IMA to Levitt: No More Rules, Please
The accountants who help run U.S. corporations are concerned that the SECs recent displeasure with the performance of certain companies audit committees may lead to rule-making overkill. Their apprehension stems from SEC Chairman Arthur Levitts comments last fall, criticizing a lack of meaningful disclosure in the current audit process and calling for changes at CPA firms, in corporate management and for audit committees. (See Arthur Levitt Addresses Illusions , JofA, Dec.98).
Included in Levitts nine-point call to action was a proposal for a blue-ribbon panel to recommend changes for audit committees. Unveiled in September 1998, the panel is a joint project of the New York Stock Exchange and National Association of Securities Dealers.
Richard Swanson, CMA, executive director of the Institute of Management Accountants, got a chance to respond to Levitts criticisms when he was given an opportunity to address the panel in December. In a discussion with the Journal , Swanson summarized his remarks and commented, from a management viewpoint, on the state of audit committees. The most important message I tried to get across to the panel was that we have to be careful about being too prescriptive, he told the Journal . The problem isnt a lack of regulation or guidelines but that, by adding more rules, you end up eliminating the flexibility and judgment needed by management, boards and audit committees.
Swanson said, in his opening comments to the panel, To a large extent, we believe that the recent spate of high-profile abuses that led to your committees charter resulted more from execution failures in management, board or audit committee oversight than from any lack of rules as to what the audit committees should be doing or how they should be staffed.
Swanson acknowledged that there may be some ineffective audit committees but said the problem was not widespread. He suggested the problem might be more common among companies below the Fortune 500 level than in larger corporations. Maybe audit committees really need more emphasis on staffing and training.
In his remarks to the panel, Swanson stressed that all board members should have a high level of business acumen. Finance and accounting experience was desirable for audit committee members, he said, but should not be required. The ability of a company to attract competent board members would be made more difficult if an explicit finance or accounting background was required.
Point by point
Swanson made a number of other points in his presentation to the panel:
- The IMA supports formal charters and vision/mission statements for audit committees.
- Audit committees should have the right to hire outside advisers but should not be required to do so.
- The audit committee can and should review financial statements, but it is not well-positioned to attest to their accuracy. That is, audit committees are not trained to duplicate the work of outside auditors.
- Management should help educate new committee members about accounting and reporting practices, but no formal training is necessary.
- Auditing literature is adequate as is; it is clear to auditors that their duty is to the shareholders.
More information about the IMA is available at its Web site www.imanet.org .