The Public’s Profession: Remarks by SEC Chairman Arthur Levitt at the Fall AICPA Council Meeting

For a commentary and analysis of Chairman Levitt’s remarks, see Robert Colson’s column on page 80. The CPA Journal would like to thank the SEC for allowing it to publish this speech.

My appearance here today is special to me for a number of reasons. While I’ve addressed the Institute’s annual Washington Conference a number of times in the past, I’ve never had the opportunity to address the Council, whose membership includes accountants from across America, practitioners like Stuart Webster from Wyoming, Robert Chrysler Jr. from Montana, Brenda Cutwright from Hawaii, Charles Rigden from Alaska, and Quinton Booker from Mississippi.

While it may come as a surprise to some of you, I’m here today as a friend, not a foe. As one of this profession’s greatest admirers, I’m here to celebrate the importance of a profession that has grown in stature alongside the great American economy. John Carey, in his seminal book The Rise of the Accounting Profession, wrote that in 1850, only 14 accountants practiced in New York, four in Philadelphia, and just one in Chicago. Today, the AICPA boasts a membership of more than 330,000 CPAs.

Yet about the time accounting became a “profession” in its own right, the American economy was transitioning into the Industrial Age. Now, nearly 150 years later with the profession at a crossroads, we find ourselves amidst another grand transformation: the rise of the Information Age. What was true then is no less true today: the timeless value of credibility, objectivity, and independence; the enduring significance of integrity.

My father, for more than two decades, was responsible for the protection and integrity of New York State’s public retirement fund. My mother was a public school teacher, whose attitude and outlook were very much molded by the Great Depression. Technically, my father worked for my mother, a fact she was never shy to point out. But both ingrained in me a deep sense of stewardship for the public interest. From them, my passion for independence, both in thought and action, was born. And my experiences throughout my life, particularly at the Commission, have given it even greater life.

Today, we have within our collective grasp an opportunity to embrace a renewed commitment to the public trust. Considering what’s at stake, I think it’s time we take a moment to speak plainly and openly about the challenges before us. It’s time we start discussing the fundamental and common goals of the Commission, the AICPA, and the profession at large. It’s time we talk pointedly and constructively about what we can do to build an even stronger covenant of trust with America’s investors.

I know people on both sides of the issue hold earnest and passionate views about independence, an issue that both the SEC and the profession have struggled with for decades. But as we move forward in addressing this matter and others, every step we take must be through a partnership, grounded in understanding, imbued with integrity, and bound by trust. It’s what we do together—not alone—from this point forward that will set an enduring course for the future of this great profession.

The Special Franchise of the Small Practitioner

As many of you know, the large accounting firms are not the only voice of this profession. America’s smaller firms and practitioners make up a significant number of today’s practicing CPAs, and continue to do the profession proud.

A few weeks ago, at one of the Commission’s public hearings on our independence rule proposal, Gary Shamis, an accountant in a smaller firm, testified about his deep concerns that the proposal might “trickle down” and impact the small practitioner. He expressed concern that he might somehow be prohibited from providing many of the services he’s been offering his clients for years. While that certainly isn’t the case, we took his concerns to heart. That’s why in recent weeks, I’ve spent a great deal of time talking with this country’s small public accountants, listening to their stories, discussing their day-to-day challenges, addressing specifically their concerns for the future. And after each meeting, I walk away not only with a deeper understanding, but with a sense of utter amazement. The obstacles and challenges that many of them face each day are weathered with an abiding commitment to their work and the communities they serve.

They are, as I have said in the past, the very soul of America’s accounting profession. America’s small, independent practitioners are active on the boards of cities, communities, and neighborhoods; they volunteer their services to local public and nonprofit organizations; they perform the audits for public schools and often prepare the town financials. People like Larry Gelfond, a member of the Colorado State Board of Accountancy and partner in a smaller firm, who also serves as chair of the National Jewish Medical and Research Center in Denver.

