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Speech by SEC Staff:
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| The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Mr. Turner and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff. |
With that let me congratulate the AICPA, the SEC Regulations Committee and its Chair, Amy Ripepi for once again putting together a tremendous conference. I understand that there are approximately 1,800 participants here and around the globe. That is a noteworthy accomplishment and no doubt a daunting task. So congratulations to all who have worked so hard to make it a success.
We gather this morning at a time of great challenge and opportunity for the accounting profession. But before we look ahead, its worth considering the many accomplishments we have undertaken together to serve investors; accomplishments that all too often may get lost in the heat of the battle and the headlines in the press:
But we all know that we cannot rest on past accomplishments but must keep our eye on the challenges ahead. Past leaders of this profession have done just that and their leadership has forged something that is intangible yet amazingly valuable. It is something that many of us in this room have spent a good part of our lives working towards, and yet it's value and credibility is dependent upon how the public perceives us. Of course, it is three letters I am proud to put on my business card, and even prouder to be known as, a CPA. A Certified Public Accountant.
For those of you in the audience who have been CPA's for awhile, remember the day you got those examination results that showed you had achieved 75's or higher. That distinguished you from many who never made the grade. At that point, you knew it was worth the effort and turmoil you had gone through. And I am sure you were equally proud to join a profession that had a strong reputation.
A reputation built by people like a Charles Haskins, a Leonard Spacek or a Colonel Robert Montgomery. But these men did not create this profession overnight. Indeed, Spacek in the face of tremendous criticism from fellow CPA's, made over two hundred speeches urging the profession on to greater public responsibility and greater heights. Colonel Montgomery, remarked when first elected as the Institute's president in 1912 , "I hope, if it is true that progress cannot arise from contentment, that there will still be enough discontent with our standards, with our ethics, to press forward, to do more than we have ever done before." And 25 years later, at the 50th anniversary of our profession, Montgomery remarked once again with words that still challenge us today. He said, "We are here today because there was and is a need for us. That demand will continue as long as people feel a need to know the truth, whether or not it hurts.... Our profession always has had a vision--this urge to find and to tell the truth--and we should cling to it and continue to strive for its accomplishments."
And so as great leaders have challenged our profession in years gone by, I believe it is time to renew that challenge to each and every member of the profession today. Let's not forget what got us where we are today, trust. Let's never stop seeking perfection even though it remains beyond our grasp. Our leaders are not born as leaders, they are the product of hard work, a willingness to take risks, and they have never lost sight of our commitment to the public. And finally let's not forget that the public depends upon us to provide them with the truth and nothing else.
That's a bold but necessary challenge for our profession today. Too often we have found ourselves the subject of unfavorable headlines. And in the public hearings of the Commission, we sat and listened to allegations of members of the profession misleading the public, of involvement in frauds and a declining level of trust. In fact, in one survey cited, it was noted that 42 percent of the respondents indicated they thought audited financial statements were, at best, only somewhat credible. I can only imagine the look on the face of the good Colonel up above when he heard this news. Can you imagine any successful businessman who would let a customer survey such as this stand without action?
I am reminded of the television ad of a few years back where the CEO walks into the room filled with executives and talks of the phone call he had just taken from a customer who was leaving them. The CEO then pulled out those airline tickets and made it clear that whatever had to be done to win back the trust of those customers, they had to do it, even if it meant going to all ends of the globe.
And so we have the same challenge. But we also have the airline tickets. You see, the O'Malley Panel Report has provided us with a plan to gain back the trust and confidence that has been lost. And it is a comprehensive plan with over two hundred solid recommendations for the profession. Recommendations for each and every accounting firm and their leaders, for the AICPA including the Auditing Standards Board, the SEC Practice Section and the Ethics Division, the Public Oversight Board, the Securities and Exchange Commission, audit committees, CFO's and international standard setters. It is a plan that requires action now.
