy" does that include an automobile policy or a homeowners policy? What about life or health insurance? I understand the professional liability policy prohibition, but should other types of policies have a materiality to net worth limit, or even be excluded altogether? Also, what about the Firm itself? Is it independent if its group health, life or disability policies are issued by an insurer that is an audit client?
- Item (G) -Investment Companies. If this is meant to include investments in mutual funds, I believe that this could become a nightmare in implementation. I believe that there should be an exclusion in the cases where people invest in mutual funds and have no control over which companies are invested in by the mutual fund.
- Definition of Affiliate:
- Affiliate w ill be a real problem if applied to peer groups and alliances by subscription with firms who furnish a varied array of services to CPA firms, if these peer groups have to be independent of the subscriber CPA firm's clients. This is an unnecessary prohibition unlessa member of the peer group participates in the audit, or the audit report is put out under the peer group's name and logo. Merely having a logo or membership affiliation on a letterhead should not be a problem. If it is, we need to take AICPA and TSCPA off of our letterhead.
- Affliate as applied to the leasing of employees will also create an on manageable problem. With the shortage of professionals, firms often lease pcople on a temporary basis when jobs cannot be fully staffed internally. Leased people assigned to a particular job will, more likely than not, be on the job until it's complete. Having an employee leasing firm such as Accountemps have to be independent from the audit client is not practical. The key is-does the auditing firm provide adequate supervision.
- Other Comments:
- Chain of command seems overinclusive in including any person who may
review, determine, or influence the performance appraisal or compensation of any member of the audit engagement team during the audit. Audit staffwork on numerous jobs for numerous managers. A manager from Job A might mention to the manager on Job B during the audit of Job B that there was a problem with a staff auditor on Job A who is now working on Job B. That comment would probably have influence on tbe Job B manager's attitude toward that staff, but I see little or no innuence by the manager of Job A on the audit performance of Job B.
- Proxy Disclosure Requirements are desirable. I believe it would be suffcient to disclose audit fees and nonaudit fees svithout any other detail.
- I am surprised that commissions are not mentioned specifically (separate from broker dealer services, etc.) as are contingent fees.
- Quality Controls concern me at item (vi) which states: "A disciplinary mechanism to insure compliance w ith this section." Does this mean the type of "disciplinary mechanism" would be decided by each individual firm without guidelines?
- Peer Review has not really accomplished what it was originaily intended to do. In our "bending over backwards" not to super impose our "judgment" on someone else's work we are not doing the right job for the profession. I cannot believe that none of the companies that the SEC has found to be misstating earnings have not been chosen in a firm's Peer Review. If our Peer Review process had "teeth," we should be able to work with the CPA firm before the SEC and the Courts do.
- And finally, I believe that most of the problems that exist today can be tied to fee negotiations on audits. People do not often negotiate wiith their doctor or attorney (or a CPA providing a consulting service), but an audit is not generally seen to be value-added. Therefore the profession has accepted being bargained with like a shopkeeper in some bazaar in order to perform other more lucrative work. The SEC needs to consider this problem. Perhaps publically-held companies could pay into a fund which is run by an independent committee that reviews audit proposals and makes the auditor selection-thus putting a "firewall" between the auditor and the client where fee negotiations are coneerned. The SEC could certainly include in their rules the prohibition against a CPA firm performing
an audit below its oost with stated criteria for what constitutes cost.
Once again, I appreciate the opportunity to be a part of the hearings. I would be delighted to assist in any way I can as you go forward with this important project.