In the Interest of the Investor

An Interview with Lynn Turner

By Robert H. Colson

In Brief

CPAs: Foundation for Transparent Financial Reporting

In the interim between Chairman Arthur Levitt’s retirement from the SEC and the appointment of new Chair Harvey Pitt, SEC Chief Accountant Lynn Turner sat down with CPA Journal Editor-in-Chief Bob Colson for a far-ranging discussion about recent SEC activities and the state of the accounting profession. Turner discussed his views regarding the myriad of recent issues that have challenged those interested in financial reporting. While he expressed concern that the accounting profession has not always rapidly addressed certain key issues, his regard for CPAs as the foundation for investor protection shone through his remarks. Turner stepped down from his position at the SEC effective August 16, 2001, and has joined the faculty of the department of accounting at Colorado State University.

The impact of the SEC’s chief accountant has rarely been felt as noticeably as when Lynn Turner has occupied that office. In part, his activism reflects the unique issues and developments during the bull market run of the 1990s, but it also reflects then-SEC Chairman Levitt’s concern for small investors and Turner’s own interests. The scope and significance of Turner’s impact have surfaced in recent staff accounting bulletins, the scope of the FASB agenda, the convergence of global accounting standards, the new auditor independence rules, and in countless speeches and interactions related to the significant and rapid changes occurring both in corporate accounting and within the large accounting firms.

Accounting Principles

The CPA Journal: The SEC has been very active in the area of accounting principles, issuing staff accounting bulletins [SAB] on revenue and expense recognition as well as materiality. Does this activism represent a continuing trend?
Lynn Turner: I really do not believe that the activity during the past few years indicates that the SEC will or should always accelerate the issuance of its own guidance and rulemaking in the accounting area. We were dealing with a set of situations that arose over a long period and reached a point that required action to protect investors. It was great to see many market participants—such as the stock exchanges, accounting firms and profession, state boards of accountancy, and others—join the Commission and play an active role in bringing about the necessary changes.

With regard to materiality, the issues eventually dealt with in SAB 99 were raised in the 1970s, but after 25 years there still wasn’t an adequate consensus in the private sector on which the standards setters could reasonably act. The SEC staff believed that something substantive had to be done. The white paper developed by the accounting firms, auditing standards from the private sector, and well-developed case law formed a sound basis for SAB 99. From what I have heard from the practitioners in the field, SAB 99 is working quite well. All of the authoritative guidance on materiality provides support for preparers and auditors that want to do the right thing when challenged with questionable accounting.

CPAJ: It sounds like you would have preferred a private sector standard on materiality. Does it bother you that the SEC had to step in?
Turner: SAB 99 does not bother me per se. However, the length of time it apparently takes the private sector to deal with some issues—very important issues—does bother me quite a bit. I truly believe that the best solutions for the problems arise in the private sector. As I indicated, we relied heavily on proposals from the private sector white paper in establishing the guidance in SAB 99. It would have been great if the accounting profession had adopted them in the form of a standard. More than 25 years after the issuance of a FASB discussion memorandum on the topic, however, they still had not. And we were most certainly seeing smoke starting to rise from the woodpile. One role of a regulator such as the SEC is to periodically exercise its authority when the private sector cannot reach a consensus in a timely fashion. In my heart, I believe it should be done in the private sector, but in this case, the public had waited long enough and we did not want the smoke to turn to flames.

The foundation of our capital system rests upon the credibility of financial statements. The materiality issues, and our actions, speak directly to protecting that credibility.

CPAJ: Does your concern about the timely resolution of major accounting issues extend to FASB?
Turner: Some do criticize FASB in terms of timeliness. However, as I view it, FASB has significant due process burdens that they must meet with very limited resources. Yes, some of the issues that FASB is currently dealing with—the determination of whether something is a liability or equity, accounting for business combinations, the question of whether to consolidate investments, and the valuation of financial instruments—have been unresolved issues for too long, some even before the days of the Accounting Principles Board. For example, in 1975 the SEC asked FASB to address the issue of when an item is to be reported as equity or as a liability. In 1985, the SEC staff asked FASB to address financial instruments, including special purpose entities. And in 1998, the SEC staff asked FASB to address concerns about liabilities such as restructuring charges.