So let me highlight the O'Malley's Panel action plan. The key recommendations address:
| 1. | How we conduct our audits. |
| 2. | Leadership and practices of the audit firms. |
| 3. | Auditor independence. |
| 4. | Governance of the auditing profession. |
| 5. | And finally and just as important, strengthening the auditing profession internationally. |
Let me start with the issue of leadership. The O'Malley Panel conducted focus group interviews with auditors of all ages and experience, with financial executives and internal auditors. Those participants indicated and I quote "...that not only clients, but also engagement partners and firm leaders, treat the audit negatively-as a commodity." And in a recent survey cited in Accounting Today, only 14 percent polled responded that the accounting profession carried great prestige as contrasted to 61 percent for those who had the initials M.D. behind their name. Another 29 percent of the respondents said we had considerable prestige and 41 percent said we had some prestige.
I think the time is now to stop this downtrend in our reputation and what the public thinks of us. If we are going to spend money branding an image, lets do it with the letters CPA.
Let's talk about the fact that we DO care about the quality of our audit work, not just the scope of our practice, and that we are not pleased when some of our peers fail to measure up to standards we set for ourselves. Let's talk about the fact that what's good for the public will also be good for the profession. Let's reach out to high schools and colleges with a message that those who achieve the designation of CPA will achieve the prestige and pride they seek. Let's spread the message in speeches, in the Journal of Accountancy, on the web pages of your firms, and on the pages of the printed press. A year from now at this conference, I hope to be able to say that we met the challenge not just once, but again and again and again.
A challenge for any profession is the ability to govern the quality of its work and to discipline those who fail to meet professional standards. In the accounting profession, the Public Oversight Board or POB plays a leading role with respect to self-governance. The mission of the five distinguished members of the Board is to represent and protect the interests of investors.
In 1978, at this very conference, then-SEC Chairman Harold Williams said, "The jury is still out whether the AICPA program of self-regulation will be successful."1 The SEC and the Congress had doubts then, as to how effective the POB would be, and those doubts have recurred from time to time. Our concerns were magnified recently when we asked the POB to investigate the firms as part of the look back process, and some members of the profession acted to block the POB.
But, today is a new era for the POB, with a new Chairman and three new members coming on board. The POB has an opportunity to respond to that nagging question raised by Chairman Williams and Congress long ago, but which remains unanswered today. Will we see the POB respond to concerns it has raised in the past with respect to the profession? Will the POB see that the recommendations of the O'Malley Panel are actually implemented? Will the POB improve the quality of today's peer reviews and quality controls? Will the POB report to the public on the progress or lack thereof being made by the profession on each of these matters that are critical to investors and our capital markets? Only time will tell.
But we will not have to wait long. The good news for investors is that the O'Malley Panel recommended a number of changes in the POB. They cited the need for greater oversight of the standard setting bodies of the profession such as the SEC Practice Section, the Auditing Standards Board, the Independence Standards Board and the Professional Ethics Executive Committee. This greater oversight included the ability to approve the chairs of the standard setters and oversight over their staff. A nominating committee was recommended, a point on which both the AICPA and I agree, as well as "no strings attached" funding. Questions have been raised in the past regarding the legitimacy of the POB, given it receives its funding from those it oversees. Absent no strings funding, including for special reviews, the POB cannot and will not be perceived as being a truly independent oversight board.
As a result of the O'Malley recommendations, the POB has prepared a new written charter that encompasses many, but not all, of these recommendations. We are hopeful however, that in the coming weeks, the profession will endorse the new POB charter, as two of the Big Five firms, PricewaterhouseCoopers and Ernst & Young, did months ago. And I have every hope and belief that time will not slip by us any further, but rather before another month passes, the AICPA and all the major firms will endorse the new and stronger charter of the POB.
Another test of any profession is its ability to effectively self-discipline its members. I have a strong belief that when discipline only comes from the shareholders we are responsible to, from the courts and government agencies, it sends a clear message to interested parties that the profession is not willing to uphold the standards of performance and quality it has set for itself.
And so I must commend the AICPA and its members for recently adding three new public members to the Professional Ethics Executive Committee or PEEC, that is the disciplinary body of the AICPA. And while I think a majority of members on the PEEC Committee should be public members, we and a number of the accounting firms, as well as the president of the AICPA, have agreed that a good step forward which we can all support, is for an equal number of public and professional members.
However, increasing public participation will require a change in the AICPA's Bylaws. I would hope this issue will be put before the Board of the AICPA as soon as possible, and that the Board will authorize a vote on this issue by the Institute's members. And as AICPA's members did this past spring, I hope we will all vote for this change in the spirit we did when we approved the change putting the initial three members on the PEEC.
