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U.S. Securities and Exchange Commission

Office of the Chief Accountant:
Letter from SEC Chief Accountant to Charles Bowsher, Chairman, Public Oversight Board (POB)
re: Business Week article: "For Accountants, A Major Credibility GAAP"

July 18, 2001

Mr. Charles Bowsher
Public Oversight Board
One Station Place
Stamford, CT 06902

Dear Chuck:

In case you had not seen it, I thought I would pass on to you this commentary piece in the July 23, 2001 edition of BusinessWeek. The opening line is a stunning comparison.

The article goes on to raise an issue that was raised some years ago by one of my predecessors, Walter Schuetze. Without getting into the specific company addressed in the letter, the broader issue is one of whether at times accountants cross the line and either become advocates for their clients, or try to justify accounting positions that result in less than transparent disclosures to investors, or which simply need to be corrected.

During my three years at the Commission, I have observed different levels of performance by different accounting professionals as individuals and different accounting firms. There have been times when the auditors clearly "went to the mat" with their clients and got the accounting corrected. Unfortunately, there have also been times when the engagement team did not get the accounting right. Often this also involves a situation where the national office was not properly consulted on the accounting before the financial statements were issued. My sense is that at the staff, we have seen more of these in the past six months than at any time during my three years. Too often when this occurs and the auditor has already issued the opinion, it places great strain on the system as the auditor now faces prospects of an unhappy client, litigation and/or the SEC staff requesting the accounting be corrected. An auditor who faces a questionable accounting practice and litigation on one side of the issue or the SEC staff on the other side is not in an enviable position.

Various studies such have shown the rise in the number of restated financial statements that are occurring. More importantly, some of the studies have quantified to the extent possible, the large losses that investors are incurring. Given these events, one of the questions I must raise is why is there nothing showing up in the reports from the peer reviews regarding this increasing problem? Do the peer reviewers undertake to examine the list of restated financial statements a firm has opined on and report back to the POB on the nature and causes of those restatements and possible action plans that might reduce them?

I also must say that the issuance of SAS 50 letters by accounting firms does not always work to the betterment of our reporting system. Certainly such letters issued directly to an existing audit client can assist the company in properly preparing the financial statements. But when these letters are issued to assist Wall Street in the development of "financial engineering" that impedes, that clouds rather than improves the transparency and quality of financial reporting, it raises a policy issue as to whether the profession is adequately serving the auditor's client, the public shareholders of the company.

The commentary in the article raises a number of interesting issues and questions. John Morrissey and I would be pleased to discuss them further with you at your convenience.


Lynn Turner
Chief Accountant


Cc: John Morrissey


Modified: 08/10/2001