Three Voices, One Message
The appointment, direction, and work of the Public Company Accounting Oversight Board (PCOAB) will be a major focus of the accounting profession for the coming years. Former SEC Chief Accountant Lynn Turner shared with The CPA Journal the following letter to acting PCAOB Chair Charles Niemeier. What is remarkable about the letter is less its incisiveness, which one would expect from these gentlemen, than its demonstration of a consensus opinion from three past SEC chief accountants with different backgrounds and opinions. Walter P. Schuetze served as chief accountant from 1992 to 1995; Michael Sutton from 1995 to 1998; and Lynn Turner from 1998 to 2001.
Schuetze’s testimony before the U.S. Senate Committee on Banking,
Housing, and Urban Affairs, in February 2002, was published in the April 2002
CPA Journal. Former CPA Journal Editor-in-Chief James L. Craig Jr.’s interview
with then–SEC Chief Accountant Michael H. Sutton, “Preserving Auditor
Independence,” was published in December 1997. Editor-in-Chief Robert
H. Colson’s interview with then–SEC Chief Accountant Lynn Turner,
in November 2001, won an honor-able mention in the Max Block Outstanding Article of the Year Award program. All are accessible online at www.cpajournal.com.
December 31, 2002
Public Company Accounting
c/o Mr. Charles Niemeier
Securities and Exchange Commission
Institutions responsible for financial reporting in our capital markets are under intense scrutiny, reeling from the fallout of financial reporting scandals that have raised serious questions about the integrity of our financial reporting system and the quality and usefulness of information that is so critical to the success of our capital markets. Clearly, these cataclysmic events have changed the world’s view of a system that we have often proclaimed to be “the best in the world.”
Understandably, the damage to the reputation of our financial reporting system and its critical guardians has been so severe that the investing public has lost confidence and now demands real reforms.
The foundation upon which investor confidence is built is an audit of the financial statements by an independent third party, the independent auditor. However, the past several years have shown numerous cracks in this foundation. Investors have come to question the trust they formerly bestowed on auditors as they have seen restatements of financial statements aggregating billions of dollars,* and even the criminal indictment and subsequent conviction of a major international auditing firm.
In the past, the auditing profession has responded to challenges to its performance with arguments that, on the whole, audits are effective and that public expectations of the independent audit are unrealistic. As a result, a wide and deep chasm has developed between the expectations of the investing public and the product the independent auditor is delivering. This chasm has devoured both investors as they have sustained losses totaling hundreds of billions of dollars and members of the auditing profession as they have been sued when investor expectations have not been met.
The road to a more lasting resolution begins with full acknowledgement by the auditing profession and all other gatekeepers in our capital markets of the reality that seems so clear today. Failures in our financial reporting system are more than aberrations. They seriously undermine the confidence of investors and the public in the institutions that are supposed to protect them. They “poison the well.” Pleas that the vast majority of financial reports are of high quality, that most audits are effective, and that financial reporting failures are few miss the point. In our capital markets, a single catastrophic reporting failure is a disaster in which losses to investors and the public can be, and often are, overwhelming, wiping out decades of hard work, planning, and saving. Debates about how many failures are acceptable are counterproductive.
Now is the time to design and implement major reforms in the governance and oversight of independent audits of the financial statements of public companies. Auditing firms need to adopt reforms that embrace a role that is fully consistent with high public expectations, tackle fraudulent financial reporting, and accept and support the necessary regulatory processes that give comfort to investors and the public that the auditing profession is doing all that it can do to prevent future episodes of failed financial reporting. It is critical to the integrity of the U.S. capital markets that the public trust in independent auditors be restored.
To restore investor confidence, we believe that it is critical for the Public Company Accounting Oversight Board (PCAOB) to exercise strong leadership in implementing the Sarbanes-Oxley legislation. In particular we believe that the PCAOB should:
Now is the time to begin in earnest the process of rebuilding public trust, and it is important that the PCAOB take the lead in doing so. We believe that by taking the steps outlined above, the PCAOB can rebuild public trust. But make no mistake, if the efforts of the PCAOB fall short, and if the investing public continues to receive and rely on financial statements that fail to present fair and accurate information, the result for our capital markets and investors will continue to be devastating.
Each of us has served as the Chief Accountant to the Securities and Exchange Commission. We have been members of the auditing profession, have been in or led the professional groups in national offices of international accounting firms, have served as business executives or as consultants to or members of corporate boards, and have taught college students seeking to join the profession.
Please do not hesitate to contact us if we can be of further assistance.
Walter P. Schuetze
Michael H. Sutton
Lynn E. Turner
cc: Members of the Securities and Exchange Commission
*Financial Statement Restatements— Trends, Market Impacts, Regulatory Responses, and Remaining Challenges. United States General Accounting Office (GAO-03-138), October 2002. This report identifies 919 financial statement restatements announced by 845 companies from January 1, 1997, to June 30, 2002. It also states on page 4 that “From January 1997 through June 2002, about 10% of all listed companies announced at least one restatement.” A Study of Restatement Matters for the Five Years Ended December 31, 2001, published by the Huron Consulting Group, states “the number of restated financial statements filed by public companies has grown from approximately 120 in 1997 to 270 in the year 2001.”
The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.
Visit the new cpajournal.com.