Testimony of William R. Kinney, Jr.
Charles and Elizabeth Prothro Chair in Business

The University of Texas at Austin
On Auditor Independence
Before the Securities and Exchange Commission, September 20, 2000

I am William Kinney, accounting professor at the University of Texas at Austin. I appreciate the opportunity to express my views on the proposed Revision of the Commission's Auditor Independence Requirements. My comments are based on my 32 years of experience as a professor of accounting and as a former member of the AICPA's Auditing Standards Board and Special Committee on Assurance Services. Today I am speaking as a professor: I have not been paid or retained by any firm or professional organization.

In my classes, I tell MBA and accounting students that investors' perceptions of the auditor's independence comprise one of three determinants of the value of audited financial statements (the other two being investors' perceptions of the decision-relevance of the accounting rules used, and care taken in applying the rules). Because a registrant hires an auditor to certify compliance with GAAP, each audit firm has a huge stake in investors' perceptions of their particular audit firm's independence. If investors perceive that the auditor or audit firm has a substantial interest in financial statements other than their quality, the firm's audit cannot add value for the registrant and the audit firm will be fired. I believe that the Commission can leverage this private interest for the benefit of investors.

Below are comments on two of the Commission's proposals. The first is modernization of proscriptions of financial and employment relationships, and the second is proscription of certain non-audit services.

1. I believe that the proposed modernization of proscriptions of financial and employment relationships is in the interest of investors. The modernization reflects large audit firms' dominance of the registrant audit market. Adoption of the proposed changes in proscribed relationships for individuals associated with the audit firm would, in my view, reduce aggregate regulatory compliance without affecting audit quality or increasing independence impairment risk for investors.

2. I do not believe that the proposed proscription of certain non-audit services is in the interest of investors. In my view, its adoption would:

I hope that these comments will be useful to the Commission. (9/25/00)