The question is: How long should the SEC defer to a private standards setter before it acts on behalf of investors? Needless to say, the point of creating FASB was to bring together all the private sector groups interested in accounting principles. This has resulted in a better, but also unavoidably longer, process.

I believe that the ability of FASB to produce timely and relevant standards depends directly on the cooperation and input of its constituencies. Not all of the professional accounting firms, the corporate preparers, the users, and the regulators have contributed as much to FASB as they could. Most of the professional fellows at FASB have come from large accounting firms; only a few have come from corporations. Accounting firms and corporate preparers dominate the submission of exposure draft comment letters. Unfortunately, too many users of the FASB product, including institutional investors and their organizations, are just not players “at the table.” On the other hand, the major beneficiaries of FASB’s work are the stock exchanges, such as the NYSE and NASDAQ, and the institutional investors. I don’t believe that these user groups, with the notable exception of a certain few, such as Goldman Sachs and TIAA-CREF, have adequately supported FASB either intellectually, through comment letters, practice fellows and task force members, or financially. We need more active participation from these user groups now.

FASB has a tough job, as do other standards setters such as the ASB and AcSEC. Their job is made tougher when those groups that most directly represent the viewpoint of investors are not totally engaged. When investors are not well served, the SEC must become directly involved.

With respect to FASB, I think they must be challenged to improve their project management by establishing clear goals, objectives, and timetables and by holding people accountable, to the extent possible, for achieving these. As I have publicly stated, it would be helpful to use an “investor” report card on standards and require new standards that set forth the basic principles FASB wants preparers to follow and that explain how these principles meet the characteristics FASB has set forth in its conceptual framework. Finally, I think we need to be sure standards are operational and practical from the perspective of the average knowledgeable preparer and auditor in the field. I have often heard that too many standards are written by or for the national technical partners and cannot possibly be interpreted in the field. Some people believe that FASB and EITF have written some of the most complex rules known to man, such as the standard for beneficial conversion interests.

While all of this has some truth to it, too often the standards setter, whoever it is, deviates from the mission of serving society and the public interest and arrives at a compromise solution that obscures rather than accurately reflects the economics of the transactions. When that occurs, preparers and auditors all ultimately pay the price. I hope we will one day get smarter and learn from history and experience.

CPAJ: What are your thoughts about the FASB proposals on acquisitions and goodwill accounting?
Turner: Here’s what I think: The pooling method should be eliminated—it just does not reflect underlying economics. At this point, questions of goodwill and how to account for it arise. I have concluded that there are good, rational arguments for both major positions on goodwill accounting. On the one hand, in the context of the traditional accounting model, purchased goodwill does “waste out” if ongoing expenditures and investments are not made and, accordingly, should be amortized. On the other hand, common sense tells you that if the value of a business has not declined, you should not be charging a loss for a decline in value.

In terms of the general arguments, one is no more compelling conceptually than the other—they come at the issue from different perspectives. The SEC staff will have to look carefully at the comment letters to FASB and analyze the support and arguments for the various positions. Additional comment letters from financial statement users would be particularly helpful. If users are not interested in amortization numbers, but are interested in impairment numbers, then the standards setters would have some excellent guidance.

There is a very significant aspect of the FASB proposal on goodwill accounting that does concern me. The impairment test, as proposed, does not provide adequate implementation guidance to ensure comparable, consistent application. Comparability and consistency are two qualities FASB has said are necessary for quality financial reporting.

My concern is that the test is not tied directly to fair values and relies on impairment triggers similar to those in SFAS 121, a standard that I believe has not worked well. If impairment triggers are the sole safeguard, I am truly concerned that there will be a lot of intangibles, goodwill, and equity on the books that does not in fact exist and that the triggers will never be pulled. The savings and loan crisis in the late 1980s demonstrated how badly depositors could be burned when write-downs are not taken on impaired assets in a timely fashion. I am concerned that investors could be harmed by inflated goodwill and other intangible assets that have never been impaired because of flaws in the proposed standard. And just as damaging are the large write-offs done on an “overnight” basis with little or no advance notice to investors. We know that, in general, problems in business and declines in value occur over time. Yet the audited financial statements being issued today almost always show the decline in value within a short, 90-day interim financial reporting period. That’s just fiction, not reality. And it certainly calls into question the credibility of the financial statements and the audit and the accounting standards that perpetuated them.

