11th September 2000

Summary of testimony by Professor Peter Cappelli
Re: Comment File No. S7-13-00
Proposed rule to revise the Commission's auditing independence requirements

My name is Peter Cappelli, and I am the George W. Taylor Professor of Management and Director of the Center for Human Resources at the Wharton School. My expertise is in the area of human resources, broadly defined, and in particular policy issues associated with human resource practices. The statement below summarizes my written testimony concerning the Security and Exchange Commission's proposed rule to revise its auditor independence requirements.

My understanding of the proposed rule is that it would rather sharply limit the scope of services that auditing firms could provide to their clients. As a result, the rule would also sharply limit the tasks that the accountants in such firms could provide. This limitation would have serious consequences on the field of accounting, on the ability to attract and retain qualified employees and on the motivation of such employees to perform their jobs well. The separate arguments supporting this position are numbered below:

1. Job satisfaction and related aspects of job performance such as work quality: There is an extensive literature in applied psychology that documents the importance of having a variety of tasks to perform in jobs, especially variety of tasks that require different skills.1 Jobs where tasks have been narrowed down - whether there is less variety in the skills required, to be specific - are associated with reduced job attitudes and performance on a variety of relevant dimensions, such as absenteeism, turnover, and work quality. Sharply restricting the range of tasks that accountants can perform should be expected to lead to reductions in their job performance along the lines noted above.

2. Limited career prospects: The attitudes among employees toward careers have shifted in recent years, especially the decline in the belief that lifetime employment with the same organization is likely. Employees understand that careers are now likely to take them across employers, industries, and in many cases, across occupations. In order to succeed in this environment, they understand that the key issue for them is to be able to learn and grow on the job. Surveys of employees and, in particular, recent college graduates, make clear that the factors they desire in new jobs are opportunities to learn and grow and exposure to a variety of opportunities.2 Employees who are already working in auditing firms would find that, under the proposed rule, they would only be able to learn about auditing and would have to leave the field in order to learn about other aspects of business. If things did not work out with their current firm, the only other option would be with other auditing firms. This career path, then, would be considerably more risky - and therefore less desirable - because opportunities would be more limited. Other things equal, fewer job seekers would find the accounting field desirable and those with other options would go elsewhere. An occupation that consciously constrains the range of opportunities available to employees is also placing itself at a considerable disadvantage in attracting employees because it limits their ability to learn.

3. The tendency in most fields is to take the simpler tasks and structure them in ways that either automate them with software or allow them to be passed off to lower-skilled and lower-paid assistance. This is the essence of the drive for efficiency and cost cutting.3 This pattern has also played out in auditing where paraprofessionals and accounting software have taken on some of the more routine auditing tasks while the professionals have concentrated on the new, more challenging work. If the tasks associated with accounting are narrowed to exclude much of the new and more challenging work, we should expect to see both the firms and the profession change - with fewer positions that require true professionals and creative individuals and more paraprofessionals. Auditing, it is fair to say, is a field that benefits from stability; it has not been subject to the amount of change seen in other occupations. If the accounting firms were limited to only doing auditing, the firms themselves would soon change form, with fewer and fewer true accounting professionals.

4. Beginning in the late 1980s, the Big 8 Public Accounting firms led a rethinking of the accounting profession, which emphasized the fact that the nature of the work was changing in ways that required broader skills and greater intellectual ability. They helped redirect accounting education away from rule-based principles and toward greater critical thinking and a broader curriculum that paid greater attention to the business context. This trend toward broader tasks and broader education appears to be continuing through to the present.4 Changes in the profession that would narrow the range of tasks performed by accountants, in particular eliminating the broader business-related work associated with consulting, would be enormously frustrating to the incumbents in the accounting field. This would be especially so for the new generation educated to address broader challenges -- those with roughly 10 years or less of experience - who would rightly find their expectations frustrated, and many of their skills unnecessary. They could justifiably claim that they were mislead about the accounting career. Those students who were attracted to the broader accounting curriculum of the past decade might not at all be suited to the narrower auditing career envisions by the proposed rule. Among other things, these developments could lead to considerable turnover among the up-and-coming generation of accountants.

5. Further, if the proposed rule was put in place, the training of accountants would have to change, Accounting education has always been closely tied to the practice of accounting. The education required for auditing, therefore, would have to be redesigned to reflect the change in practice. It would have to eliminate the breadth that had been put in place over the past decade. The broader tasks outside of auditing that are currently performed by public accounting would still remain, however, and students interested in jobs that performed those tasks would require an appropriate education. Higher education institutions, therefore, might be forced to develop two separate accounting programs: A broad one for accountants who would not become auditors and a narrow one for those who would. It is easy to imagine that the auditors, with the narrow curriculum cut off from the more exciting aspects of business, could become the second-class students.

Respectfully submitted,

Peter Cappelli


1 The importance of "task variety," as it has become known, is generally seen as part of the job enrichment movement and was articulated in detail by J. Richard Hackman and Greg R. Oldham. Work Redesign. Reading, MA: Addison-Wesley, 1980.

2 These arguments are summarized in Peter Cappelli. The New Deal at Work: Managing the Market-Driven Workforce. Boston: Harvard Business School Press, 1999.

3 There is a long literature particularly in sociology about the tendency to "deskill" specific jobs and occupations. A summary of this literature is provided in Peter Cappelli. Are Skill Requirements Rising? Evidence for Production and Clerical Jobs. Industrial and Labor Relations Review, Vol. 46, No. 3, April 1993, pp. 515-530.

4 For a description, see, e.g., Patricia M. Flynn, John D. Leeth, and Elliott S. Levy, "The Accounting Profession in Transition: Implications for Education and Training." Philadelphia: National Center on the Educational Quality of the Workforce. 1994.