Remarks of

Isaac C. Hunt, Jr.
Commissioner*
U.S. Securities and Exchange Commission
Washington, D.C.

“A CALL FOR RESEARCH ON SEC INITIATIVES”

Annual Convention of the
American Accounting Association

New Orleans. Louisiana
August 17, 1998

*	The views expressed herein are those of Commissioner Hunt and do not 
necessarily represent the views of the Commission, other Commissioners or the 
Commission’s staff.

I.	OPENING REMARKS

	Good morning.  Thank you for inviting me to address this 
plenary session of the American Accounting Association.  I am 
honored to make a presentation before such a distinguished group of 
scholars.

	As a member of an agency one of whose cardinal principals is 
full disclosure to the investing public, I should tell you two things at 
the outset of my remarks.  First, the views I am about to express are 
mine and do not necessarily reflect the views of the Commission or its 
staff.  Second, I am not an accountant.  However, I have been 
fortunate enough to speak before accounting professionals 
throughout my tenure at the Commission.  One of my first speeches 
as an SEC Commissioner was before a group of management 
accountants, and I gave a speech on auditor independence before 
the National Association of State Boards of Accountancy in 
September of last year.  In December 1997, I delivered an address at 
the 25th Annual Convention of the American Institute of Certified 
Public Accountants.  

	My participation in these events reflects my strong interest in 
the field of accounting and reflects that I have focused a substantial 
amount of my work at the Commission on addressing accounting 
issues.  In addition to having another opportunity to voice my views 
on accounting matters under consideration at the Commission, I am 
especially pleased to address your association because of our shared 
interest in academic pursuits.  

	Prior to joining the Securities & Exchange Commission, I served 
for eight years as Dean and Professor of the University of Akron 
School of Law in Ohio.  Before that, I held the position of Dean at the 
Antioch School of Law in Washington D.C.  Although I am now a 
Commissioner at the SEC, my commitment to scholarly pursuits has 
not abated.  I think my continued dedication to teaching and research 
is evident to those at the Commission who know me well --  many of 
them have taken to referring to me as “The Dean.”

	All members of the academic community have an opportunity to 
play a role in the formation of policy at the Commission.  I cannot 
imagine a circumstance in which the Commission would adopt rules 
or take final regulatory action without seeking feedback from the 
persons and entities who have interest or expertise in the subject 
matter covered by the proposed rule or action under consideration by 
the Commission.  As scholars, you are probably best suited to the 
task of providing honest and frank commentary on Commission 
proposals without regard to whether your views would be satisfactory 
to a client.  

	In addition, you are endowed with the skill to review an issue, 
formulate a scientific approach to examine the issue, collect data, and 
apply analytical reasoning to reach a sound conclusion.  Few others 
are so well equipped to scrutinize proposed Commission actions and 
provide statistically supported recommendations as to the wisdom of 
those actions.  In sum, you have the potential to wield substantial 
influence over the course of Commission policy in many areas.

	My remarks today reflect my objective of inspiring you, the 
scholars of the accounting profession, to utilize your research skills 
and your independent perspectives towards making a substantive 
difference in the agency’s approach to various issues impacting 
accounting practices.

	As a fellow academic, I see immense potential for academic 
achievement through involvement in SEC initiatives. Specifically, I 
believe academic efforts can have substantial influence in the 
outcome of Commission endeavors in four areas of tremendous 
import to accountants.  Those areas are: 
	-  international accounting standards;
	-  auditor independence;
	-  market risk disclosures; and
	-  conduct resulting in professional discipline when practicing 
before the Commission.  

I hope my remarks will spark some interest and ultimately generate 
some results in the world of accounting and the formation of 
Commission policy.  


II.	INTERNATIONAL ACCOUNTING STANDARDS

	As you probably know, the Securities and Exchange 
Commission was founded after the market crash of 1929.  Its primary 
goal is the protection of investors by ensuring full disclosure.  
Financial information is therefore of paramount importance to the 
Commission.  Federal securities laws set out the specific financial 
information that must be disclosed to the public, who must make such 
disclosures, and under what circumstances.  

	For this full disclosure system to provide sufficient information 
for public investors to make informed investment decisions, the 
accounting and reporting standards governing financial information 
must be of the highest quality.  I believe that we here in the United 
States have achieved high quality standards for financial reporting in 
the form of U.S. generally accepted accounting principles.

	However, we are now entering an era of globalization where our 
need for financial information is greater.  Modern technology now 
enables us to communicate with someone clear across the globe with 
the stroke of a computer key.  Technological advances and a bull 
market are two of the factors that have encouraged U.S. investors to 
broaden their investment horizons and look abroad for investment 
opportunities.  Of course this option currently is available to U.S. 
investors for foreign companies listed on U.S. exchanges, which 
means those foreign companies who prepare their financial 
statements in, or reconcile them to, U.S. GAAP.

