SEC HEARING - SEPTEMBER 20, 2000
OUTLINE OF TESTIMONY ON AUDITOR INDEPENDENCE

HARVEY GOLUB
CHAIRMAN AND CEO - AMERICAN EXPRESS COMPANY

The objective of this testimony is twofold. It is to present observations on the issue of auditor independence - both my personal views, and my views as CEO of a large, publicly traded company, which is a significant consumer of the professional services of auditing firms.

American Express has an interest in both sides of this issue:

• As a consumer of audit and consulting services, and

• As a provider of non-audit accounting and business advisory services through our subsidiary - American Express Tax and Business Services (TBS). TBS will be separately responding to the Commission's proposal, so American Express' concerns as a provider of accounting services will not be covered in this testimony.

Audited financial statements are a key reason for investor confidence in our capital markets. American Express relies on audited financial statements in two capacities:

• Our own financial statements, which investors must have confidence in, and

• The financial statements of other companies, in which we invest on our own behalf and on behalf of our mutual fund customers.

Questions have been raised as to whether the independence and reliability of audit opinions has weakened as a result of the expansion of services offered by auditing firms. Empirical evidence from the Cohen Commission and the Public Oversight Board conclude that independence has not been impaired. Based on my business experience, I also do not believe that independence has been weakened by this expansion.

There are 6 points I would like to make:

• At American Express, whenever we have engaged our auditors for consulting assignments, we have always seen total independence and objectivity in their delivery of either service.

• Engaging our auditors as consultants on specific assignments can make for a more efficient process based on their core knowledge of our business.

• A greater conflict actually exists in auditors having a "paying customer" relationship with the companies they audit. Yet this is not a substantial issue because of the ethical standards and principles in place that guide an auditor's actions.

• I believe the quality of audits is ultimately linked to the competence and integrity of the people conducting them. Any regulatory action that results in accounting firms being less attractive employers will ultimately have a negative impact on the caliber of people they hire and, ultimately, the quality of service they provide.

• Any ruling that constricts the growth and financial potential of accounting firms can reduce their ability to attract capital, leading to the failure of firms, further consolidation, or both.

• At most publicly traded companies, corporate audit committees monitor the amount and nature of the consulting services provided by independent auditors with the intent of identifying potential conflicts.

The issue of auditor independence is an important one, but I do not believe it is a problem in serious need of repair. The significant audit failures that occur are failures of competence and quality control, rather than independence lapses. The assurance of audit integrity going forward cannot be successfully addressed by substituting legislation and rules for ethics and principles. I have long believed that the most effective regulation on this kind of issue comes from responsible private sector initiatives. Development of a reasonable conceptual framework should precede any attempt to craft checklists or rules governing every potential conflict that might or might not occur. This framework can then be interpreted and applied to specific situations through professional pronouncements and, where appropriate, in enforcement proceedings.