Testimony of Anne H. Ross
Member and most recent past Chairman of the
South Carolina Board of Accountancy
SEC Hearing on Proposed Rule Regarding Auditor Independence
September 13, 2000
My name is Anne Ross and I appreciate the opportunity to offer testimony relative to the Commission's proposed rule regarding auditor independence. I speak to you today as a regulator. I am the most recent past chairman of the South Carolina Board of Accountancy and have served 6 years on that Board. I also speak to you today as a partner in a local accounting firm that has practiced before the Commission for over 40 years. Finally, I speak to you today as a member of the Independence Standards Board task force that assisted the ISB in drafting their third standard on Employment with Audit Clients.
As a member of an ISB task force, I was impressed with the ISB and the process our task force used to deliberate, analyze public comments and draft Standard Number 3. The committee was composed of members from industry, academia, the Five largest firms, regulatory bodies, smaller firms and investors. Each discipline brought a unique perspective to the table, which prevented the Committee from having tunnel vision in addressing the issues. We deliberated among ourselves, we issued a discussion memorandum soliciting public comment, we evaluated and discussed the responses to the discussion memorandum and prepared an exposure draft for additional public comment. We evaluated the comments from the exposure draft and crafted a standard that embodied the very best of all the comments we received. At each and every turn along the way we were exposed to views and questions even this diverse group of experts had not considered, but were forced to consider because of the deliberative process that is required to address such issues at the ISB. Our issue was only one of many that confront the profession and the public today. Each issue must be considered and evaluated thoroughly because the decisions that are reached will affect my profession, registrants and the investing public for years to come. The SEC and the AICPA agreed jointly to create the Independence Standards Board to address issues of independence. I urge you not to regulate them out of existence and thereby stifle the evolution of considered standards that has been put in motion to address all of these issues.
When I started my career in public accounting, advertising and direct solicitation were absolutely prohibited as a threat to auditor integrity and independence. The times have changed and so have the rules that address advertising and direct solicitation. Lifting of this regulatory ban has resulted in increased competition among firms at all levels and the public has benefited from increased efficiencies and more varied services from its accountants. The times are changing even faster now. The accounting profession which you acknowledge is a part of the backbone of the American capital markets can't be relegated to providing only audit and tax services to its clients. There are many who believe that if this proposed rule is implemented it will filter down through other regulatory agencies, including the boards of accountancy, and significantly limit the scope of practice in all firms. In order to keep the accounting profession as a viable part of the New Economy one must realize that to a very great extent what is good for the accounting profession in these changing times is also good for the investing public. The accounting profession has rarely been found guilty of bad auditing resulting from lack of independence.
No one wants to have an audit. An audit is generally performed because some outside entity requires it and I believe a time may come, in our rapidly changing e-commerce world, when the SEC may be one of the few entities that will require a historical audit as we know it today. As a partner in a local accounting firm, I can tell you that providing certain non-audit services are an important part of what we offer to our clients and add tremendous value to the audit services we provide as well. We do not provide actuarial services, human resource services and some of the other services addressed in the document but we have provided internal audit services, which I would like to address.
The smaller public companies, such as the ones we deal with, look to us as a resource for highly technical professional services and advice. These companies are not able to attract the talented people for their internal audit departments that the General Motors of this world are able to attract and retain. They may be based in smaller rural towns or not have the budgets to pay for specialists in every area. They certainly don't have the time or inclination to train several sets of auditing or financial specialists in all the areas in which they may need expertise. Internal auditing outsourcing, if conducted by the outside accountant, under the current AICPA standards which require a responsible and qualified client employee to direct, report and make recommendations to management relative to the internal audit function, offers these smaller public companies a viable alternative. From the audit prospective, the more you know about the company you audit, the higher the quality of your audit. I know of no more effective way to understand the intricacies of a client's business than through performing internal audits. The questions that must be asked are would these clients be better off without having internal audit services - the banking regulators don't think so. Or would they be better off having to procure these services from other accountants not familiar with their business. There is no evidence that the investing public would be harmed or the independence of the external auditor would be compromised by outsourcing internal audit and possibly other services that I do not have direct knowledge of, to the independent auditor. ISB rules are already in place for disclosure of and communication about these types of services with the audit committees. I support disclosure of such arrangements in the company's filings with the Commission to allow an informed and knowledgeable investing public to make these judgements for themselves. Then, and only then, will there be evidence available to determine whether the prohibitions called for in the proposed rules would be necessary.