	Despite the tremendous success of U.S. exchanges in 
attracting non-U.S. companies, we continue to look for ways to 
reduce barriers to cross-border capital raising activities.  In this vein, 
the SEC and fellow regulators around the world have been exploring 
the development of a set of international accounting standards.  This 
task involves identifying common needs of investors around the 
globe, and developing standards that are responsive to those needs 
while providing benefits to all capital market participants.  

	With international accounting standards, issuers could lower 
their costs for communication with shareholders, potential investors 
and lenders.  Further, these standards would make it easier for 
investors to “shop and compare” investment opportunities.

	The road to achieving international accounting standards has 
not been short.  The International Accounting Standards Committee 
(“IASC”), an organization consisting of member bodies from over 87 
countries throughout the world, has been dedicated to this task since 
its formation in 1972.  The Commission has supported development 
of international accounting standards, both through its active 
participation in the IASC’s work, as well as through its role as a 
member of the International Organization of Securities Commissions 
(“IOSCO”).  

	In April 1996, the IASC announced its commitment to 
completion of the key components, or “core standards,” of 
international accounting standards.  The SEC issued a statement 
supporting IASC’s efforts to develop international accounting 
standards, and indicating its willingness to consider allowing foreign 
issuers to use the IASC standards in securities offerings in the U.S., 
provided those standards met certain criteria.  At this time, the IASC 
expects to complete the core standards by the end of 1998.  

	Once the IASC completes its work on core standards, the baton 
will be passed to IOSCO.  The SEC and its staff will actively 
participate in IOSCO’s assessment of the acceptability of the core 
standards.

	How will this endeavor affect American issuers and investors?  
Currently, foreign companies seeking access to U.S. markets must 
provide audited financial statements either prepared in accordance 
with U.S. GAAP or reconciled to U.S. GAAP.  The assessment of the 
acceptability of the core standards will help form the basis for the 
Commission’s decision on whether it should reduce or remove the 
current requirements on using, or reconciling to, U.S. GAAP.  If the 
Commission decides to change these requirements, it will have to 
issue a rule proposal which describes in great detail the proposed 
changes, and solicits public comment thereon.  

	However, the Commission may decide to issue a “concept 
release” on this matter before doing a rule proposal.  A concept 
release would explore alternatives for changing the current 
requirements without making a specific proposal.  The Commission 
would seek comment on the concepts and alternatives described in 
the release.  

	No decisions have yet been made on how the Commission will 
proceed if it decides to alter the current requirements on the use of 
U.S. GAAP.  But I understand that the staff is exploring the possibility 
of recommending that the Commission issue a concept release in 
early 1999 concerning international accounting standards.

	While it is unclear at this point whether and/or when the 
Commission will formally solicit your input on international accounting 
standards, I encourage you to take a look at the issued draft 
standards now.  They are publicly available on the IASC’s web site at 
www.iasc.org.uk and I believe AAA’s Financial Accounting Standards 
Committee will be coordinating research efforts concerning these 
standards.

	As the Commission indicated when it announced its support for 
international accounting standards, it will consider certain key factors 
in making its assessment of the acceptability of these standards.  The 
Commission will consider whether the standards:

	- constitute a comprehensive basis of accounting;
	- are of high quality;
	- result in transparency, comparability and provide for full 
disclosure; and
	- can be rigorously interpreted and applied.

	In applying these criteria to assess the completed standards, 
the Commission will be confronted with many issues.  For example, 
how can the draft standards be tested against these factors?  Are 
these factors the most appropriate measure by which the standards 
should be tested?  Do these factors protect or give favorable 
treatment to certain market participants over others?

	Ladies and gentlemen, I believe it is your research, your 
analysis and your reasoning that will be best suited to the task of 
addressing these questions.  I urge you to take part in framing the 
discussion, providing the data, and helping us form the conclusions.
	
	Even if you decide not to conduct research on the draft core 
standards, I ask that you consider sharing your opinions on the 
standards.  The Commission’s invitation for comments will be 
sincerely extended and all submissions will be seriously considered.  
Your input is valued and vital.  So I encourage you to speak out.  
Review the standards with a critical eye; be frank in your assessment 
and, most importantly, make certain your views, your knowledge and 
your expertise make their way to the Commission.  Our staff is 
accessible and interested.  I know that Lynn Turner, our Chief 
Accountant, is making appeals for participation of various accounting 
professionals in this process.  Lynn also is speaking on international 
accounting standards in more detail during this convention.  

