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U.S. Securities and Exchange Commission

Public Statement by SEC Chairman:
Proposed Rules to Create a Framework for a Public Accountability Board


Chairman Harvey L. Pitt

U.S. Securities and Exchange Commission

SEC Headquarters, Washington, D.C.
June 20, 2002

Good morning.

Our first matter is a proposed comprehensive system of rigorous private-sector regulation of the accounting profession. Before hearing from the Staff, let me set the proposal's backdrop.

Six months ago, we articulated the compelling need for comprehensive regulation of the accounting profession. And on March 21st, I testified before the Senate Banking Committee on our framework for a regulatory system known as a Public Accountability Board, or PAB.

Today, we take a major step toward effectuating the framework I described three months ago. Thank you, Bob, and your dedicated Staff, and you, Giovanni, and your indefatigable Staff, and the unstinting efforts of Jonathan, and our talented Office of Economic Analysis Staff. This proposal reflects, literally, thousands of hours of thought and work; it is a milestone in our agency's history.

Whatever ultimately comes of our rulemaking and Congress's legislative initiatives, I'm very proud of our Staff's incredible achievement, creativity, thoughtfulness, and dedication to the public interest.

Every day, people invest in the stock market relying on public company financial statements. The SEC and public investors rely on the competence, ethics, and independence of accountants who certify those financial statements. And yet, it is uncontrovertibly clear that longstanding deficiencies in the system we employ to produce quality audits of financial statements have caused a serious threat to the efficacy of our capital markets; we're experiencing a significant loss of investor confidence in public companies, their audited financial statements, and the accounting profession.

Since January, we sought public input on the content and scope of necessary reforms. Our efforts included three public Roundtables and our first-ever Investor Summit. We heard from experts, investors, academics, lawyers, accountants, money managers, public interest representatives and financial journalists. I also want to reiterate my admiration for the thoughtful hearings led by Senate Banking Chairman Sarbanes, and the invaluable record he compiled.

Some speculate we are competing with Congress to see who gets to solve our crisis of confidence. No such rivalry exists — the only important thing is that this crisis is resolved. We've said all along, and proven, that we will work with both Houses of Congress in the development of legislative solutions to problems we've identified. I commend Chairman Oxley of the House Financial Services Committee for his expeditious legislative response; I commend as well Senator Sarbanes' leadership of the Senate Banking Committee in reporting out, earlier this week, a different legislative approach.

Both Committees demonstrate enormous confidence in the SEC — first by endorsing our general approach to the issues, and second by proposing to entrust to us the job of implementing proposed legislative mandates. As a result, although we consider today a proposal on which we encourage and expect thoughtful comment, we believe everyone recognizes that this model — which sends a loud and clear message that the era of self-regulation of the accounting profession is over — offers a strong framework for rigorous private sector regulation.

We take up this proposal with a deep conviction that, to improve our system of disclosure and strengthen investor confidence, immediate action is necessary. A lot of careful thought went into the legislative proposals. If legislation is enacted, we will recede and implement Congress' mandate. But, if no legislation ensues, our action today sets the stage for the first ever system of comprehensive regulation of the accounting profession to be in place before the calendar year ends.

The rules the Staff presents for our consideration reflect the best tradition of two-tier regulation involving our capital markets. It is important to stress that this structure won't supplant our oversight and enforcement efforts, it will supplement them. We'll continue vigorously to investigate and pursue instances of accounting misconduct. But, the independent PAB envisioned by this proposal allows for a broader enforcement capability, beyond fraud and illegality; for the first time it would put in place a private sector system powerfully able to address accountants' ethical lapses or competence deficiencies.

The PAB will conduct frequent audit quality reviews — every year for at least those firms that audit over 80% of public companies, which represents well over 90% of our market capitalization. Moreover, the PAB will discipline individual accountants or whole firms for unethical or incompetent conduct; and discipline accounting firms lacking quality control systems that meet or exceed the highest professional standards. The PAB's disciplinary and remedial arsenal will include fines, censures, removal from client engagements, limitations on activities and suspension from auditing SEC clients. Those failing to cooperate could be barred from doing public audits.

A PAB will add an additional layer of protection for investors, a layer subject to vigorous continued SEC oversight. This oversight would begin when we recognize a PAB, after reviewing its proposed structure, as well as all aspects of its functions. The government and private sector, working together, will bring about tremendous improvements to our system.

This proposal is significant in its own right, but its strength lies in the fact that it is only one of numerous initiatives to improve how our markets function, and to ratchet up the protections on which public investors confidently rely. Many of those initiatives were discussed in my letter to the President this week, detailing our commitment to implementing his Ten Point Program, and include initiatives related to corporate governance, accountability of CEOs and CFOs, independent audit committees, improved and timely disclosure, analyst conflicts of interest, and stepped up enforcement efforts.

As we noted in that letter, we look forward later this summer to additional rule proposals from the Staff that will be a powerful companion to these rules, by significantly strengthening company safeguards and disclosures regarding non-audit services provided by company's public auditors.

Investor confidence is the bedrock of our markets. Ineffective oversight of public company audits damages that confidence. Our proposal will help restore investor faith by ensuring strong and effective regulation of the accounting profession. In putting forth this proposal, we begin a process that ensures real change before year's end. This is only the beginning of the process — we're eager to receive additional public comment that will enhance our ideas.

Bob, as I turn this over to you, I thank you again for your remarkable leadership, integrity, and devotion to the public interest. I hasten to add, however, that you are not unique; all those who worked along side you to produce this important proposal share those attributes.



Modified: 06/20/2002