McDowell, CPA, PC

Certified Public Accountants
410 Park Avenue, suite 1530
New York, NY 10022-9441, USA
Telephone +1+212+949 1966
Fax +1+212+949 1494
Cell phone +1 646 479 0463
E-mail: angus@mcdowell.com
http://www.mcdowell.com

JUNE 19, 2002

THE SENATE BANKING COMMITTEE
ATTN. SENATOR P. SARBANES

THE SECURITIES AND EXCHANGE COMMISSION
ATTN. CHAIRMAN HARVEY PITT

SENATOR MIKE ENZI

BY FAX 1 202 224 5137
BY E-MAIL rule-comments@sec.gov - Senator@enzi.senate.gov

AUDIT REFORM

CONGRATULATIONS ON YOUR CONSENSUS TO RECOMMEND THE FORMATION OF AN AUDITING REGULATORY BOARD. HOWEVER, AS YOU CAN NOW ASCERTAIN FROM THE BEHAVIOR OF THE SELF-SERVING MEMBERS OF MY PROFESSION, YOU CANNOT LEAVE FUNDAMENTAL CHANGES TO SUCH A BOARD.

I BELIEVE THAT THE AUDITING PROFESSION WILL EVENTUALLY BE VERY GRATEFUL FOR YOUR LEADERSHIP IN AGAIN MAKING THE PROFESSION RESPECTED AND A VITAL PART OF THE FINANCIAL HEALTH OF THIS COUNTRY AND INDEED THE WORLD.

I STRONGLY RECOMMEND THAT YOU INCLUDE THE FOLLOWING IN YOUR LEGISLATION - IT SHOULD APPLY TO ALL AUDITS AND SIMILAR SERVICES AND NOT BE LIMITED TO SEC REGULATED SERVICES:

  1. AUDIT FEES / ENGAGEMENT CONTRACTS TO BE MADE BY INDEPENDENT BODY FUNDED BY LEVY ON BUSINESS (IT IS A MYTH THAT BOARD AUDIT COMMITTEES CAN BE INDEPENDENT OR THAT AUDITORS CAN BE INDEPENDENT WHEN THE CLIENT DIRECTLY PAYS AND SETS THE FEES).

  2. AUDIT FIRMS TO BE PREVENTED FROM DOING ANY WORK (FOR ANY BUSINESSES) OTHER THAN AUDIT / ATTEST FUNCTIONS (SPECIFICALLY THEY WOULD BE PRECLUDED FROM STATEMENT PREPARATION AND ANY TAX WORK; TAX WORK OF ANY TYPE ARGUABLY RAISES THE MOST CONFLICTS OF INTEREST ).

  3. AUDIT FIRMS ARE TO BE PRECLUDED FROM HAVING MARKETING, SHAREHOLDING OR ANY OTHER RELATIONSHIPS TO PROVIDE SERVICES TO THEIR "CLIENTS". IT IS A MYTH THAT AUDITORS CAN BE INDEPENDENT WHEN THEY UNDERTAKE OR RECOMMEND OTHER SERVICES.

  4. GRANT AUDITORS A MINIMUM AND MAXIMUM PERIOD FOR THEIR AUDITS (REQUIREMENTS TO SOLELY CHANGE THE AUDIT PARTNER OR STAFF ARE A RED HERRING; IT IS THE FIRMS CULTURE WHICH MUST BE QUESTIONED; AUDITORS WOULD BE REQUIRED TO HAND OVER COPIES OF ALL DOCUMENTATION AND CORRESPONDENCE TO SUCCESSORS).

  5. LIMIT AUDIT FIRMS TO 5% OF THE INTERNATIONAL MARKET, 5% OF THE DOMESTIC MARKET AND 10% OF ANY INDUSTRY (EXCEPT WHERE ONE "CLIENT COMPROMISES MORE THAN 10% OF AN INDUSTRY). (WHEN AUDIT FIRMS BECOME TOO LARGE, THEY GENERATE AUTOMATIC CONFLICTS AND COMPROMISES. HOW EASY IS IT FOR AN AUDITOR TO REQUIRE PROVISIONS AGAINST ASSETS SUCH AS RECEIVABLES, WHEN THEY ARE ALSO THE AUDITOR OF THE DEBTOR? IS 10% THE CORRECT OR BEST FIGURE? THAT IS DEBATABLE. AT THE END OF THE DAY, IT IS A ZERO SUM GAME AS FAR AS THE TOTAL INDUSTRY REVENUE AND NUMBERS OF PERSONNEL ARE CONCERNED, SO SOME FIRMS MAY HAVE TO DOWNSIZE, BUT THE TOTAL MARKET WILL REMAIN STATIC.)