The sole practitioner is the very glue of the local financial community. His or her rigorous work, tireless scrutiny, keen judgment, dependable and trusted advice provide both the foundation and springboard for greater opportunity. One accountant, Randy Sweeten, whom I recently met in Dallas, told me he worked in a little town on the U.S.–Mexican border, an area of high unemployment and difficult times. His clients were small businessmen and a local community college. That town depended, literally depended, on his work.

But the small accountant sometimes must honor an even deeper and closer franchise, one which binds a business community through professionalism and steadfast integrity. Often the CPA serves clients who are colleagues or close friends: Their children go to the same schools, they attend the same churches and synagogues, they serve on the PTA together. And when it comes time to prepare and certify the financials that give a local businessman credibility in the eyes of his community, it’s the CPA who declares with his or her stamp: The numbers speak the truth.

And really, that’s where it all begins when we talk about cultivating the finest American companies and markets in the world. The small practitioner helps build businesses from the ground up. They establish the very bedrock on which today’s emerging companies will one day grow into tomorrow’s global leaders. Small accountants serve on the boards of start-up incubators, donating hundreds of hours to help new ventures take root. Take, for instance, Tom Brock in Longmont, Colorado. His own project was recently named the national “Incubator of the Year.” Simply put, the small practitioner is often the very first step in helping others achieve the American dream. And this, in turn, has helped build a better country for all of us.

A Profession Like No Other

The auditing profession is, in my mind, one of the most noble in our marketplace. At the very core of the auditor’s mandate is preserving the sanctity and purity of the numbers. In that sense, it is also one of the most elegant. But its elegance does not overshadow what is a hard, and sometimes thankless, job.

As part of a private profession with a public mandate, you face unique pressures and challenges that, every day, demand your careful attention and impeccable judgment. And whether you are an accountant in a large firm, or a sole practitioner in a small town, every public accountant in America has been handed the same precious franchise, granted its special privileges, and charged with its care.

But it’s a franchise that demands you defend and protect, above all else, the public trust; a franchise that asks you to stand firm—even under the weight of management’s pressure to “see things their way.” But as you well know, the role of the accountant is sublimely unique. The watchword of many in business is “the customer is always right.” But in what other profession is it one’s duty to tell the customer when he’s wrong? What other profession is enshrined in our nation’s securities laws to serve no interest but the public’s? What other profession so directly holds the key to public confidence: the life force of our markets?

In this vein, I caution the profession against taking actions that may have the potential to negatively impact or subordinate the credibility, integrity, and, most important, the respect the public has for three letters, CPA. Today, the mission and purpose of the CPA has never been more important.

Like never before, companies are under increasing pressure to “make their numbers” or risk losing millions of dollars in their stock value, simply because they are a penny or two shy of Wall Street earnings expectations. Auditors are sometimes encouraged to “go easy” on a judgment call, or “look the other way” when it comes to accounting sleight of hand, all in the name of boosting revenues. In this environment of conflicting interests, the investing public relies on accountants to stay true to their fiduciary duty, to never lose sight of the precious franchise that is theirs to guard so vigilantly.

Unfortunately, it has become clear that the perceived value of the audit is being put at risk. As the O’Malley Panel concluded, leaders of the largest accounting firms “treat the audit negatively—like a commodity.” Should we be surprised that some in the profession claim they cannot recruit the best and brightest talent from our universities when they talk of the audit as if it were little more than a skill set or a business line?

For these and other reasons, the Commission is fiercely committed to ensuring that this great profession, and the public trust it is charged to preserve, will not be compromised by arrangements or circumstances that threaten the auditor’s integrity and independence.

But regardless of measures taken, the Commission cannot do it alone. Even if a government agency were to construct the most elaborate regulatory regime imaginable, it could never be as effective as what would be achieved through a shared mission with the profession. And today, we are making important progress toward a more enduring professionwide approach to working through our differences and confronting the issues at hand.