An alternative approach, taken by the former U.K. Accounting Standards Board Chair Sir David Tweedie, does a much better job in dealing with goodwill impairment and goodwill amortization. I am not convinced that we need a solution with the label “Made in America.” Rather, we ought to look for the standard that best protects investors, wherever it is developed. I’ll be looking carefully at what Sir David does, now that he chairs the International Accounting Standards Board.

There is another piece of FASB’s goodwill proposal that concerns me deeply because it’s closely linked with other challenging accounting issues. I’m referring to guidance on how to systematically identify, value, and allocate the purchase price of an acquired company to intangible assets. Under the proposed standard on goodwill, absent more meaningful guidance on accounting for intangibles, there is a substantial risk that companies will begin to allocate the largest portion of their purchase price to nonamortizable intangibles, including goodwill, leaving other intangibles and even perhaps hard assets such as property, plant, and equipment unreported on the balance sheet. Accounting for intangibles will likely be the next battleground between standards setters, registrants, and regulators.

Again, it is critical to the credibility of financial statements that the accounting make economic sense to users. If not, then investors will certainly question whether private-sector standards can adequately provide consistent, comparable accounting. I think this is also why we have seen groups such as the ASB and AcSEC express their concerns to FASB. In fairness, however, let us see if over the next few years the final standards do result in better identification of intangibles and better recording of impairments and declines in values when they actually occur. If that is the final result, then FASB deserves tremendous kudos. The SEC will obviously be watching.

CPAJ: You refer to accounting standards beyond the scope of FASB. What is the significance of the globalization of capital markets to the SEC?
Turner: It’s highly significant. The SEC has worked diligently with regulators from other countries to reorganize the global accounting standards-setting body based on a model similar to that of the FAF/FASB. I think everyone hopes that it can deal effectively with the issues that we have already discussed.

At this time, the largest obstacle to high-quality transparent international financial reporting faced by regulators, standards setters, the capital markets, investors, and the accounting profession is the auditing and enforcement of either domestic or international accounting and auditing standards. It’s hard to overstate the interdependence of audits conducted in this country with those conducted on overseas affiliates, yet the audits vary significantly in quality around the world. In some respects, the global environment is still very similar to 1932, when the failure of a major Swedish match manufacturing company with foreign affiliates in the U.S. contributed to the loss of investors’ money and public confidence in corporate financial reporting, which led to the Pecora investigation, which in turn led to the Securities Acts of 1933 and 1934.

The Big Five and other global auditing firms have taken the initiative by creating the Forum for Firms at IFAC, which will bring a more consistent approach to auditing standards and peer review in the global arena. They have plans for a public oversight board that would oversee such efforts as international peer review. I will be watching those initiatives closely to determine whether they can ultimately serve the public’s interests or will solely serve the profession’s interests. For example, if the Big Five end up controlling the appointment of the members to the Forum for Firm’s POB, or if the firms rather than independent representatives of the public draft the POB charter, then I would not consider that body to be serving the public interest.

Auditing Standards

CPAJ: Are you satisfied with the progress to date on the O’Malley Panel’s recommendations on auditing standards?
Turner: The O’Malley Panel made a large number of very good recommendations that affected just about everyone connected to financial reporting and auditing. It is interesting to note in light of your question that Congressman John Dingell (D-Mich.) has also asked the GAO to update its 1996 report on the progress the accounting profession has made on the numerous recommendations that have been made over the years by groups such as the O’Malley Panel, the 1993 POB Report, the Treadway Commission, and the Cohen Commission. I believe it is very important that we have more timely progress reports from the accounting profession, the accounting and auditing standards setters, and the SEC. Both former Chairman Levitt and I have requested the POB report at least annually on the status of the implementation of the O’Malley Panel recommendations. At the same time, public reporting is not enough; we need substantive, timely implementation of the various recommendations that have been made by these various groups, without the constant prodding by regulators or Congress.

CPAJ: What specific topics do you think will be at the forefront in the next few years?
Let me pick on three areas in particular: inherent risk; the specificity of auditing standards; and the institutional organization and adequacy of the oversight of the auditing profession, in particular the Public Oversight Board.