	I promised to cover four areas in which your involvement could 
have an impact on public policy.  Let me move on to the second area, 
auditor independence.


III.	AUDITOR INDEPENDENCE

	Auditor independence is an important yet sensitive issue for 
both accountants and securities regulators.  Your participation in this 
area would be valuable, in large part, because of this sensitivity.

	First, a little background.  As I indicated before, the federal 
securities laws were developed in the wake of the collapse of our 
securities markets in 1929.  To regenerate public trust and credibility 
at a time when investor confidence was at an all time low, Congress 
mandated that financial statements of companies whose securities 
are publicly held be certified by independent public accountants.  
These accountants, by act of Congress, are entrusted with the duty of 
serving as protectors of the reliability and integrity of the financial 
information disseminated to the investing public.

	Independent auditors shoulder a large responsibility and are 
held to high standards.  Notably, independent auditors must not only 
maintain independence “in fact,” but also must be independent “in 
appearance.”  In essence, independent auditors must avoid even the 
suggestion that they have an interest in the company whose financial 
statements they are auditing.  Auditors cannot, for example, invest 
money in businesses related to their audit client, participate in the 
management of such clients, or audit their own work for a client.  
These restrictions seem relatively straight-forward to me.  

	A limitation on auditors’ activities which raises more difficult 
issues is whether and when they can provide non-audit services to 
audit clients without impairing their independence.  In addressing the 
issue of when auditors lack independence because of non-audit 
services provided to audit clients, the Commission focuses on how 
reasonable investors would perceive auditors’ independence in light 
of those non-audit services.

	More recently, the Commission has seen challenging fact 
patterns where the impact of non-audit services on auditors’ 
independence has been difficult to assess.  Moreover, such 
determinations are having an increasing impact on the revenues 
earned by accounting firms due to the large amount of non-auditing 
services these firms now provide.

	In response to these and other challenges, the Commission and 
the accounting profession jointly formed the Independence Standards 
Board (“ISB”).  Its mission is to establish independence standards 
applicable to audits of public companies.

	Auditor independence is, in my view, a cornerstone in 
maintaining the integrity of capital markets and thereby maximizing 
investor protection.  My concerns about the ability of auditors to 
maintain their independence are heightened when I hear, for 
example, that the auditing function of accounting firms now brings in 
less money than other services the firms provide, and that firms 
believe they must expand their non-audit services to remain 
competitive.  

	The work of the ISB will be invaluable in addressing my 
concerns.  Their efforts would be perfectly complemented if dedicated 
members of the academic accounting community take an active role 
in considering standards in this area and applying scholarly 
approaches to answering the tough questions that auditor 
independence issues raise.  

	For example, what is the correlation between perceived and 
actual lack of independence?  How should that correlation be 
measured in determining when an auditor lacks independence?  
What other factors can undermine investors’ confidence in the audit 
process?

	These are challenging questions, and I am sure there are 
others that need to be addressed.  You possess the unique skill and 
expertise to conduct the research and analysis important to reaching 
a conclusion on these issues.  It seems to me that the ISB, the 
Commission and the public would benefit greatly from your active 
participation in this project.  I encourage you to consider undertaking 
academic research in this area.


IV.	MARKET RISK DISCLOSURES

	Market risk disclosure is an area in which the Commission has 
chosen to exercise its rule making authority.  By way of background, 
derivatives have come to serve as an important tool for public 
companies in controlling the extent to which they will make or lose 
money as the result of changes in market conditions.  While 
derivatives can be useful, they can also be devastatingly harmful.  
The bankruptcy of Orange County in 1994 is a prime example.  In that 
instance, the county sustained immense losses on derivatives 
transactions when interest rates rose.  Some were so concerned 
about the potentially harmful effects of derivatives trading practices 
on investors that they questioned whether derivatives should be 
banned outright.  

	The Commission chose to address these concerns by focusing 
on the adequacy of disclosures of market risk.  In 1994, FASB 
adopted FAS No. 119 on disclosures concerning derivatives.  The 
staff of the Commission undertook, during 1994 and 1995, to review 
approximately 500 annual reports filed by public companies to get a 
grasp on the extent of public disclosures being made of companies’ 
exposure to market risk as a result of derivatives positions.  The 
staff’s review identified deficiencies in the disclosures, although it also 
found that disclosures had improved in 1995 over 1994 (presumably 
as the result of the adoption of FAS No. 119).

	In response to these findings, the Commission amended its 
regulations in 1997 to require disclosure of market risks in financial 
statement footnotes and outside of the financial statements.  To 
provide companies subject to these regulations time to address the 
new disclosure requirements, the Commission phased in these 
provisions in two stages.  