Since the Commission’s independence rulemaking initiative was proposed, two firms, PricewaterhouseCoopers, led by Jim Schiro, and Ernst & Young, headed by Phil Laskaway, have engaged in a meaningful dialogue with the Commission staff and come up with thoughtful and constructive comments which have been extremely useful to the Commission in thinking through these issues.

And in recent weeks, I’ve sensed a new willingness by those in the profession who have expressed serious concern about the Commission’s rulemaking to come to the table and share with us the detail and depth of their concerns, willingness to talk constructively so that we can craft rules that will stand the test of time and serve our nation’s markets and the interests of investors. I am optimistic that if we can continue to stay at the table, we will not only make progress toward long-overdue modernization, we will take the first steps toward mending and renewing the relationship between the Commission, the AICPA, and the profession.

Renewing a Partnership

The truth is, we will always have some differences. That’s just a fact. In many respects, healthy tension is a good thing. Unfortunately, that’s not been the case in recent years. What must bridge our discord and bring us closer, both in purpose and in practice, is a renewed commitment—forged in a collective mandate—to furthering the interests of America’s investors.

Toward this end, we must open the channels of communication between the Commission and the AICPA and work toward a relationship in which discussions are regular and constructive, where cooperation and mutual respect are never in debate.

These past few months, perhaps both of us need to consider whether we have given the other the benefit of the doubt. The sooner we appreciate how fundamentally we agree on long-term ideals—high-quality financial reporting, the auditor’s franchise, investor confidence—the better our relationship, and ultimately this profession, will be.

I want to acknowledge the important work the AICPA has done over the years, mostly in conjunction with this Commission. You have been a strong supporter of the independence of the FASB. You have advocated that a “new” international standards-setter must also be independent, comprised of the brightest minds, and overseen by a strong board. You’ve been a champion for empowered audit committees, standing behind the findings of the Blue Ribbon Panel, and one of the first to publicly support them.

You have provided valuable guidance to improve revenue recognition practices under the leadership of Debbie Lambert, who chaired the Auditing Standards Board of the AICPA. Your early efforts on materiality abuses laid the groundwork for SAB 99, and you’ve begun important work on loss accruals for “Big Bath” charges. The Commission and the AICPA work in partnership to provide guidance to auditors on “hot topics” in audit risk alerts. And I’d like to explore how we can work together to create more enhanced quality review programs for CPAs—something the AICPA has supported for years.

All of these efforts have improved the quality and integrity of financial reporting. But today, I’m going to ask you for more. And I’m going to tell you what you can expect from the Commission in return. While everything we do should promote an end game, none of our work must ever be considered to have an ending point. We must subscribe to a philosophy of continuous improvement: financial reporting that every day better serves America’s investors, our capital markets, and the public interest.

You can expect the Commission to help you address the difficulties that arise in serving the interests of large firms and small practitioners alike; to be active in those areas where you strive to bring even greater luster to the auditor’s franchise and the public interest. More specifically, you can expect the Commission to be responsive to the changing nature of business, the emerging Information Age, and how these impact our financial reporting framework.

Now, some have argued that the credibility of financial information in today’s markets, with companies trading at incredible multiples, has been lost. But consider the views of Jack Bogle, founder of Vanguard, when he states, “While that seemingly omnipotent master ‘the stock market’ may be telling the profession that the … model of reporting doesn’t work anymore, please don’t write off too hastily the possibility that the model may be right and the market wrong.”

Without question, we must continually improve the type of information provided to investors, and give them the tools to understand and act on today’s drivers of value. Last year, I asked Dean Garten of the Yale School of Management to assemble a group of business and accounting leaders to put forth ideas on how this common goal might be accomplished. We will soon have the opportunity to review their recommendations. More recently, I have asked the Commission staff to consider how our disclosure model can better provide useful information to investors. We have received some input on this issue, including those from your former chair. But frankly, I would like to see more from the AICPA in this important area.

