TESTIMONY OF GARY SHAMIS,
CHAIRMAN, MANAGEMENT OF AN ACCOUNTING PRACTICE COMMITTEE,
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS,
ON AUDITOR INDEPENDENCE
BEFORE THE SECURITITIES AND EXCHANGE COMMISSION
WEDNESDAY, SEPTEMBER 13, 2000
Ladies and Gentlemen:
I speak on behalf of myself, as a practicing CPA for 22 years, my firm, Saltz, Shamis & Goldfarb, Inc., the 50th largest firm in the country, as chairman of the Leading Edge Alliance, an association of 30 of the 125 largest firms in the country, and as chairman of the AICPA Management of an Accounting Practice Committee representing approximately 44,000 practice units.
Up until about sixty days ago, I was an interested bystander in the process of updating the auditors independence rules. Today, I find myself as a potential casualty in the path of a speeding train - namely the new SEC rule proposal. I find myself so concerned with the proposed changes that I can't sleep at night, worrying about what may happen to my practice, my career and my profession. I believe the implementation of these rules will profoundly change the accounting profession. The process and actions by the SEC completely confuse me and many other CPA's across the country. Most of us (CPA's who are not in the largest five firms) have little or no involvement with the SEC and are confused as to why the SEC is proceeding on this course to profoundly change our lives and our profession.
We don't understand why the SEC will not permit the Independence Standards Board to complete their work and to propose new standards for independence. It is our understanding that the ISB was created at the encouragement of the SEC to address the very issues the SEC now seeks to charge through this rulemaking.
We don't understand the timing the SEC imposed upon the process. We have been given 75 days to respond to changes that profoundly impact our practices, our profession and our clients. We have found that because of the chosen time period many of our members have yet to be informed. Our Congressional representatives are not able to listen to us, given such a short comment period, and in this, an election year.
We don't understand why the SEC has limited our due process by attempting to limit our professional association, the AICPA, to a mere 15 minutes in a single hearing relating to a change that will have such a profound impact. We can't believe the SEC will not permit our concerns to be thoroughly heard.
We don't understand the necessity of these proposed rule changes. There is no empirical evidence of audit failures and the POB Panel on Audit Effectiveness concluded that the audit process was fundamentally sound. With respect to ancillary services, there is no evidence that these services negatively impact the audit process. In fact, we would argue that ancillary services enhance the audit process and have provided tremendous benefit to American businesses.
My intention is not to debate the SEC's reasons and logic in determining their position. At first blush, the new rules and debate had little or no relevance to most CPA firms, other than the five largest - because of their lack of SEC audit engagements. The concern has developed though that these rules will become the benchmark for the entire CPA profession. In anticipation of this hearing, I talked to three of the members of the Ohio Board of Accountancy to inquire how these rule changes at the Federal level will influence their requirements on independence. I was sufficiently convinced from my discussions with the Ohio Board members that a change at the SEC level has a very good chance of affecting the rules that govern my firm's independence. Having concluded that this change could impact my firm, we closely studied the proposed rules and determined the rules would have disastrous impact on my firm and firms like mine.
Before I comment on the impact of these rule changes, I would like to state that my firm has never had an audit failure due to providing ancillary consulting and business services, and I am not aware of any comparable firm that has had an audit failure related to their consulting efforts. We take the existing independence rules quite seriously and consequently abide by all existing rules. We are professionals that follow our code of ethics and practice by the highest moral values. We would never be influenced by our own personal financial well being versus our professional ethics.
The impact for the proposed SEC rules will significantly impact:
My firm and firms like mine have evolved over the past decades to provide higher level - value added services to our clients. These services have helped to increase profitability and performance of our clients in addition to the traditional assurance services we provide. The magnitude of consulting fees my firm and firms like mine generate in relation to assurance services fees varies. If these new SEC rules become applicable to my firm, we will have to dismantle our firm - we will reduce our work force by approximately 50% by selling off business lines and/or terminating employees. The financial results of imploding our firm will be devastating to me and my partners - long term commitments for rental space will be in place, but not needed, client relationships will be terminated and significant investments made into developing and acquiring additional consulting services will be lost.
My firm, and firms like mine, are members of loosely organized national associations of accounting firms. These associations are necessary to compete against the five largest firms and to have available broader expertise to service our client base. These associations are necessary to service clients in different geographic areas around the country and the world. The new SEC rules related to definition of "affiliates" and "business relationships" would most likely end the associations of accounting firms and provide the five largest firms a competitive advantage, by limit the scope of services available to clients of the smaller firms.
If the proposed rules are adopted, clients would be denied access to services previously provided by their CPA firm. The clients would be severely limited. In many instances, the CPA firm would be the most effective and qualified provider of services due to their intimate knowledge of the client. We have approached many of our clients to discuss the impact of these new rules, and our clients are very concerned and upset at the prospect of our firm disengaging from previously provided services. The clients cannot understand why the SEC is concerned in limiting their choices of service provided. In our specific case, the changes will impact over 50% of our clients - 1,750 businesses all across Ohio. We are just one firm - the magnitude of the collective impact nationwide is huge.
The accounting profession is facing perhaps its biggest challenge - the challenge in attracting students into the profession. Enrollments are decreasing. Competition for quality graduates has become difficult with new opportunities in the business world. We are concerned that a narrowing of the scope of the profession to assurance and tax services will make the profession less attractive to future graduates. The resulting graduate we can attract may not be the best and brightest and the numbers may not be sufficient for the related work. These circumstances may result in less qualified auditors, bearing a much higher rate.
I love my job and I love the entrepreneurial opportunities available in the accounting profession. If my occupation and my firm were reduced to simply part of a federally regulated industry, I would look for another business opportunity, as I believe many CPA's would.
My firm, and the firms I speak for, have a 100-year history of protecting the public and providing business resources to small and medium sized businesses. The firms have complied with a code of professional ethics and have taken on self-regulation of the audit process. We have done all of this and retained the coveted position of most trusted advisor to American business. We believe that the current independence rules can be improved, enhanced and updated, but not at the expense of damaging the individual firm units, the clients of the firms and the future of the accounting profession.