Let me illustrate the first issue: Many of the recent revenue recognition problems facing the SEC staff have centered on various types of side-letter agreements. Frequently, their existence is discovered only when the SEC Enforcement Division takes testimony under oath during an investigation. Although everyone knows that side-letter agreements are a common problem, auditors that talk only with the accounting staff do not uncover their existence. You have to move your auditors out of the conference room in the finance office and into the marketing department to find side-letter agreements. A search for side-letter agreements should be part of the standard audit confirmation procedures. By requiring the identification of all significant terms, those set forth in side letters will be exposed to the auditor. It’s no longer possible to audit just the work of the accounting department: You have to devote more time to auditing all those areas outside finance and accounting, where there is significant risk of financial statement fraud.

You often hear the very real concern that auditing standards with greater specificity would create unwarranted legal problems for auditors. In my view, the fear of litigation exposure has generally won out over the more compelling need for standards that support auditing in the field and deter fraudulent reporting. The point that the O’Malley Panel made with respect to the ASB is that it’s time to place the protection of the investing public first. The question is whether an essentially private sector body has the will to take that public protection perspective. Too often, the public learns about audit failure through the media. Public confidence erodes under such a barrage.

The POB adopted a new charter earlier this year [see “New POB Charter,” The CPA Journal, July 2001] and is responding to the O’Malley panel recommendations by trying to expand its oversight responsibilities and bolster its independence from the AICPA. In this vein, I recently reread the 1978 congressional testimony of Sandy Burton regarding the governance of the profession and the role of the POB. Burton, who had just completed his term as SEC Chief Accountant, argued that a purely private sector approach would not be able to effectively accomplish the desired disciplinary end because of antitrust concerns. He instead suggested a self-regulatory body with congressional authority. Al Sommer, a former SEC commissioner and future POB chair, had argued that it would be better to first test the POB in the private sector.

Here we are, 23 years later, and Sandy’s concerns are just as true today. I’m not saying that the POB cannot succeed as is, but it is time for a realistic assessment of whether Congress needs to vest authority in the POB or some form of self-regulatory organization in order to provide the appropriate, timely discipline. The SEC’s limited resources and required focus on the more egregious fraud cases; the fact that the PEEC [Professional Ethics Executive Committee] has failed to investigate or take action when serious financial fraud occurred and investors suffered large losses; and the inherent conflicts of interest possessed by the professional members of the PEEC leave a significant void that requires action.

AICPA Initiatives

CPAJ: Some of the O’Malley Panel recommendations were aimed at the AICPA. What are your thoughts on the various recent AICPA initiatives?
Turner: Unfortunately, the first things that jump to my mind right now about the AICPA are their proposed global credential and CPA2Biz. I say “unfortunately,” because there are so many important professional issues that demand the type of public leadership the AICPA could provide, but they are devoting their time and resources elsewhere. Their global credential proposal concerns me on two counts. Whenever I ask accountants about XYZ, their responses are overwhelmingly negative. Even those CPAs that agree with its premises—global identity, technology advances, and strategic vision—believe this can be accomplished via the CPA rather than through another, competitive credential. A number of state societies and international accounting organizations have decided not to support the proposal. Certainly, my experience in the global regulatory environment has convinced me that CPAs are well known and highly regarded internationally. The whole situation makes me wonder if the AICPA leadership has lost touch with their members on this issue.

In addition, the AICPA has not fully appreciated the impact on public perception when they become the “Institute of CPAs and Consultants.” Regardless of how they characterize the global credential, the public will likely view it as tainting the self-regulatory aspects of CPAs’ work, including statutory responsibilities. It may not occur immediately. In short order, however, it would simply be incompatible with the public interest for an organization comprising both CPAs and consultants to be the principal self-regulatory body for CPAs.

One of the things I learned during the debates on auditor independence is that the public views the auditor-consultant relationship differently than the profession does. It may not happen immediately, but soon it will be apparent that self-regulation by an institute where unregulated consultants outnumber CPAs is not compatible with the public interest. It is very hard to serve two masters.

CPAJ: What kinds of public leadership activities should the AICPA undertake?
Turner: The AICPA could do a lot more in communicating with the public, not only about what services CPA firms offer but about the solutions CPAs can offer to public problems. Right now, there is a great need for the AICPA to communicate effectively with the public about basic issues related to the public’s trust and confidence in financial statements. As it hears daily about accounting irregularities, it is important for the public to hear that the accounting profession is concerned about current reporting issues and, more importantly, that it is taking specific substantive and concrete actions to do something positive. Accounting professionals and their institutions must be publicly engaged in bringing these issues to light. Otherwise, the accounting profession will lose the trust and confidence of the public and become nothing more than another group of consultants. And I believe the AICPA does have some positive things to say about its efforts.