I would like to see you develop valuation models that result in consistent, comparable, and fair values of assets and liabilities. I would like to see you hone specific but plain-English definitions for the types of information you believe should be included in public disclosure. I would like to see you take your XBRL project a step further, providing account classifications for companies in common industries. In short, I challenge you to turn all of this data into meaningful information for investors.

More broadly, I ask the AICPA to incorporate the interest of investors in a strong and vibrant self-regulatory framework. When your own self-regulatory body is challenged by the interests of a few, I ask you to rise up and stand firmly on the side of meaningful oversight. Visible, effective, and responsive self-regulation must be as synonymous with the AICPA as gambling is with Las Vegas. There is nothing else, in my opinion, that the Institute can do more to ensure the health and vibrancy of this profession than send a message which says the public’s interest—and none other—reigns supreme.

In addition, I believe that the AICPA should adopt the POB charter proposed by the Panel on Audit Effectiveness—with no-strings-attached funding—and not a version that fails to embrace total and unequivocal independent oversight. By passing on this opportunity, you pass on a chance to create a true beacon of the public trust.

The AICPA also should adopt all of the recommendations made by the O’Malley Panel, beginning with improved U.S. auditing standards. This includes fraud prevention measures. For the first time ever, the CEO of a Big Five firm, Jim Schiro, supported proposals to identify fraud, stating “forensic-type procedures on every audit to enhance the prospects of detecting material financial statement fraud is fundamentally sound and, I might add, long overdue.” And I encourage your continued support of strong internal controls. I have asked the Commission staff to prepare a rule proposal that addresses management’s reports on internal controls, bringing all three elements—auditors, audit committees, and management—into the reporting process.

Finally, I ask the AICPA to nominate a majority of the members on the Professional Ethics Executives Committee, the disciplinary body and ethics standards setter within the AICPA, from outside the profession. And I ask you to consider whether your own board should have a majority of public representatives as well. While I am not suggesting that the AICPA’s board is not functioning well, I am suggesting that broader public membership on any organization—particularly one with public responsibilities—sustains lasting confidence.

Conclusion

I have an abiding and unquenchable faith in America’s capital markets and the institutions and public confidence that sustain them. Over the years, broad investor confidence has been bolstered by a recognition by both regulator and regulated that disclosure and fairness are essential to nurturing this truly unique character of our economy.

Those of us who have experienced both exuberant and depressed markets and watched scandal, world events, and acts of God resonate throughout our economy and in our marketplace understand well that our society’s buoyancy, resiliency, and adaptability to change are born from the public’s belief, in both appearance and fact, in values like justice, honor, fairness, and transparency. It’s not so much an issue of right or wrong. Rather, we are dealing with subtle but timeless principles that must sustain a heritage of trust, without burdening the private sector with regulation that might dampen innovation or the creative spirit that is the hallmark of this great nation.

It is my intention to work with you, and with the profession, to craft rules that, five years from now, we will be able to look back on and honestly say, “Our efforts, our patience, and our vision resulted in a consensus solution that will both nourish public confidence and lay a foundation for public trust in years and decades to come.”

But more important than one organization or any one rule, it is the people of this profession who weave the fabric of trust and integrity—people like Dom Tarantino who embody the profession—people who give life to the concepts and ideals of a profession that demands and expects so much from its members.

One generation of accountants passes on the light of independence to the next. That light sustains the profession’s life through a culture of integrity, a mission of objectivity, and an ethic of responsibility. You have been handed a precious legacy. What you do with it will determine the future of this profession. It is a heavy burden but an awesome privilege. Lift the light far and wide for the next generation of accountants to see. Lift the light far and wide for America’s investors to see. And, lift the light far and wide not just as a profession, but as individuals, committed, passionate, and resolute to a fidelity that is as much about the profession’s past as it is about the profession’s future. q

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