SECURITY AND EXCHANGE COMMISSION
PROPOSED REGULATIONS ON AUDITOR INDEPENDENCE
September 20, 2000
Comments of Michael T. Daggett, CPA
Director at Large, National Association of State Boards of Accountancy
Past President, Arizona State Board of Accountancy
Mr. Chairman and Commissioners, I thank you for the opportunity to express my views here today as a regulator, a user of audited financial statements, and a certified public accountant. I am Michael Daggett and I am a CPA practicing in Phoenix, Arizona, and have practiced in national and local CPA firms for over twenty-five years. My current practice provides a broad range of services for small and medium businesses, and those businesses vary in types of industry and services. While I do not perform services for public companies, and I no longer perform auditing services, I am still subject to the independence rules and standards promulgated by the American Institute of Certified Public Accountants. As you may note on my resume, I have served on the Governing Council of the American Institute of Certified Public Accountants, the American Institute's Quality Review Executive Committee, the Board of Directors of the Arizona Society of Certified Public Accountants, the Arizona State Board of Accountancy, and finally, the Board of Directors of the National Association of the State Boards of Accountancy. I have significant experience serving my profession, as well as the public, from the perspective of the professional associations and the regulatory board and its association. My remarks are personal to me and are not intended to reflect a position of any of those associations that I serve or have served.
As has been stated numerous times in one form or another, independence is a fundamental tenet of our professional conduct. To maintain our professional trust and integrity, it is extremely critical to live by the highest standards of independence, particularly when providing attestation services. Our clients, as well as the public, do not always know us well and, certainly, not personally, and mostly extend that trust through their perception.
In my past service with the professional associations, and I might add that I continue to serve the professional association in various roles, we fought the mandate by the Federal Trade Commission to allow for our profession to accept commissions. The position of the professional associations, the American Institute of CPAs and the states' professional societies, was that the prohibition of CPAs accepting commissions protected the trust and integrity extended to our profession by the public. It was generally felt that the public perceived that we performed our services without the influences of monetary gain. While the associations gallantly fought this change, it reluctantly conceded, allowing the acceptance of commissions on a limited basis. The arguments expressed at that time against commissions parallel the arguments at this time for maintaining the highest standard of independence. Incidentally, one of the major limitations placed on our profession when accepting commissions is the continued prohibition of accepting commissions from clients for whom we provide attestation services. Just as commissions threatened the objectivity of a CPA's judgment, so do the financial rewards received from services which also have a significant and material investment in the success of the company's performance.
I have an extremely high level of respect and admiration for the American Institute of Certified Public Accountants, its leadership, and its staff, and the prominent national/international CPA firms, their partners and staff. I, as well as just about all CPAs, look up to the leadership of these groups and reap professional benefits from their successes. We also suffer their failures. I prefer to believe that the recent violations of independence rules by a certain national CPA firm were more the result of the firm's frustration with rules which have failed to keep pace with changing times, rather than blatant disregard of the standards. We can ill afford the development of a more relaxed and cavalier attitude towards the standards from which we have attained our professional prestige. It behooves these organizations to be sensitive to their impact on the profession as a whole and the credibility that has been attained by their leadership. To be at such odds on such an important issue with these organizations makes me nervous, at least, and, at worse, concerned about the direction of our profession.
I have, as previously noted, considerable experience working with the leadership of our profession and have without exception observed a constant and unwavering dedication to maintaining high standards for our profession, as well as, a commitment to maintaining the public's trust. I am a strong supporter of the profession's efforts to be self-regulatory, but appreciate the need for partnering with and accepting oversight by other organizations whose primary commitment is to protect the public.
I would, however, like to caution this agency, as I would any regulatory agency, not to overreach or overreact. A tendency that I note in regulatory entities, be they a standard setting committee of the American Institute or a governmental agency, is to micro-regulate. This tendency becomes inflamed at times of crisis or controversy. Try as we might to identify the nuts and bolts of independence, it is a mindset, or as the Wall Street Journal quoted your Chief Accountant, Lynn Turner, "You'd have to get into the auditor's head." Consequently, we can become so focused on our efforts to tighten the nuts and bolts of an auditor's behavior, that we haven't allowed for expansion and contraction, or changing times and out of the ordinary circumstances.
Do the rules need to restrict a firm's ability to provide human resource services to a company, because of the firm's interest in the success of the company's employees? It's important to remember that auditors already have an interest in its client's success. I would suggest that such services would create relatively little risk and an unyielding prohibition would seem to me to be excessive. Clearly, designing an information system that sets controls and procedures which are integral to the reporting of the company's financial results is far more likely to impair an auditor's mindset than evaluating employee performance and compensation. I would feel differently if the firm were then hired to audit its performance in connection with the human resource engagement. I might also feel differently, if the magnitude of such an engagement, in terms of its impact on the company's performance, or the firm's fees, exceeds a reasonable level of materiality. Granted, materiality can be as difficult to define as independence. Perhaps, such determination should be that of the board of directors or its audit committee. If they perceive the other engagement(s) to be material, then they should opt for a different firm.
In summary, independence in appearance is as critical as in fact. Public trust in our profession is a factor of how our behavior is perceived and is as critical today as it has ever been. This is especially true in the global and electronic environment in which our commerce thrives today. And, finally, with respect to the significant changes in the standards, I hope that common sense will prevail when clarity of need does not. Thank you, again, for your time.
Wichita State University - B.B.A. (Accounting), December 1974
Daggett & Daggett, CPA's, LLP - 1984 to present
Cleveland & Daggett, CPA's - 1982 to 1984
Lester Witte & Company - 1980 to 1982
Lester Witte & Company - 1978 to 1980
Alexander Grant & Company - 1975 to 1978
PROFESSIONAL ASSOCIATIONS AND BOARDS
Member of Board of Directors of National Association of State Boards of Accountancy (NASBA)
Chairman, NASBA Litigation Response and Assistance Committee
Chairman, NASBA Transborder Discipline and Enforcement Task Force
Past President, Arizona State Board of Accountancy (ASBA)
Member of ASBA Law Review Committee
Member of governing council, American Institute of Certified Public Accountants (AICPA)
Member of AICPA Quality Review Executive Committee
Past President, Arizona Society of Certified Public Accountants (ASCPA)
ASCPA Life Member
Past Chairman, ASCPA Arizona Tax Liaison Committee
Member of ASCPA Arizona Tax Legislation Committee
Member of ASCPA IRS Tax Liaison Committee