A New York Times editorial and subsequent commentary covered the SEC’s proposed rulemaking on auditor independence and the ensuing events that have created some unfortunate animosity between the accounting profession and the SEC. The comment, “Auditors are the only profession enshrined in the nation’s securities laws,” brought to mind testimony given by Col. Arthur H. Carter in 1933 before the Senate committee considering how to fulfill the auditing requirements of the new securities regulations. Most senators favored government auditors, but Col. Carter, called before them in his capacity as NYSSCPA president (not as managing partner of Waterhouse and Co.), convinced the committee that private sector auditors would provide a higher-quality financial reporting product.
Objectivity and integrity in professional conduct have fueled the growth of accounting practices. Over time, the CPA’s reputation for “telling it like it is” rather than telling management “what it wants to hear” created myriad opportunities for CPA firms to offer nonaudit services where their knowledge and skills made them a provider of choice. The economic value created by CPAs acting as trusted professionals for millions of clients is reflected today in the health of the U.S. financial markets.
The SEC’s independence regulations have been the practical cornerstone of CPAs’ objectivity and integrity, ensuring that the investing public receives high-quality, trustworthy financial statements. Concerns about auditor independence led to the creation of accounting standard bodies—first the APB and subsequently the FASB—to create a standard set of authoritative principles independent of client management’s preferred accounting practices.
Most people find parts of the SEC’s current proposal—those that attempt to modernize specific rules regarding investments in public companies by partners and employees of their audit firms and their family members—well-founded in the complicated realities of how individuals and families with two working adults hold retirement investments and other portfolios. They are uncontroversial because they are fundamentally reasonable, workable provisions for an increasingly complex world.
The second category of concerns addresses limitations on the scope of services auditors can provide to audit clients. Even those who agree that the growth in size and scope of the services rendered by CPA firms today poses complex, unanticipated challenges to auditor independence question the helpfulness of the SEC’s proposed rulemaking. Their questions center on the following concerns:
To create and develop a system that ensures that an auditor rendering an opinion on financial statements is economically independent of the client is certainly within the scope of the SEC’s authority and ability. Such a system, already under consideration by the ISB, would provide guidelines for auditor compensation packages that would mitigate the potential effects of client economic power. SEC support would give this process urgency and credibility.
In the heat of debate, let us not forget that we all pursue the same goal: high-quality, trustworthy financial information for the investing public. We should pay close attention to the system that supports the objectivity and integrity of CPAs. Chair Arthur Levitt, Chief Accountant Lynn Turner, the SEC commissioners, and the accounting profession all deserve great credit for venturing into this arena.
Executive Director, NYSSCPA
Publisher, The CPA Journal
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