I support the SEC Proposed Rule revising Auditor Independence Requirements (2.01) under Regulation S-X because I believe auditors providing substantial other services to their audit clients impairs audit judgement, in the heart of the auditor, and in the eyes of third-party users of audit opinions.
Based on this fundamentalist logic, an auditor providing even tax services to an auditee client is in direct conflict with independence, as well, since a tax advisor is an advocate of the client, much the same way an attorney represents the best interests of a client.
The same firm, cannot, at the same time, be an advocate and an independent reporter. One of these roles must ultimately prevail. When fees, approved and paid, by the client are the only source of compensation, a powerful temptation for rationalization is created. For instance the specious assertion that independence arises from different people providing the variety of services... even though the same partner group shares in the profits from all these services.
The foundational British paradigm from which our profession arose was that "a man's word [language of a century ago] is his bond" and the belief that a client paying the auditor for an opinion does not, on first principles, compromise the auditor's independence.
In most other cultures on Earth, this paradigm is preposterous, and may actually never have been fully operational in America.
Look no further, for anecdotal evidence, than the present Inspector General of the U. S. Department of Health and Human Services, who has said publicly that, in his opinion, based on field observations, public accountants do not report compliance deviations, discovered during Yellow Book audits, for fear of losing clients...an assertion that surprises no one...and not one auditor in the large forum in which this accusation was leveled rose to challenge this sad conclusion...especially from a group whose daily activities consist of challenging assertions in completion of their duties of care in forming opinions issued for public usage.
This observation by a government official does not even address the risk of impaired independence from offering non-audit services...this observation questions auditor independence during an audit!
Based in a variety of economic and sociological evolutions, I believe my profession has lost sight of it's role in a democratic society to "lean against the prevailing wind" by independently opining on public assertions of conformity with, not only generally accepted accounting principles, but any other body of comprehensive principles of accountability, using verification methodologies developed in due process with the users of those assertions.
The deeper issue is that the traditional audit report on financial statements and consideration of the related internal control system, provides an opinion which is untimely and irrelevant to most users' needs. Perhaps, this diminution of relevancy has resulted in the current devaluation of the audit in economic terms...the so called "commoditization" of audits, and concomitant low profit margins to audit practices.
Mr. Robert K. Elliot, CPA, Chair, AICPA Board of Directors, in apparent opposition to the Proposed Rule Change, poses this question. "Will regulatory forces prevail and reduce us effectively to statutory auditors?" But, isn't this the role we have already been "reduced" to since the 1934 Act, or with the publishing of the Yellow Book, when we have accepted engagements to audit pursuant to those regulations?
The Proposed Rule Change is not the only recent questioning of auditor core competencies. The debate over the existence and valuation of Intellectual (Human) Capital has resulted in SEC opinions that the CPA profession has... "neither the expertise, nor mandate..." to opin on IC even in the face of the profession's 500 year history of providing practical solutions to complicated valuation issues as they arose over the course of the Industrial Revolution.
While the core competency issue is arguable, what is clear is that: (a) the internal control system for protecting the synergy which produces and maintains IC assets is founded on trust among the members of the "synergy team"; and (b) generally accepted auditing standards(AICPA Statements on Auditing Standards 78 and 82) form the infant basis of metrics which assess the effectiveness of these controls via the process of understanding the "tone at the top" regarding ethics and attitudes toward regulatory authorities.
The components of these "checks and balances" are found in Corporate Values and Mission Statements, and are implemented in Corporate Ethics and Social Responsibility Programs.
In many instances, large public accounting firms have installed and monitored these systems and then have audited them in connection with traditional audit services. However, the results of this monitoring process have not been included in traditional audit opinions.
This would appear to be a greater conflict with independence than is apparent with general management consulting services traditionally offered by most US CPA firms.
Such third-party opinions on ethics and corporate social responsibility have been rendered by non-auditor consultants, but are more prevalent in the UK and Europe. America lags in holding corporate citizens to generally accepted standards of ethical and socially responsible behavior.
The so called "green" mutual investment funds claim such standards for equities they hold. However, these funds do not publish independent opinions on conformity with the stated standards. Investors must rely on fund manager assertions, without verification, in assessing the extent to which funds are invested in socially responsible businesses. I believe this attest role could be effectively assumed by our profession if we were proscribed from offering independence conflicting consulting services.
I do not support the concept that the SEC, or any other governmental body, can effectively "protect" citizens by dictating either morality or auditing principles. However, I do support the principle that government does best that which cannot, or will not be done, by citizen communities.
To that end, I believe the SEC can aim private momentum in the direction of improving CPA core competencies in auditing human systems, related assets, and conserving controls, by amending Rule 2.01 to limit auditor services to auditees. This directive may open a door to an industry shakeout but also provide a smaller audit profession whose efforts may be of greater relevance to users.
Essentially, the proposed rule change revolves around a three component ethical debate:
1. Who are the stakeholders and how are they each affected?
2. What core principles are involved (trustworthiness, fairness, citizenship, respect, responsibility, and caring)?
3. If one principle needs to be violated to honor another, which choice does the least harm or is best for society in the long run?
I suspect the outcome of this debate will be based more on which party wins the Presidential election, how many Congressfolks CPA's co-opt, who has the largest buddy network, ...etc...and not on the ethical congruence of a particular position. However, as a member of the AICPA , and the larger profession, I have a duty to participate in this dialogue.
Certain realities in considering our response include the following: Our small Firm does not audit public companies. Our small Firm does not provide significant consulting services (less than 5% of our annual time charges). Our Firm devotes almost all it's resources to auditing Child Welfare Agencies receiving large parts of their budgets from Federal departments requiring Yellow Book audits. Our Firm will not be affected in any significant way by the Proposed Changes to Rule 2.01.
We appreciate being included in this due process and hope our response helps the Commission reach a fair conclusion.
Very Truly Yours,
Rolland J. Vasin MS, CFE, CPA