Office of the Chief Accountant:
Letter from SEC Chief Accountant to IFAC re: IFAC Oversight Organization
October 16, 2000
Mr. Tsuguoki Fujinuma
International Federation of Accountants
Century OTA SHOWA & Co.
Hibiya Kokusai Building
Chiyoda-ku, Tokyo 100
Dear Mr. Fujinuma:
As you know, John Morrissey had the opportunity to participate in the recent meeting of the International Steering Committee on Vision Implementation held in Basel, Switzerland on September 20, 2000. The meeting was informative and allowed the U.S. Securities and Exchange Commission staff to learn more about the Vision Project and the related developments.
The information provided by you and Mr. Rene Ricole provided us with a further understanding of the status of the IFAC restructuring, especially as related to a new international public oversight organization. The staff commends IFAC for instituting changes to improve its oversight and structure. However, we believe that a credible standard-setting process would require the creation of an independent oversight organization that ensures IFAC's standard setting process is conducted in the public interest, in the "sunshine."
In order for IFAC's oversight organization to be independent and effective, two critical elements must be present.
The first is the selection process and eventual composition of the members of the oversight organization. We believe that members of the oversight organization should be public interest representatives without ties to the accounting profession. The members should be from a broad base of backgrounds such that no one entity or constituency has predominance. This would be consistent with the recent approach taken by the profession and government in the U.K.
In addition, the selection of the initial members of the oversight organization, including a chairman, should only be finalized after seeking and receiving consideration from international organizations representing the public interest, including securities regulators.
Second, the structure and process of the oversight organization should contain certain characteristics, as discussed below.
- The funding for the organization's operations should be structured in such a manner that the organization can be independent in fact and in appearance.
- The organization should have oversight over the major committees responsible for the establishment of auditing standards, quality control standards, independence standards, a disciplinary body and the committee that oversees the review and auditing of firms quality controls.
- The organization should have the power to nominate members to the committees noted above.
- The organization should go through an independent review process on a periodic basis, performed by representatives of public interests.
- The organization should have the ability to perform special reviews of the accountancy profession, if the organization deems such a review necessary.
- The organization should prepare public reports (at least annually) addressing its activities since its last report.
The SEC's staff believes the two fundamental elements described are necessary for our support of the proposed oversight organization. These elements are consistent with the steps taken by the profession in the U.K. and the Recommendations of the Panel on Audit Effectiveness (O'Malley Panel) in the United States. We believe IFAC should consider the recommendations of the O'Malley Panel and undertake to implement them.
We appreciate your efforts in this matter and look forward to a successful creation and implementation of a new oversight mechanism. If you have any questions regarding in this matter, please contact either Mr. John Morrissey or me at (202) 942-4400.
Lynn E. Turner