Recent AICPA initiatives have centered on the global credential and the for-profit portal. Recent initiatives on accounting standards, auditing standards, and independence standards—the core of the CPA profession—have come from outside the profession. I’m waiting for leadership from within the accounting profession to tell the public that they have heard investors’ concerns, that they have a plan for dealing with them, and that CPAs will work to accomplish something on behalf of the public. Instead, we have the public advocate for the accounting profession promoting an unregulated consulting credential and an e-commerce venture.

Auditor Independence

CPAJ: Your tenure at the SEC will be linked with the rulemaking on auditor independence. What did you find most interesting about the rulemaking, and were you satisfied with the final rule?
Turner: First, I was truly pleased that we were able to do something positive about the family and financial interest rules. The old ones were stagnant and needed revision. Of course, everyone was in accord about those provisions of the rulemaking.

The conflict with the Big Five and the AICPA over the provision of IT and internal audit services were really the focal points of everyone’s concern, including mine. Essentially, we were interested in establishing a clear line between CPA firms’ legitimate consulting functions and their encroachment on management’s role. Our interest was to make certain that management exercise their decision-making responsibility rather than delegate it to outside auditors. It would be inappropriate for the external auditor to perform outsourced IT or internal audit while management signs a letter accepting full responsibility for the auditor’s actions and decisions. Management must have its own expertise in such critical areas and actually make the important decisions rather than accept responsibility for decisions made by others.

I’m satisfied with where we ended up. In the final analysis, the firms and profession, including the AICPA, took a highly responsible position, offered helpful comments in good faith, and we worked out rules that dealt with our principal concerns.

During the debate, the firms repeatedly asked us to hold off on rulemaking on the consulting activities until we had economic data to support our position. Commissioner [Isaac C.] Hunt [Jr.] wrote each of the Big Five requesting the type of fee breakdown data that we eventually required to be disclosed in proxy statements. None produced data. I and just about everyone I’ve talked with have been very surprised by the proportion of nonaudit fees that are now being reported in the proxy statements. I truly believed that the audit fee on average would be more than 50% of the total. I was wrong. It’s much less. Moreover, in most cases, the fees reported in the “other” non-IT category are by far the largest. Even after considering that the audit figures reflect just that—the fees for the public function of auditing and reviewing financial statements—there still remains a very large difference from what I anticipated.

CPAJ: Some commentators have suggested that the SEC’s rulemaking preempted the Independence Standards Board, undermining its relevance and credibility. Did the SEC lose confidence in the ISB?
Turner: Let me first say that, with very few exceptions, the rule on auditor independence reflected work that the ISB had already done.

As the SEC discussed in the auditor independence proposing release, back in 1998 several of the large accounting firms were taking an in-depth look at their business structures and organizations. Some of them reached the business decision to unlock the value of their consulting businesses by either selling them or spinning them off into separate companies. During late summer in 1998, some of the firms came to the SEC and discussed their concerns about auditor independence during the period that it would take to divest their consulting businesses. Eventually, these discussions led to the issuance of “no-action” letters that were posted on the SEC’s website and cited in the SEC’s proposing and adopting releases.

The ISB was at this time deliberating the issues surrounding CPA firm independence and the planned divestitures of consulting businesses. In early 1999, the SEC staff sent the ISB a letter that identified several issues, including our thoughts on how alternative practice structures and the scope of practice affect auditor independence. Even though the SEC staff had asked the ISB to address the divestiture issue, some firms approached us to discuss their specific plans because they could not wait for the ISB. These transactions are briefly described in the SEC’s adopting release. I can certainly appreciate that the firms wanted to move ahead with legitimate business transactions.

Subsequently, some ISB members asked to discuss the independence and consulting issues with the SEC staff and chairman. During one of our meetings, all four public members of the ISB and the POB chair requested that the SEC undertake rulemaking on the independence issue as it related to scope of services.