I am also hopeful that the profession will address what happens to cases that are referred to the PEEC not only by the SEC, but also by the AICPA's own Quality Control Inquiry Committee, or QCIC. We have seen instances where referrals from either the SEC or QCIC are, in our opinion, not appropriately dealt with. This challenges the credibility of PEEC, and when their process is carried out in darkness, it raises questions that are fundamental to the integrity of the process. And while I appreciate and agree with the need to protect the rights of those subject to proceedings, there should also be a timely response on behalf of investor concerns.
Adding the public members will be a significant step forward to addressing these concerns. But the PEEC must ensure that it acts on cases that come before it, in a fashion that is credible to investors and the public, and that the results from all of those proceedings are readily transparent to the public.
I would note that one point I often hear from the PEEC is that they can't get access to information they need and they have an inability to protect the confidentiality of their files. Both of these are valid points that should not be dismissed. But it also raises the point that perhaps the PEEC ought to take steps to get what they need, including asking for legislation, if necessary, that would protect their process and give them the power to get the information they need.
The very reason we exist as a profession, is the role we play as auditors. People have a degree of trust in the person who has CPA on their letterhead, which other financial advisors or consultants lack. In the past, investors believed that if a CPA had put their seal of approval on the financial statements, they had to be right.
But as the surveys I have cited have shown, there is a small but growing crack in the public's confidence in us. And much of that relates to the performance of some in our profession on audits. The O'Malley Panel undertook what is probably the most in-depth look at the way audits are performed in this country. And the Panel could not have been successful without the cooperation and financial support it received from the profession.
The findings and recommendations of the O'Malley Panel with respect to the performance of audits provides the profession a clear roadmap to respond in a positive fashion to the public's concerns. The Panel's Report includes ideas that will help narrow the gap between what the public believes we do and say in our report, and their expectations.
Key among the report's recommendations was the need for the profession to focus more on forensic audit procedures. This was supported by the testimony of PWC's CEO, James Schiro, when he said, "The suggestion that auditors should perform some "forensic-type" procedures on every audit to enhance the prospects of detecting material financial statement fraud is fundamentally sound and - I might add - long overdue." I believe that type of thinking has also been long overdue and would ask this profession to follow his leadership in implementing the changes that are specified in the report. I have found that in many of the audits that become the subject of our enforcement proceedings, the auditors would in all likelihood have avoided the outcome they are faced with if only they had done some of those basic, common sense steps, Shaun and his Panel recommended.
The O'Malley Report highlights a couple of other important ideas I want to mention today. The Panel stated it is "concerned that auditors may not be requiring as much evidence to achieve reasonable assurance as they have in the past, especially in areas where they believe that risk is low. The Panel's perspective is that, even in the face of strengthened auditing standards issued over the past 15 or so years, audit firms may have reduced the scope of audits and level of testing, at least in part as a result of redesigning their audit methodologies."2 And in recommending that some or all of the auditing standards be rewritten to provide more specificity, the Panel made a clear statement to the Auditing Standards Board that they should "Review all the standards of fieldwork not addressed elsewhere in this report for the purpose of ensuring that they are sufficiently specific and definitive, either within the SASs or elsewhere in the GAAS hierarchy, to guide auditors in formulating their judgments and carrying out their work."3
These recommendations will require a serious commitment to making changes in how we perform audits. However, given the great teamwork that I have seen come from the Auditing Standards Board, its former Chairperson Deborah Lambert and new Chairman James Gerson, I have no doubt it is capable of advancing the ball across the goal line. In the past couple of years, the Board has done some excellent work with respect to projects on materiality and audit committees. And I have a strong belief that under Jim's capable leadership, and its quality staff, the Board can, if it maintains its commitment to excellence, achieve each and every goal O'Malley has set forth.
But again, we will be watching the scoreboard on audits. As some of you know, Chairman Levitt and I have called upon the POB to monitor the progress of the profession in implementing each of the O'Malley Panel recommendations. Investors, the public and those of us at the Commission look forward to the POB's annual report.