	Banks, thrifts and other large cap companies, which 
presumably have more experience and resources for determining 
market risk, were required to comply with the new disclosure 
provisions in filings made with the Commission for fiscal years ending 
after June 30, 1997.  Most other companies do not have to comply 
until they file their financial statements for years ending after June 30, 
1998.  This phase-in means that banks and large-cap companies with 
calendar (December 31) year-ends were required to comply with the 
rules in their annual reports that were due by March 30, 1998.  So, as 
of April 1, 1998, there was a good deal of new, and hopefully useful, 
information reaching investors concerning market risk management.

	At the time these market disclosure rules were adopted, some 
market participants expressed concern.  Among other things, they 
questioned whether the information disclosed would be 
understandable to investors, and expressed some concern about the 
costs of compiling and presenting this additional information.

	In connection with its adoption of these rules, the Commission 
indicated that it would conduct a review three years after their 
effective date to assess the effect and usefulness of the disclosure 
rules.  Recently, the staff conducted a preliminary one-year review of 
the new rules.

	The staff’s preliminary impression was that the new disclosures 
provided useful information to investors and analysts, but that it might 
be too early to tell whether the risk management disclosures were 
resulting in better risk management techniques by the reporting 
companies.

	In two years, the Commission will undertake an expanded 
examination of the effects and impact of these rules.  This will be a 
daunting task on many levels.  The challenging aspect I raise with 
you is the need for studies examining this issue.

	In particular, research and data would be useful on the impact, 
if any, of these risk disclosures on the manner in which companies 
approach risk management.  I also think the Commission would 
benefit from studies on the competitive harm, if any, of these market 
risk disclosures.  I believe this could be a promising area for 
academic study because the Commission’s review of these rules is 
two years away, providing some time for formulating, designing and 
executing research on this issue.

	Walter Teets, a professor at Gonzaga University and an 
outgoing SEC Accounting Fellow, has been intimately involved in this 
issue, and I believe he is addressing it at one of the sessions to be 
held during this convention.  I encourage you to seek him out if you’d 
like to hear more or further discuss how you can get involved.


V.	RULE 102(e)

	The last area where I’d like to pique your interest and solicit 
your participation is professional discipline under the Commission’s 
rules.  Pursuant to Rule 102(e) of its Rules of Practice, the 
Commission can censure, suspend or bar professionals who practice 
before it under certain circumstances.  While accountants are most 
often the subject of Rule 102(e) proceedings, the Commission also 
has sought sanctions against attorneys under this provision.  Frankly, 
I’d like to see the Commission discipline more lawyers under this 
provision, but that is a topic for another speech!

	The purpose of Rule 102(e) is to ensure diligence and 
competence of the professionals on whom the Commission relies.  
Accountants are a vital part of the disclosure process which is core to 
the Commission’s regulatory scheme; their importance is illustrated 
by Congress’s mandate in the securities laws themselves of an 
independent auditor. 

	In June of this year, the Commission published for comment 
proposed amendments to Rule 102(e) concerning what constitutes 
“improper professional conduct,” which is one basis for a Rule 102(e) 
proceeding.  This amendment was proposed principally in response 
to a decision by the D.C. Court of Appeals indicating that, in the 
interest of fairness, the Commission should define with some 
specificity the circumstances under which a professional may be 
deemed to have engaged in improper professional conduct.  

	The proposed amendment includes, as a basis for action under 
Rule 102(e), intentional violations of applicable professional 
standards and, under certain circumstances, negligent conduct.  I 
understand that Walter Schuetze, Chief Enforcement Accountant at 
the Commission, will be discussing Rule 102(e) in a presentation 
during this convention, so I won’t go into the details of the proposal at 
this time.  But, I do want to say that Rule 102(e) is an important tool in 
protecting the integrity of the Commission’s processes, and therefore 
in protecting investors.  The proposed amendment is the result of 
much hard work by the Commission staff and I am looking forward to 
receiving the comments that are submitted on the proposal.

	I want to specifically ask you to contribute your views on the 
proposed amendment to Rule 102(e).  The comment period officially 
ends this Thursday, August 20th, but comments will be accepted 
even after that date.  Your independence as well as your role in 
influencing the accounting professionals of tomorrow give you a 
unique point of view on this issue.  I think the Commission will be 
greatly benefited if you share your views with us.


CLOSING

	Thank you for allowing me to share my views on how 
accounting scholars can have an impact on current Commission 
initiatives.  I hope you will consider taking an active role in one or 
more of these areas.  I am convinced that this organization has the 
resources and the skills to make a difference in the formation of 
Commission policy.  Please consider taking advantages of these 
opportunities.  


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