September 19, 2000
Chairman Arthur Levitt
Commissioner Paul R. Casey
Commissioner Isaac C. Hunt, Jr.
Commissioner Laura S. Unger
Gentlemen and Madam,
I own a small CPA firm in Kinnelon, Morris County. I employ a total of 8 people. The majority of our clients are closely held businesses and non-profit organizations. Some of our non-profit clients receive government contracts and grants in some form or another. Consequently, we perform audits for these clients. In that connection, I would like oppose the proposed scope of service regulations that are being driven by the Securities & Exchange Commission. I believe they will have a negative impact on every CPA in private practice in New Jersey. Moreover, the impact could be felt by every business and non-profit organization as well.
Many feel that local firms need not worry. Our firm has no SEC clients but I'm concerned. Why? If the rule is adopted, this new restrictive standard could easily trickle down to every firm's ability to provide many of the services that are common place in our profession. We have assisted audit clients in the past with the systems design to improve internal controls, implementation of computerized accounting systems, employee benefit consulting, employee hiring for key accounting positions, selecting outside service bureaus to process data and other management consulting projects for which CPAs are well qualified to perform.
I am concerned that other federal agencies, such as the Office of Management and Budget, HUD and the Department of Labor, would adopt similar rules. The various state accountancy board could also follow suit. I understand that Mr. Levitt characterizes our concerns as "hypothetical" (recent Congressional hearings). Why then is Mr. Levitt addressing the National Association of State Boards of Accountancy on this issue at their national conference?
In addition to affecting our firms, it also potentially limits our client's ability to choose whom they want to serve them. Business owners and non-profit boards who have confidence in their CPA firm should be able to retain us without new government hindrance. Our clients are usually a very good judge of whether we are independent. In those situations where independence is an issue, based on our long-standing code of professional ethics, the CPA would step aside. The SEC proposal seeks to limit auditors to performing the audit and preparing the tax returns for audit clients. This is totally unrealistic. The SEC claims its proposed rule "would not affect tax-related services" to audit clients. However, it would ban acting as an advocate for an audit client, or providing expert services in administrative proceedings, thus (except in preparing returns) potentially prohibiting CPAs from representing audit clients before the IRS.
Isn't it true that the Independence Standards Board ("ISB") conducted a study of corporate executives and found no evidence to support the conclusion that providing non-audit services has impaired independence or audit quality?
Our consulting work is a natural extension of our audit work. Our extensive knowledge of the clients system and business affairs provide us with a unique opportunity to ably assist our client in whatever special project may be required. If the rules were to change, our client would not have access to the knowledge and experience we have obtained at their expense.
A further consequence I envision is the "brain drain" affect it will have on our workforce. At a time when young people turn away from the accounting profession due to its lack of appeal, we would be further hurt if these changes were to take place. Many of us may consider eliminating audit work from our menu of service. Ask the boards of the local non-profit associations how they would feel about losing their auditors because of the limits placed upon them by the government.
I understand why this is happening. The Big 5 has had some independence issues with some of the public clients they audit. They have made some mistakes. But my reading of the situation indicates a world that has changed rapidly and some old rules that need some updating. Your proposal does not address the changing world, you are simply is throwing a potentially dangerous regulation at it. The SEC ignored the conclusion of the current Panel on Audit Effectiveness of the Public Oversight Board, a panel that was formed at the request of the SEC. The panel concluded that, "both the profession and the quality of audits are fundamentally sound." The panel said it could find no evidence that the provision of non-audit services has hurt audit quality. On the contrary, it concluded that in numerous instances non-audit services contributed to a more effective audit.
Your rush to regulate is most concerning. You have adopted a schedule designed to avoid Congressional oversight and preclude meaningful public participation. You have waited until the eleventh hour of the Clinton Administration to push through a radical rule to restructure the accounting profession, without permitting informed oversight, or policy participation, by Congress or the new Administration. In each of the last 10 annual reports to Congress, the SEC has not mentioned any concerns about the scope of services issue. The timing of the 75 day comment period is curious as it has covered most of the summer months and it is inadequate to fully address this far-reaching and highly complex proposal.
The scope of service rule must not be allowed to go forward.
If you or staff would like to discuss this matter in more detail, please feel free to call me at 973-492-5000.
I look forward to your reply.
Very truly yours,
David G. McIntee, CPA