I compliment the Commission on the depth and intensity of the proposed rule and I fully support the modernization of the financial interest and family relationship rules. These changes are badly needed to meet and deal with the rapid changes taking place in the financial and accounting world today. The Commission's definition of the engagement team in crafting this part of the proposed rule may offer an alternative to addressing some of the other issues. If safeguards and internal firm structure could be designed so that the independence of the audit engagement team could be preserved, perhaps the Commission would not see the need for an outright ban on non-audit services. In smaller firms such safeguards could require that the audit engagement partner and other senior members of the audit team not be involved in any of the non-audit services. This would negate any danger associated with the auditor auditing his own work yet still offer the client the ability to use the other internal expertise available within the firm, if they choose to do so. It would also allow the audit firm to learn more about the risks inherent in its client's business and devise more efficient and effective means of dealing with that risk.
Clear professional standards have been established and tested over time requiring CPA's to be independent. Although generally developed by the profession itself through the AICPA, these standards have been adopted into law in all states and are enforced by the Boards of Accountancy. The roll of these state boards cannot be overemphasized and should not be ignored by the Commission. If and when an independence violation occurs, the South Carolina Board of Accountancy is prepared to enforce the law by taking action against the individual CPA.
The ISB thus far has also embraced the concept of independence in fact and appearance and is working diligently to promulgate appropriately updated standards addressing various areas relating to independence. As it relates to the Commission's proposed rule regarding auditor independence, I respectfully urge the Commission to let the ISB continue with and complete its work using the deliberative model it has been employing. Let the new rules regarding communication with audit committees and new proxy disclosure requirements, if deemed necessary by the Commission for full disclosure, have a chance to work. To quote Chairman Allen of the ISB "There is no reason to believe that information about non-audit services - if in fact it is information that relates to the integrity of financial disclosure and thus to financial risk - will not be priced." The principle of full and adequate disclosure has been a sound basis for regulation of our capital markets and a test for what knowledgeable investors' value. Please give these alternatives that are already in place a chance to work and guide us towards future regulation.
Note: The foregoing testimony represents the views of the author and does not represent the views of the South Carolina Board of Accountancy or the author's CPA firm.
ANNE H. ROSS, CPA
Bachelor of Science - Business Administration - Accounting - 1973 Cum Laude Graduate; Member Phi Beta Kappa - University of South Carolina
1973 - Present
J. W. Hunt and Company, LLP, CPA's
Promoted to manager in 1983 and admitted to the partnership in 1985.
Professional Affiliations and Other:
Member of South Carolina Association of CPA's Board of Directors, 1981-1990,
io1997 to date
President of the South Carolina Association of Certified Public Accountants, 1991
Member South Carolina Association of Certified Public Accountants
Member American Institute of Certified Public Accountants
Member Southeastern Intergovernmental Audit Forum
Participant Leadership Columbia sponsored by Columbia Chamber of Commerce
Treasurer - Sherwood Forest ARP Church, 1990 to date
Chairman South Carolina Board of Accountancy, 1999-2000
Member South Carolina Board of Accountancy, 1995 to date
Member National State Boards of Accountancy, 1997 to date
Member American Institute of CPA's Governing Council, 1997 to date
Member American Institute of CPA's National Banking Committee, 1998-1999
Member Independence Standards Board Subcommittee on Employment with Clients,