These are not just idle words. Our
profession has a more than 100-year history based on
public trust and integrity. Each year more than
15,000 audits of publicly traded companies are
completed successfully without restatement or
allegations of impropriety. Thousands more audits of
private companies and business enterprises—from
hospitals, charities and youth groups to the newest
businesses—are performed successfully by our
members. Collectively these audits serve as the
bedrock of the U.S. economy. Unprecedented
disasters, however, sometimes call for
unprecedented actions. We want to make it
unmistakably clear that not only does our
profession have zero tolerance for any CPA who
does not adhere to the rules but, in the wake of
the Enron collapse, is prepared for unprecedented
change. Our history is marked by a willingness and
commitment to respond to key market and economic
events and to make the changes required to
maintain public confidence in both our profession
and the securities markets. Twenty-five years ago
the profession created the SEC practice section
(SECPS) to improve accounting and auditing
practices before the SEC. We also instituted peer
review as a means of ensuring the uniform and
consistent application of the profession’s high
standards to all clients. Most recently in 2000
the Public Oversight Board’s Panel on Audit
Effectiveness—more commonly referred to as the
“O’Malley Panel”—recognized that the profession
and the quality of its audits were fundamentally
sound although certain improvements clearly were
needed. The panel’s recommendations are currently
being implemented. In 1996 the General
Accounting Office issued a comprehensive,
two-volume report titled The Accounting
Profession—Major Issues: Progress and Concerns.
It detailed the actions and progress the
accounting profession had made during the previous
two decades to improve accounting and auditing
standards and the performance of independent
audits. The report expressed support for the
quality control programs we had implemented to
ensure that professional standards were being met
and commended the profession for the steps it had
taken to strengthen auditor independence, such as
the AICPA’s revision of its code of ethics. “Most
firms now have effective quality control programs
to ensure adherence with professional standards,”
it concluded. That said, we have never
been content to rest on our laurels but have
always made continuous, incremental improvements.
The profession’s self-regulatory framework is now
about 25 years old. Although it has been
continually enhanced and improved by the
profession since its inception, the Enron collapse
has made it clear to everyone that a substantial
overhaul and modernization are needed. The
public’s confidence has clearly been shaken. We
know that in order to restore that confidence in
the auditing profession, our self-regulatory
process must be further strengthened for the
future. We are prepared to do just that.
The AICPA is actively engaged in supporting and
implementing reforms on a number of fronts in an
effort to restore public confidence in the capital
markets. Some of our current efforts represent new
initiatives. Many more are an acceleration of
efforts that have been under way since well before
the Enron collapse.
SCOPE OF SERVICE RESTRICTIONS
In some instances the
AICPA has embraced reform proposals that it
previously had opposed, such as some scope of
service restrictions for auditors of public
companies. The largest five CPA firms in the
United States have recently agreed to impose
unprecedented restrictions on the consulting
services they offer to their audit clients, and
Congress is currently considering federal
legislation along these same lines. The AICPA has
decided not to oppose these changes as a necessary
step toward restoring public trust in CPA firms,
despite the fact that it continues to believe that
nonaudit consulting services do not compromise a
CPA firm’s objectivity or independence as long as
the required safeguards imbedded in the Code of
Professional Conduct are followed. Studies have
continually concluded that providing certain
nonaudit services helps both the client and
auditor understand the economic realities of the
company and lays the groundwork for a better
audit. The POB’s Panel on Audit
Effectiveness stated in its August 31, 2000,
report that its “reviewers did not identify any
instances in which providing nonaudit services had
a negative effect on audit effectiveness.” Going
even further, the panel stated that “on about a
quarter of the engagements in which nonaudit
services had been provided, the … reviewers
concluded that those services had a positive
impact on the effectiveness of the audit.” Study
after study conducted by those independent of the
profession has expressed the same conclusion. At
the same time, however, we recognize that the
public and Congress are demanding meaningful
change, and this is one area where the profession
can act unilaterally to help restore public
confidence.
NEW SEC PROPOSALS
While specific
details haven’t yet been announced, SEC Chairman
Harvey Pitt recently proposed to create two new
boards to oversee auditors of publicly held
companies. They would operate independently from
the AICPA and be made up of a majority of public
members. A disciplinary board would be
created to accelerate the investigation of alleged
public-company audit failures and to provide more
transparency. Additionally, the current program of
firm-on-firm triennial peer reviews for the
largest CPA firms would be replaced by an annual
quality-monitoring process administered by a new
organization, again with a majority of public
members and again outside the profession’s
existing structure. This new body would have
expanded authority to monitor compliance with SEC
practice standards and to refer instances of
noncompliance to the new disciplinary board.
The AICPA is committed to working with both the
SEC and Congress to make Chairman Pitt’s proposal
a reality. We believe, however, that these new
regulatory boards are appropriate only for
auditors of financial statements of SEC
registrants, not for auditors of the financial
statements of privately held companies.
MANY OTHER REFORMS NEEDED
The AICPA also
strongly believes there are a number of additional
reforms that need to be enacted in order to deter
accounting abuses and to help investors make
better informed investment decisions. These
include
Modernizing our current reporting and
financial disclosure model to supplement
historical financial statements.
Revising current accounting rules for
special purpose entities, such as those Enron
used.
Requiring additional disclosures in
company filings with the SEC, including
management’s discussion and analysis (MD&A).
Requiring reporting on a company’s
internal control system to evaluate its
effectiveness and making that report available to
investors.
Requiring auditors to take additional
steps to search for fraud.
Requiring disclosure of nonfinancial
information to highlight what will contribute to
the future success of the company.
Increasing the frequency of
reporting.
Making it illegal for anyone in a
publicly held company to lie or withhold material
information from their auditor.
IMPROVING THE AUDIT
There will always be
the threat of management’s overriding the system
and preparing fraudulent and untruthful
disclosures. That is why the accounting
profession, even before the recent Enron collapse,
was working on improving auditing standards and
guidance to help auditors better detect fraud. An
exposure draft of a new standard has already been
issued, with the expectation that a final standard
will be issued later this year.
IMPROVED REPORTING MODEL
No reporting model
will protect investors from greed and bad
judgment. However, an improved reporting model
will provide every investor with better quality
information and increase the likelihood of better
investment decisions. More information and timely
disclosures in plain English are required.
The reporting model should also address
off-balance-sheet activity, liquidity issues,
other risks and uncertainties, forward-looking
information, nonfinancial performance indicators,
unreported intangibles and other important
information. To modernize the model, we must focus
on
A broader “bandwidth” of information.
Different distribution channels,
namely the Internet.
Increasing the frequency of financial
reporting so that the delivery of financial
information is eventually in “real time,” rather
than only periodically. The AICPA looks
forward to working with Congress, the SEC and the
Financial Accounting Standards Board to develop
meaningful reforms that we believe are essential
to restoring investor confidence in the financial
reporting system. I can assure you the CPA
profession is committed to taking every necessary
step toward that end—and has already begun that
process. JAMES G. CASTELLANO, CPA,
became chairman of the AICPA board of directors in
October 2001. His acceptance speech, delivered at
the Institute’s annual meeting in November,
appeared in the February 2002 JofA (see “
Let’s
Play to Our Strength ,” page 52). |