Testimony of Harold L. Monk, Jr.,
Chairman of the PCPS
American Institute of Certified Accountants,
At the Public Hearing
On Auditor Independence
Before the Securities and Exchange Commission
Wednesday, September 13, 2000
New York City
Chairman Levitt and Commissioners Hunt, Carey and Unger, thank you for the opportunity to testify.
I am the Chair of the Executive Committee of the PCPS or "Partnering for CPA Practice Success" of the AICPA. The PCPS, which has more than 6,800 local and regional CPA firms as members, provides a forum for these firms to work together on ways of improving the quality of our services and the performance of our firms.
One means of improving the ability of the many small and mid-sized firms which participate in the work of the PCPS is the formation of alliances or networks of firms. The typical structure for such an arrangement does not involve cross ownership, or "control," by one alliance member over the other members, or over the alliance itself. In fact, no one member could be said to exert "significant influence" as that concept is understood in the accounting literature. However, we are concerned that the breadth of the definition of "affiliate of an accounting firm" coupled with the collaborative business activities of the typical alliance (cross referrals, shared marketing and the like) would lead to alliance (or network) members being considered affiliates, for independence purposes, under the rule proposal. These alliance or network arrangements are critically important to these firms in serving clients operating in many different domestic and foreign locations and thereby in competing with larger firms.
Our PCPS members, by definition, do not have very much in the way of SEC audit practices. Still, we believe your proposed rule will adversely effect us. If the proposed rule is adopted, we would expect that other regulators - state boards of accountancy, the U.S. Department of Labor, and federal and state bank regulators - would follow your lead. Hence, we must assume that your rule would become our rule. And, that causes us great concern.
In particular, the definition of "affiliate of an accounting firm" would force our members who participate in an alliance of accounting firms, to treat each member of the alliance, including any foreign affiliates, as an affiliate for independence purposes. As a result, any work for any audit client of any member of the alliance would be attributed to every other member of the alliance, notwithstanding the fact that no member of the alliance exercises control or even significant influence over any other members. This is simply unworkable. None of the members of the alliance would have the information about the other members required to comply, and the risk of disqualifying members from serving a client, because of the attribution of the activities of other alliance members, would be so great that alliances would have to be scrapped. By creating an insurmountable hurdle to those of us in smaller firms seeking to compete against the larger firms by coming together in various alliances, the rule proposal would make it very difficult for smaller firms to complete effectively and encourage further consolidation, whether we wish it or not. Audit quality would suffer.
In addition to my role at the AICPA, I am the managing partner of Davis Monk & Company, a local Florida firm with 35 people in two offices. Our firm is also a member of the CPAmerica alliance, a group of 60 firms similar to my own who have banded together to enable us to provide our clients with extended services outside of the geographic area of our firm, and to enrich the expertise available to our clients.
Restrictions your rule proposal place on particular non-audit services, such as human resource consulting, financial information systems consulting, internal audit outsourcing and valuation services, and the uncertainties it creates with respect to any and all consulting services provided to audit clients, are of great concern. These are traditional service areas that have grown in recent years. For example, human resource consulting is frequently a client requested service, and one area where small firms can add tremendous value for clients. Small firms like mine will also be impacted adversely if the rule barring contingent fees, is expanded to include value billing. We do not see any connection between fee arrangements that are contingent upon the result of our services and those where the firm bills based upon the value added to the client.
I urge you to slow down and hold additional hearings including regional hearings so that accountants practicing in small firms across the country have the opportunity to address you directly. For a small firm to comment on the 400 plus questions in the SEC rule proposal is difficult, to do so in 75 days is impossible. There are many voices in the profession all across America who want to be heard but are not able to come to Washington or New York. Consider carefully consequences you may not intend. There is no reason to rush to regulate on this very complex issue.