The ISB’s public members restated these views on two occasions. The first was in May 2000. I had announced earlier [in January 2000] that we would be undertaking rulemaking to address the numerous ways in which our rules about family relationships and financial interests had become obsolete. It soon became apparent that we should also add the scope of service issues. All four public members of the ISB attended Chairman Levitt’s May 2000 speech. When questioned as to why the SEC chose to undertake rulemaking rather than have the ISB deal with it through standards, Chairman Levitt asked ISB Chair William Allen to respond. Allen indicated that the ISB had asked the SEC to engage in rulemaking because of the critical importance of auditor independence in the public policy arena.

The second time the public ISB members publicly confirmed their request for SEC rulemaking occurred during their testimony on the Commission’s auditor independence rules. Testifying before the SEC, each public member stated that he believed the public policy aspects of the issues transcended the ISB and the accounting profession, and that the scope of service issues were so important to investors that it was appropriate for the federal regulator to engage in rulemaking.

We ended up using about 95% of what the ISB had already done in our rules. Thank goodness we had the benefit of their efforts and deliberations. We went further in the area of quality control than the ISB had contemplated, but we looked to them for counsel and input during the rulemaking process. In light of the attention our proposed rules have drawn to independence, I must say that the public members of the ISB were astute in their assessment of the public policy dimensions. Not only was auditor independence debated intensely here in Washington, but also throughout the United States, North America, Europe, and other areas of the world. It became one of the most significant issues the profession has worked on in some time.

The ISB’s one shortcoming has been its exposure draft of a conceptual framework, which is based on a “threats and safeguards” approach. In its release, the SEC rejected such an approach for audits of all public companies, including international filers. We have seen hundreds, if not thousands, of violations of the independence rules. We have seen the firms’ national office staff try to justify, often retrospectively, why a violation of the rules could not have impaired independence. A recent peer review comment letter on one of the major firms noted a number of questionable calls on independence issues. The ISB approach would, in reality, have left the fox guarding the henhouse and investors unprotected. I don’t see how any regulator could accept such an approach.

CPAJ: The SEC rules on auditor independence have been criticized for not dealing more directly with an auditor’s economic dependence on a client. Members of the NYSSCPA senior technical committees included in their comments to the SEC a discussion of the pressures to “make clients happy.” Do you believe the SEC rules could have been crafted to address the economic dependence issue more directly?
Turner: I realize that concerns about the economic dependence of auditors on their clients are valid and real. Let me talk about the context the issues must be placed in and about what the SEC has done about the economic dependence issue. Congress debated the economic relationship between client and auditor at the time the SEC was initially created and concluded that, from a purely statutory perspective, it is appropriate that clients retain and pay their independent auditor. Congress has made it clear that it believes that the economic dependence issue should be handled through the regulation of auditor independence rather than through the compensation mechanism. In this context, the SEC has been empowered to safeguard auditor independence.

As a practical matter, the SEC has always cooperated closely with the private sector and even looked to it for guidance. To date, no one has suggested a practical, detailed regulatory solution to the problem of auditor independence being compromised in certain situations because of economic dependence on a client. In other words, the SEC’s job is to regulate independence and to provide incentives for standards that ensure independence, including bringing enforcement cases when necessary. It would be up to Congress, however, to address the fundamental economic arrangement between auditors and clients.

Nevertheless, the SEC has indirectly addressed the economic dependence issue by putting limitations on the provision of those services that would give rise to the lack of independence in fact or appearance and by requiring the disclosure of audit and nonaudit fees in the proxy statements of registrants. Investors, as well as other members of the public, can draw their own conclusions from the disclosures. The SEC is fundamentally based on a disclosure system whose value has been demonstrated over the years by the success of the U.S. capital markets. Armed with information, investors can speak up to their corporate audit committees if they see things they like or dislike about the economics of auditing. If investors believe that their auditors are jeopardizing independence by providing too many nonaudit services, then they should inform their corporate audit committee. If they think the auditors are doing too little, they should speak up, too. I am interested in seeing if audit committees or investors determine, based on newly available information, that some services or fees do give rise to a lack of independence on the part of the auditor.

Change at the SEC

CPAJ: Does the appointment of Harvey Pitt as SEC Chairman mean that there will be many changes? What can we expect on the horizon from the SEC?
Turner: Certainly, the Chairman’s agenda will affect the staff’s work on broader policy matters. But much of the day-to-day work on registrant matters and standards-setting oversight are not impacted. Some chairmen are not very interested in the accounting and auditing side of the SEC. Others become very interested, as Chairman Levitt was, usually because something happens to bring accounting and auditing to the forefront.

