Tuesday, September 12, 2000
Summary of the Anticipated Testimony of Paul M. Koren
Before the Securities and Exchange Commission
Washington - September 20, 2000
Auditor Independence Proposal - Comment File No. S7-13-00
My name is Paul Koren. I am a CPA and have been a partner in the public accounting firm of Goldstein Golub Kessler in New York for almost 30 years. I am an auditor and head of audit and accounting for our firm. Just over two years ago our firm entered into an "alternative practice structure" arrangement with American Express Tax and Business Services ("TBS"), and so I am also now a TBS employee. My firm, Goldstein Golub Kessler, is 100% owned by our partners; American Express does not subsidize us or market our services; my partners and I bear all the risks and rewards of ownership of our audit practice. Goldstein Golub Kessler primarily services privately held companies and to a lesser extent SEC registrants. I appear on behalf of our firm, Goldstein Golub Kessler, not as a spokesman for TBS or American Express.
Here, in summary, are my points:
1. Middle market accounting firms, like ours, provide essential services to hundreds of public companies that are not in the largest 1000, or even 5000. The Commission's proposed rule will drastically impact firms that enter into "alternative practice structures" because of a perceived lack of independence resulting from such arrangements. The net effect would be to damage such accounting firms and indirectly deny audit services to these companies.
2. Middle market firms like ours are disappearing primarily because of demands for capital to meet technology requirements and because of the difficulty these firms have in attracting and retaining talented young professionals. The Commission's proposals will hasten the demise of the remaining middle market firms because, by indirectly limiting their ability to practice on behalf of clients before the Commission (and other regulatory agencies who adopt the Commission's rules), the economic viability of these firms will be diminished because of the loss of business opportunities.
3. With respect to the limitations of non-audit services: Many of our clients do not have available to them, and could not afford, outside consultants for their various needs. They need continuity and people who know them and their business, particularly in their formative years. The Commission's proposal will deprive these firms of our non-audit services and deprive them of the cost savings attributable to our familiarity with their businesses.
4. Arrangements like the "alternative practice structure" we entered into with TBS provide enormous benefits to firms like ours and smaller firms. We can continue to provide young professionals with an attractive career path and a sense of permanence; we can offer a corporate-style benefit package; we can afford to invest in the technology and facilities required to survive. These benefits are real and essential to our firm and to our clients.
5. We believe that to retain the benefits of alternative practice structures and other similar arrangements, reasonable assurances of independence can be provided. Our firm, Goldstein Golub Kessler must and does observe the usual independence requirements. Moreover, because we are sensitive to the appearances created by our association with TBS, we created, as a condition for New York State acknowledging our arrangement, a series of "protocols" that further define requirements for our independence.
6. We do not believe that any reasonable person or investor would conclude that an appearance of impaired independence would arise, if we audited a company that had some immaterial and inconsequential, normal and in the ordinary course of business interactions with American Express. Yet, even the most remote, immaterial and inconsequential business interactions between our audit client and American Express would, under a literal reading of the Commission's proposal, preclude us from performing the audit.
7. Nor do we believe that any reasonable person or investor would perceive a risk because an American Express executive somewhere in the corporate hierarchy (who has nothing to do with us, who we don't know and who probably doesn't know we exist) could possibly try to influence our audit judgment because of an interest in an audit client. Every auditor faces far more realistic pressures every day of his or her professional life from audit clients in the fee-for-service model.
8. Our experience over the past two years provides empirical evidence to support our observations. Even though we always make known our association with American Express, we have continued to attract a considerable number of audit clients. Our recruiting of professional staff has improved. We have not had any interference by American Express in any audit activity or judgment. When we established our association with TBS we were apprehensive; that has proven unwarranted.
9. Although focused on the Big 5, the Commission's proposal will dramatically affect many middle market and smaller firms and their clients. It will limit their ability to compete in the market place because of organizational structure and by forcing clients to choose between audit and other services. By forcing that choice, the Commission will deprive these companies of the range of professional services they require and that are not realistically otherwise available to them. The Commission raises some legitimate concerns that merit thoughtful analysis (though many suggest that it passes on others of equal or greater importance), but the Commission's proposed "solutions" on defining client and accounting firm affiliates and scope of services fail to balance the reasonable and legitimate interests and needs of much of the accounting profession and many public (and private) clients.