  6. REQUIRE ALL FIRMS TO HAVE THEIR AUDIT PAPERS REVIEWED BY ANOTHER INDEPENDENT AUDITOR, BEFORE A REPORT CAN BE ISSUED. BOTH AUDITORS WOULD BE IDENTIFIED IN THE AUDIT REPORT. (CURRENTLY MOST AUDITORS HAVE AN INTERNAL REVIEW FUNCTION; THIS WOULD SIMPLY MAKE IT AN EXTERNAL REVIEW AND RELIEVE THE REVIEWER OF THE INTERNAL PRESSURES AND CONFLICTS.)

  7. AUDITORS SHOULD BE REQUIRED TO REPORT ON WHETHER THE FINANCIAL STATEMENTS. MAKE SENSE - "TRUE AND FAIR VIEW". (NO BODY OR INDIVIDUAL IS CAPABLY OF SETTING STANDARDS THAT MAKE SENSE IN ALL CIRCUMSTANCES. THIS IS ESPECIALLY TRUE IN OUR PRESENT FAST MOVING ENVIRONMENT.)

  8. AUDITORS SHOULD BE REQUIRED TO COMMENT ON ANY ITEMS WHICH THEY FEEL ARE NECESSARY FOR THE USERS OF FINANCIAL STATEMENTS TO FULLY COMPREHEND THE FINANCIAL POSITION OF THE "CLIENT". (TODAY, AUDITS ARE BASICALLY USEFUL TO THIRD PARTIES, SO WITHOUT THE CONSTRAINTS OF AUDIT REPORT FORMATS, AUDITORS SHOULD BE ENCOURAGED TO MAKE THE USERS AWARE OF IMPORTANT CONSIDERATIONS, WHICH MAY NOT OTHERWISE BE OBVIOUS.)

  9. THERE HAVE TO BE RESTRICTIONS ON THE MIGRATION OF STAFF FROM AUDITORS TO THEIR CLIENTS.

MANY CLIENTS PERCEIVE AUDITS AS BEING A WASTE OF TIME AND MONEY AND THAT THE PROFESSION FEELS IT IS EASIER TO SHOW CLIENTS THAT WE OFFER VALUE FOR MONEY WHEN WE UNDERTAKE TAX AND OTHER WORK.

THE PROBLEM HAS PARTLY BEEN THAT, GIVEN MODERN TECHNOLOGY, CLIENTS KNOW THEIR FINANCIAL POSITION BETTER THAN THEIR AUDITORS; SO THE AUDITING FUNCTION DOES NOT PROVIDE DIRECT VALUE ADDED TO MANAGEMENT, DIRECTORS OR SHAREHOLDERS "CLOSE" TO MANAGEMENT AND DIRECTORS - THESE OF COURSE ARE THE VERY PEOPLE WHO ARE RESPONSIBLE FOR AUTHORIZING THE FEES.

AUDITORS SURELY ONLY PROVIDE "PERCEIVED VALUE TO MANAGEMENT AND DIRECTORS" WHEN WE THE AUDITORS ARE HELPING TO TELL THE STORY OF THOSE PLAYERS TO THIRD PARTIES, BUT WITH AN ADDED VENEER OF INDEPENDENCE. THAT SERVICE IS PERHAPS ONLY VALUABLE TO MANAGEMENT ET AL WHEN IT MAY NOT BE ABSOLUTELY TRUTHFUL.

THE REPRESENTATIVE OF THE ACCOUNTING PROFESSION HAVE MAINTAINED THAT THE ABOVE ARE IMPRACTICAL AND TOO EXPENSIVE. HOWEVER, I SUGGEST THAT IN REALITY THAT IS NOT TRUE.

ANGUS MCDOWELL CPA, FCA
MCDOWELL CPA PC, NEW YORK