I have worked for three SEC chairmen and each in his own way has risen to respond to the issues that came before him. In that sense, the SEC has been both a reactive and proactive agency. When I returned to the SEC as chief accountant in 1998, auditor independence was certainly not a topic I expected to spend as much time on as I eventually did. Auditor independence and scope of services came up because of the consulting divestiture plans of the large accounting firms and widespread noncompliance with the existing rules. At the same time, we had to address the increase in inappropriate earnings management because of concerns from the public and the SEC staff, as well as from surveys which indicated that too many companies were hooked on it as a way to meet expectations and achieve results. Globalization has come to the forefront because so many foreign companies want to access the cash and liquidity in the American capital markets.

Certainly, one of the biggest issues on the horizon is the quality of international audits. In my opinion, accounting standards are not rigorously enforced in the international audits of global and foreign companies. Serious problems exist with current quality control, auditing, and enforcement regulatory schemes, as well as infrastructure, in many countries, including some larger countries. The public sector—international financial institutions, banking and securities regulators, and those that have oversight over the accounting profession—must speak up and do a better job of creating model systems of sufficient quality. They will also need to provide muscle behind the firms’ efforts to bring about change in countries that have shown a reluctance to make the necessary changes.

The AICPA, a number of the accounting firms, and the Business Round Table have clearly expressed in their comment letters that, until the quality of international audits improves, the SEC should not reduce our reconciliation requirements. I personally strongly agree with their perspective. Certainly, some foreign countries understand that they must change before their companies and economies can gain the benefits of the world’s capital markets. At the same time, private sector initiatives, such as IFAC’s Forum for Firms, could make a positive contribution—but only if they are driven by the desire to serve the public’s interests.

Likewise, financial accounting standards setters face challenges ahead, such as accounting for the fair valuation of financial instruments, accounting and reporting for business combinations and intangibles, and enhancing our current set of financial disclosures. The AICPA has developed some good guidance for consultants in the area of fair value for assets related to mergers and acquisitions. Conferences, CPE sessions, and software products cover valuation techniques for many types of business assets. It’s time to develop some of this technical material on the accounting, financial reporting, and auditing side.

In the past few years I have come to appreciate that the SEC is not really about who the chairman or who the chief accountant is. It is about protecting the investor by providing relevant and transparent information about the finances of public companies. It is about building public confidence in the integrity of the financial reporting and capital market system in this country. Those individuals that happen to occupy the offices of the SEC at any given time have always shown a remarkable ability to rise to whatever challenges come before them.

Looking Back and Looking Forward

CPAJ: What advice would you give your successor at the SEC?
Turner: The accounting profession’s customer, the investing public, makes the final judgment on the quality of its product. Financial reporting is the foundation upon which the capital markets are built. Reporting transparent information that reflects the reality of economic events affecting a company allows investors to make informed, timely decisions as to allocation of their capital among available investment opportunities. When our product fails to meet the needs of our customers, the accounting profession, as would any business, pays a heavy price.

With that in mind, this position is a wonderful opportunity to work with many constituents on improving the quality of financial reporting. Nevertheless, the product development roadmap must be laid out to meet the needs of investors. When faced with the difficult decisions that have faced each chief accountant, you must ask yourself one question: Is this the right answer for investors?

CPAJ: What would you do differently?
Turner: My only real regrets are that we did not get out the final releases on disclosures of loss accruals and on property, plant, and equipment. I also would have liked to have completed a release in response to the FEI request that we require management reports on internal controls, as well as a concept release on enhancing disclosures in our filings with information such as key performance indicators. The staff continues to do some work on these issues, however, and they could be moved along quickly.

CPAJ: What is the scope of your new position?
Turner: I will be teaching graduate students at Colorado State University, which will give me the chance to pass on to the young, upcoming members of the profession many of the things I have learned from my experiences and from my outstanding mentors. I will also be the director of the university’s center for quality financial reporting, where I intend to devote a lot of time to many of the issues that I have been working on in recent years. I hope that this will include working on educational programs and newsletters for audit committees, addressing international issues, and performing research relevant to improving the quality of financial reporting.