Lawrence P. Gelfond, CPA/CVA/CFE
Presentation to the Securities Exchange Commission
September 13, 2000
Chairman Levitt and Commissioners, I appreciate the opportunity to participate in today's hearing on the Securities and Exchange Commission's Proposal to revise the rules relating to Auditors' Independence.
My name is Larry Gelfond, a senior director of the local accounting firm, Gelfond Hochstadt Pangburn, P.C. from Denver, Colorado. In addition to being a Certified Public Accountant, I am a Certified Fraud Examiner, a Certified Valuation Analyst, and a former audit partner who now spends a great deal of my time in the forensic arena. I base my comments on over 35 years of public accounting experience.
I have just completed 12 years on the Colorado State Board of Accountancy. I am the immediate past president of the Colorado Board. During my 12-year tenure, I have served as president three times.
I am also a former partner in the failed accounting firm of Laventhol & Horwath, and although not an issue of discussion today, I can tell you when an accounting firm fails for whatever reason, it not only impacts firm members, their families, clients, and the public, it sends repercussions throughout the entire profession.
I apologize for any duplication of remarks by me. I have had the benefit of reading and hearing much of the recent debate on this matter. I might also add that much of what has been said or written is very worthwhile and clearly should be taken into consideration by the Commission.
I will attempt to limit my remarks to general areas and focus from the regulatory perspective. My remarks are not intended to reflect negatively on the current self-regulation by the AICPA, which at the end of the day is still a trade organization of CPAs and CPA firms which gets its funding from its members. How the public views that relationship is not for me to judge. I have been an AICPA member for over 35 years, and have a great deal of respect for the organization's work and the leadership it has given to the profession.
My comments today are personal to me, and are not to be construed as an official position of the Colorado State Board of Accountancy. The Board, in conjunction with NASBA, will review and make its own official comments.
My experience while serving on the Colorado State Board is that the SEC, along with the AICPA, has significant influence on the rules promulgated by the only official licensing authority, namely the State Board of Accountancy. Clearly, there should be a close working relationship and understanding of the role each plays in protecting the public at large, with respect to the attest function. It is clear that there are multiple authorities that govern CPAs and their firms.
I can appreciate the concern to modernize the rules and maintain the trust of a fully informed public in the financial markets. I am supportive of many of the Commission's proposals.
Auditor independence and the possible impact non-audit services may have on it has been the topic of extensive concern and research for many years.
The Public Oversight Board (POB) looked at this topic and expressed caution regarding the possible effect non-audit services could have on the fact and appearance of independence.
The Panel on Audit Effectiveness devoted a full chapter on this very subject although no definitive conclusion came forth from the exposure draft. I had the distinct pleasure of addressing the panel, my remarks were primarily directed to Chapters 5 and 6, and I will share my specific remarks on Chapter 5. I did review the other technical chapters and frankly have high regard for the recommendations contained in those chapters. However, I do feel the relationship of auditor independence and consulting assignments was not fully answered or dealt with.
I told the panel that I had a strong concern that audits are looked upon as a commodity-although this concern is not apparently shared by my brethren in the larger firms or the AICPA, I respectfully disagree.
Many of the audit failures I see are either caused by unqualified firms or individuals within firms taking on work, and not possessing the technical skills required to do the audits, be it SEC, governmental, not for profit, or private company audits, usually in smaller firms.
The other area that causes audit failure is budget constraints. Auditors low-ball bids on audits in the hope of getting more lucrative consulting work. When audit tasks exceed allotted time, errors or failures occur. Many are unintentional.
I will take the liberty of suggesting that firms are reluctant to reward or promote auditors that do not bring engagements in on budgets. Many of these budgets are even unrealistic from the get go. Therein lies a dramatic problem within the profession.
Firms have to assess clients on the merits of the audit engagement itself, and not on what other fees might be generated by the client.
If the POB would examine billing practices within firms, and understand the pressures that the audit staff are under, they would then see why good, qualified staff want to do other less stressful and more rewarding work.
Clearly the emphasis on non-audit work is complex and is now under significant study and evaluation.
I have a concern that we continue to establish one set of rules of independence for SEC audits and another for private non-SEC audits. This, I believe, creates confusion and should be avoided.
The audit of Cargill, a large private company, should not have a set of Independence rules that is different from the smallest of audits performed for a public company under SEC rules of Independence.
Auditors should be independent irrespective of other considerations and the same rules should apply across the board.
I applaud the SEC for stepping forward and dealing with this difficult issue.
Independence is a crucial contribution to the credibility of audits. Non-audit services diminish independence both in fact and appearance. The Panel on Audit Effectiveness found that audits are fundamentally sound, but we should strive to continuously improve.
Over the years the profession has seen different proposals set forth to address the issue of non-audit services. The issue has never been fully resolved or settled.
To make reference of not being aware of situations in which auditors' independence has been impaired as a result of providing consulting services may be begging the question as to the exact research and cases that were exhaustively examined. It may also suggest that this situation is an accident waiting to happen. Hopefully not.
An unduly broad blanket prohibition on consulting may impact the expertise audit firms can provide clients. However, I do feel that proper disclosure of all non-audit fees and services should be disclosed, including tax services, and all fees should be addressed in relationship to the audit fees.
There is without doubt in my mind pressure on the CPAs to sell other services that the firm can provide. The actual impact this has or could have on independence would be difficult for me to speculate on, but certainly the pressure exists.
I caution the SEC not to change certain rules in the hope of modernization when they may impact the appearance of independence. I believe the rule of no partner or firm having a financial interest in an audit client is one to be retained. Any modification must be very carefully analyzed so that independence is not left open to speculation.
There appears to be a rush to conclusion. I believe this is a very complex matter and time should be made for adequate comment by all interested and affected parties. If additional provisions or revisions are needed, let them evolve from this discussion.
I concur with the AICPA position that the SEC rules, if adopted, will most likely be incorporated by regulatory agencies, including the OCC, and various U.S. Departments, including HHS and DOL.
For the most part, it appears that the proposed SEC regulations codify in one place what has been the SEC position which it has iterated through no action letters, enforcement releases, etc.
I believe the SEC is on target to prevent another "Expectation Gap" as happened in the early 1980s when the profession issued several new auditing pronouncements in response to very visible audit failures, which rocked the profession. The actions being taken by the SEC may very well enhance the reputation and credibility of the profession, and preclude another "expectation gap."
I want to thank the Commission for its hard work, deliberation, and giving me the opportunity to share my views with you today. I wish you well as you complete this very important task before you.
I have attempted to keep my remarks somewhat brief in case there are any questions I might answer.
Again, thank you very much.