R.G. Associates, Inc.
210 N. Charles Street, Ste. 1325
Baltimore, MD 21201-4015
July 24, 2000
Please allow me to present some background information about myself in order to provide some context for my comments. I spent nearly seven years as an analyst with a major mutual fund group in Baltimore, starting in 1985, and I am now an accounting analyst who writes about accounting issues in a research service entitled The Analyst's Accounting Observer. I work with many buy-side and sell-side analysts; I provide assistance to individual analysts of both stripes when it comes to understanding either general or company-specific accounting issues. One impression has struck me over the last fifteen years I have been in the investment business: users often have little knowledge or understanding of the auditor's mission or responsibilities. That may be largely be due to an accounting profession that increasingly seeks to distance itself from a public image as auditor, in favor of one that positions accountants in the public's collective mind as business-enhancing consultants. For evidence of this, one only has to look as far as the Wall Street Journal ads for the Big Five accounting firms or in the public image campaigns of the AICPA. Let me state that I don't believe there's anything innately wrong with accounting firms offering consulting services - but I believe that this kind of activity only increases the confusion of the user community regarding the role of the auditor in the capital markets. I detect frequent cynicism on the part of users regarding auditor independence. When the really spectacular accounting disasters occur, that cynicism is only magnified.
I believe the single most important challenge facing the auditing profession today is the issue of auditor independence - and the appearance of independence. Enhance the independence of the auditor, and many of the other issues that concern investors will be remedied as well. I believe that the truly independent auditor, freed from worries about other services provided by his or her firm, would bring about more improvement in the audit process than say, any number of new rules about revenue recognition.
I think the single best way to improve the auditor independence and the appearance of independence is to call for an exclusionary ban on non-audit services to audit clients. I am concerned that the auditing side of accounting firms may wind up being a mere sideline to consulting activities if trends continue - and that the appearance of independence will be tainted. If such a ban were enacted, I believe that the auditing profession would enormously improve its independence both in appearance and in fact. In providing advisory and auditing services, a firm is effectively serving two different clients. Liberated from serving two potentially conflicting masters, auditors would enjoy greater independence in appearance. No longer might they look like they were auditing their own work or advice.
I have heard one argument proposed that the existence of consulting relationships with audit clients actually enhances audit reliability. That argument invites one to believe, then, that the auditor is relying on the work of the consulting side of the business - or is auditing its own firm's work. Such an argument does not support the existence of independence in such situations, either in appearance or in fact.
I believe that the auditing function is enhanced when it stands alone from the consulting practice - when there is no opportunity for it to be used as a "loss leader" to gain entry to more lucrative consulting opportunities for clients. Cutting audit services free from consulting services might permit a stable pricing structure to emerge in the whole auditing business - one that would allow firms to hire talented professionals and give them the necessary resources to perform more thorough audits.
I believe that the accounting firms have difficulty in attracting professionals to be auditors at a time when staggering financial rewards are available in other fields, such as finance and technology. I have heard the argument that the existence of consulting practices in accounting firms assures that the "best and the brightest" talent can be recruited. That may be so - but such talent is attracted to the consulting side and not the auditing practice. Perhaps such recruits might be required to spend a minimum number of years in the audit side before graduating to the consulting practice, as a "stepping stone." That doesn't encourage one to believe that the auditing side is the real attraction - or that their best efforts are being directed at their short auditing careers.
I think the real problem in attracting talent in the auditing profession is the share ownership restrictions placed on auditors. The Commission's independence proposal is a move in the right direction toward making accounting firms more competitive in the labor markets. Entrants to the audit profession shouldn't have to presume that they must take a vow of poverty during a bull market to comply with independence rules. The relaxation of share ownership constraints that are proposed in this document should allay most fears of future auditors.
I am in favor of the Commission's proposal for proxy disclosure of the amount of non-audit services provided by auditors to their clients. As I have said before, I believe the existence of such relationships damages the appearance of independence. It would help investors channel their skepticism more constructively if they had hard facts about the dollars involved in such relationships. I find it ironic that such a disclosure existed when the non-audit services provided by auditors was insignificant compared to the audit services; since the roles have reversed at many firms over the last decade, the information is unavailable. If there is truly a benefit to the audit process to having a consulting practice work with the client, then firms should not object to the disclosure of such information in the proxy.
That concludes my opening remarks. I would be glad to take any questions you may have.
Jack T. Ciesielski is the owner of R.G. Associates, Inc. an investment research and portfolio management firm located in Baltimore. Mr. Ciesielski is the publisher of The Analyst's Accounting Observer, which is an accounting advisory service for security analysts.
He has been a CPA since 1978, and a CFA since 1988. He also holds the Certified Management Accountant designation. Before founding R.G. Associates in 1992, he spent nearly seven years as a security analyst with the Legg Mason Value Trust. Prior to that, he had performed various stints in the accounting profession as an auditor with Coopers & Lybrand, as an internal auditor with Black & Decker, and as an educator at the University of Maryland.
Mr. Ciesielski is a member of the Financial Accounting Standards Advisory Council, (FASAC), which is the advisory body that consults with the Financial Accounting Standards Board (FASB) on practice issues and advises the FASB on setting its agenda.
He is also a member of the American Institute of Certified Public Accountants, and served on that body's SEC Regulations Committee from 1992 to 1995. In 1998, he became a member of the AICPA's Accounting Standards Executive Committee.
As a member of the Association for Investment Management Research, he served on their Financial Accounting Policy Committee from 1993 to 1996, while filling the role of Vice-Chairman from 1994 to 1996. As a member of the Maryland Association of CPAs, Mr. Ciesielski has served as the Chairman of their Accounting Standards Committee from 1993 to 1995, and is currently a member of the MACPA's board of directors. He has also been a member of the Baltimore Security Analysts Society since 1986.