Let me finish by discussing a topic that is controversial in our profession. It relates to the AICPA Vision Project. Each and every organization and business needs to have a vision and strategic plan for the future. And in the quickly evolving world we live in today, those plans need to be continuously revisited and improved upon. We need to constantly be challenging ourselves to find ways to improve what we do, to making our profession as strong as it can be in the future. On that point, I totally agree with the AICPA. And I am pleased to see that Integrity and Objectivity are among the Top 5 Core Values set forth in the Vision Statement of the AICPA.
But we must never lose sight of our mission. We must not compromise our values. And we must recognize that the demand for our services exist because we serve the public interests. When our vision of that mission becomes clouded, so does the view the public has of us.
And so I want to share with you an experience I recently had. A few months ago, I was asked to speak to a group of about 60 practitioners from the California State Society of CPA's about the new rule proposal on auditor's independence. As I was preparing to speak, the person introducing me asked if I would express my views on the newly proposed "Cognitor" designation. As most of you are aware, this designation has been proposed by the AICPA in conjunction with other professional groups to be broader than, and presumably augment, the familiar and respected "CPA" designation. That morning, before my presentation, the group had been shown a presentation on the AICPA's Vision, and XYZ/Cognitor project.
Rather than giving my comments and viewpoint on Cognitor, I asked the group what their views were on the subject. The group was made up of a cross-section of the profession, with partners and staff from Big 5 firms as well as partners and staff from some smaller firms and I was interested in what they thought.
So I told the group I would ask them two questions:
| 1. | How many of you are supportive of the Cognitor designation? |
| 2. | How many of you are NOT supportive of the Cognitor designation. |
Then, I repeated the questions and asked for a show of hands. Only one person in the entire audience raised their hand in support of Cognitor. Everyone but that one person opposed it. And I asked, "Why?"
The answers that came back to me went something like this: "We went through a rigorous program in school, and took the toughest test you could go through (meaning the CPA exam), and we think that distinguishes us from others. It makes us different. We went through what we did to become CPA's. And we're proud of it. And we don't want that taken away from us." One particular gentleman came up to me whose practice was principally litigation support work. He said that when he went into court, the judge immediately viewed him as having credibility as a CPA. He felt very strongly that he was going to lose that credibility as a direct result of the cognitor project and he vehemently opposed it.
The Chairman and I have seen that same sense of pride and honor in the profession in many of the 3,000 comment letters we received on the independence proposal. In a letter we received from David Orszulak of LaPorte, Indiana, Mr. Orszulak wrote: "The outward appearance the public has of our profession is very important. We should do whatever it takes to strengthen the view stockholders/shareholders have of the internal/external auditors in each and every way we can. The confidence investor's need is at an all-time high. We need to do what is appropriate (to) demonstrate that our profession is still as sound as when it started more than one hundred years ago." 4
And a letter sent to Chairman Levitt by the National Conference of CPA Practitioners stated their concern that "the XYZ designation and the internet portal will dilute the CPA certificate and will undoubtedly create ethical and independence difficulties. They, we believe, are not in the public interest."5
During the past year, the Chairman and I have heard from many of you who care deeply about this profession. You have challenged us at the Commission to be open-minded and make some changes to advance and modernize the rules. I believe we have listened and responded to what you told us.
Now in turn, I hope we can expect you will also listen to what you are hearing from investors, from the O'Malley Panel and from us at the Commission. And as we have listened and made changes, I hope you will. We cannot let the O'Malley Panel Report become another paperweight or bookend on a desk. We have to crack that book, talk about it, and use it as an important tool in moving the profession forward to even greater strengths, to continue to play the role it has for generations in instilling confidence in our markets through the integrity of the audited financials of our nations companies. That is our mission. Those are our values. And that must be our vision.
| 1 | Professional Self-Governance: An Interim Report. Harold Williams. 1/4/78. |
| 2 | The Panel on Audit Effectiveness, Report and Recommendations ("O'Malley Panel Report") page 82, paragraphs 3.28 and 3.29. POB, August 31, 2000. |
| 3 | Ibid, page 71 (paragraph 2.232). |
| 4 | David T. Orszulak, letter to Jonathan G. Katz, re: File No. S7-13-00, August 16, 2000. |
| 5 | Robert Goldfarb, National Conference of CPA Practitioners, letter to Chairman Arthur Levitt, September 25, 2000. |
http://www.sec.gov/news/speech/spch437.htm
| Home | Previous Page | Modified:12/06/2000 |