Remarks to the Panel on Audit Effectiveness
by Chairman Arthur Levitt
U.S. Securities & Exchange Commission
New York, N.Y.
July 10, 2000
Mr. Chairman, members of the Panel, thank you for giving us the opportunity to present our views on the recently issued exposure draft.
Nine months ago, I testified before the Panel and urged you to ask tough, difficult questions. The breadth and scope of your findings and resulting recommendations are ample evidence you did just that. I commend each of you and the Panelís staff for the work and dedication you undertook to produce proposals that are both thoughtful and substantial.
From audit methodology to profession self-regulation, you have issued responsible, progressive, and most importantly, necessary recommendations to improve the effectiveness of audits and the reliability and quality of financial statements. As the panel plainly appreciates, without that faith in the numbers, public confidence in the profession and confidence in our markets cannot exist.
In the last three decades, weíve seen committee after committee, and panel after panel consider and analyze many of the same issues you have. And, in some respects, their recommendations werenít that much different from the Panelís exposure draft. But, in too many cases, those recommendations remained just that Ė suggestions Ė never crossing the threshold to implementation.
This especially has been the case in the area of profession self-regulation. For years, weíve heard that a POB with input into or oversight of the professionís self-regulatory processes and other activities is needed to realize a truly effective system of governance. For years, weíve heard that a POB with annual reports, special reports, and minutes of meetings will help improve public confidence in the oversight process. For years, weíve heard that a POB with "no strings" funding and the authority to conduct appropriate special reviews of firmsí practices is needed to fully discharge its public responsibilities.
In the midst of ever more complicated audit engagements and interwoven business relationships, a more modern and effective approach to self-regulation is an absolute necessity. The Panelís call for a system of governance unified under a strengthened, independent Public Oversight Board must not be ignored. The publicís interest has been disregarded in this area for far too long.
The Panelís report states, "The POB [needs] a charter that commits the firms, the SECPS, the AICPA and the SEC to its expanded role and to the new system of self-regulation." Such a charter Ė already approved by the POBís board -- is before the firms and the AICPA right now.
It doesnít go as far as the Panel recommends or as the Commission might prefer, but it is a charter worthy of implementation today -- not tomorrow or next week. I implore the firms and the AICPA to heed the work of this Panel and work constructively with the POBís Chairman, Charles Bowsher, to approve and sign on to this plan now to modernize the professionís oversight and reinforce its commitment to the public interest.
Before I turn to Lynn Turner, the Commissionís Chief Accountant, I want to acknowledge the difficult discussions you had on the issue of independence and non-audit services. This is an issue that has long been debated and analyzed; one in which reasonable people hold quite different views. The views presented in the report are thoughtful and the Commission will closely consider them as we move forward in our rulemaking process in this important area.
Lastly, we wholeheartedly support the panelís recommendations with respect to both the conduct of the audit and earnings management and fraud. Definitive auditing standards, vigorous audit methodologies, among other proposals, will help better detect fraud and establish a greater deterrent to improper accounting practices. Lynn will talk more specifically about these set of recommendations.
Once again, I cannot thank each of you enough for the time and effort you have invested and the perseverance and dedication you have shown. Your collective thought and action has made this report a body of work that deserves the full attention of the Commission, the profession, standard setters, and audit committees. Some may say that the cost of acting on many of the reportís proposals will be too great. I disagree. But putting that aside for a moment, consider the losses investors have incurred in recently reported financial frauds. Those failures have been staggering. The cost in the loss of investor confidence cannot be understated.
I urge you to finalize these recommendations in short order and I call on the POB to oversee their progress and implementation and report to the public annually on steps taken and not taken. In return, I pledge that the Commission will continue to work with the firms in a constructive, productive, and good faith dialogue to ensure that effective, independent audits of financial statements will continue to be at the foundation of financial reporting in this country.