Testimony of James J. Schiro
Chief Executive Officer
September 20, 2000
Before the Securities and Exchange Commission
Revision of the Commission's Audit Independence Requirements
Good morning, my name is Jim Schiro, CEO of PricewaterhouseCoopers.
I would like to begin by commending Chairman Levitt and the Commission for initiating this critical dialogue. The SEC is providing appropriate and necessary leadership to help us achieve our shared objective in this rulemaking process: safeguarding and improving the quality, significance and reliability of information upon which the investing public relies.
However, if we are to reach that goal we must re-focus this discussion on reassessing the role of the audit and accounting firm in the 21st Century. We must resist the temptation to try to fashion rules that anticipate every conceivable future conflict or concern. We have a larger mission: to build upon the intellectual core of the profession, allowing it to grow and innovate to meet developing investor needs. Who knows what new assurance services will be demanded a decade from now...or even a year from now? Our challenge is to create a set of guidelines that will enable the profession to thrive and change.
Let me quickly illustrate. As you well know, many, many technology stocks plummeted in value last March and April, decimating the portfolios of countless investors. The reassessment of the technology sector had little to do with audited financial information.
And that's my point.
This profession's core mission must continue to be to protect investors and the public interest - an especially important role in times of dynamic change and economic transformation. Yet the audited financial statement - which is the traditional heart of this profession -- doesn't measure the very assets upon which today's companies often are valued. As a result, investors have little guidance in making investment decisions, leaving them at greater risk.
We need to create not merely a new set of rules, but a new accounting and auditing model that reflects a whole host of factors upon which investors increasingly rely. Investors want to know about intangibles - such as the potency of a company's market strategy or the value of its intellectual capital. They want to know whether companies are pursuing sustainable development, respecting human rights or addressing the global digital divide - the technological disparity that threatens to widen the inequity between the world's haves and have-nots. A decade ago, even a couple of years ago, most investors formed economic judgements based on historical financial information. Today, a more complex set of factors has an affect on value. To make decisions in this environment, reliable, contemporaneous information, supplied by a trusted and objective third party, is increasingly necessary.
The future role of my profession is still being defined. But the objectives have not changed: to provide assurance and to protect the public interest. The key is to recognize that new challenges - driven by emerging technologies and innovative ways of doing business - are arising every day.
And that brings me to the SEC's proposed rules. I am here today on behalf of PricewaterhouseCoopers to contribute to the creation of rules that safeguard the public interest and allow the profession to adapt to the evolving needs of the capital markets, our clients and the public. The right rules will ensure that this profession continues to be highly attractive to first-rate people - professionals of strong character who possess highly sophisticated analytical, technological and interpersonal skills. Make no mistake, the caliber of our people rather than the comprehensiveness of the rules will be investors' best protection. Our goal should be to ensure that the profession has an abundance of trained people with an objective mindset, supported by firms appropriately focused on audit and assurance.
Over the past many months I've consistently said - in testimony and in public statements - that the profession needs to engage regulators on a global basis to address the challenges now before us. There has been too much rhetoric and too little reasoning, owing to the mistrust that recently has arisen in the relationship between the profession and the SEC. It's time to reclaim that mutual respect and trust. We are in a period of rapid change and thus great risk should we fail to respond. The need for constructive dialogue is acute. There's been a lot of criticism of the current proposed rules. I too have had some disagreements with them - and I have made that clear to the SEC and to my partners. However, my firm has been engaging the Commission's staff and we've found them open to our ideas and interested in discussing the future of the profession.
The time for action is at hand. We are in the midst of a global information revolution as momentous as the agricultural or the industrial revolution. This is a revolution that moves at Internet speed, and so we don't have years - or even months -- to adapt to its demands. Our profession and our people need clarity -- now. The financial markets, our clients and our industry cannot afford to wait.
We have discussed specific proposals with the SEC. We have submitted proposed language to the staff that we believe would meet the Commission's objectives and under which we could provide the services we anticipate that our clients will require in the 21st Century - information assurance services. If the Commission is prepared to adopt rules along these lines, we will support them.
Let me begin with the Scope of Services rule concerning financial information systems, because this is the core issue in the rulemaking proposal. We would support restrictions on the types of consulting services accounting firms provide -- including internal audit outsourcing -- because we believe that changing market forces are making it increasingly difficult for firms to provide these services alongside their assurance practices.
We have made a decision, which I announced a year ago, to divest PwC of its management consulting practice. We believe that as our business has matured and developed a broader array of services, we have become two distinct organizations under one roof. Each has a different mission. For one, the endgame has been financial market integrity. For it, investor protection, objectivity and independence are crucial. For the other, having a direct interest in clients' success is mandatory. These differences lead quite naturally to the evolution of very different cultures and very different business models.
The restructuring plan will allow each of our businesses to grow and prosper. PwC will continue to be the world's largest audit and accounting firm and I am confident that we will be able to offer our people exciting, challenging careers. The notion that we will not be able to conduct quality audits without an IT consulting practice is simply wrong.
Let me summarize our views on four additional issues:
1. Personal rules. SEC has done well in addressing the need to modernize the archaic personal independence rules to reflect today's social and business realities. We have alerted the staff to a few areas that appear to have some unintended consequences.
2. Principles. The Commission has proposed broad governing principles. We would urge against writing these principles into the rules. By doing so, they would almost certainly become inflexible edicts rather than helpful guidelines. Instead of assisting us in navigating an uncertain future, the principles would likely impair our ability to cope with changing investor demands.
3. Affiliate rules. We agree with the Commission that certain affiliations with audit clients pose independence concerns. However, other affiliations help the profession provide assurance on the increasingly wide array of information upon which the investor relies.
4. Disclosure rules. We have always believed that transparency and sunshine are the most effective means of overseeing the profession. We have nothing to hide from clients, investors or regulators and therefore we would support disclosure of all aggregate audit fees and aggregate non-audit fees.
In crafting new rules, it is important to remember that currently we have three very important safeguards: Audit committees, the ISB and the Public Oversight Board. These three oversight bodies are ideally positioned to determine whether auditors are engaged in practices that threaten their independence. We need to give them room to work.
Before I close I want to caution that rules that work in this country and that protect our capital markets might not fit neatly into cultures elsewhere. The requirements and expectations of other countries must be taken into consideration in creating rules with global implications.
My travels throughout the world have impressed upon me our profession's awesome responsibility to a wide range of new stakeholders emerging in this global economy. These stakeholders have increasingly complex assurance needs. They are seeking not merely traditional financial information, but also accurate and objective information about a wide array of concerns - including how companies comply with standards of corporate responsibility. We cannot know in what ways the audit profession will need to reconfigure itself to ensure a continuing central role as an objective, trusted third party. What we do know is that a new era demands new thinking. This rulemaking process has broad implications for the global economy. I am confident that working together, we are equal to the task of devising rules that will protect the pubic interest today and in the decades to come.