Barry C. Melancon, president and CEO of the American Institute of CPAs (AICPA), was a key witness at the March 13, 2002 hearing on the Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002 (CARTA). CARTA proposes relatively modest changes compared with other bills, and it is believed to be the bill most supported by the accounting profession. Mr. Melancon's testimony explained why AICPA is opposed to many of the other reforms under consideration by legislators. Other witnesses were more supportive of far-reaching reforms, and their testimony was critical of the AICPA at times.
In his prepared remarks, Mr. Melancon asked Congress to evaluate accounting reform proposals based on four criteria: Will it help investors make informed investment decisions? Will it enhance audit quality and the quality of financial reporting? Will it increase confidence in the capital markets, our financial reporting system, and the accounting profession? Will it be good for America's financial markets and economic growth?
Based on these criteria, AICPA is generally opposed to many of the reforms proposed in recent weeks. Specifically, it opposes standard-setting by the new public regulatory organization, any restrictions on non-audit work by audit firms beyond those included in CARTA, (i.e., IT consulting and internal audit), mandatory rotation of audit firms, any turning back of the liability reforms introduced in the Private Securities Litigation Act, and any employment restrictions designed to address the revolving door between auditors and clients.
Instead, AICPA wants Congress to support financial reporting reforms that address unreported intangibles, non-financial performance indicators, and forward-looking information. More broadly, AICPA wants Congress to support reforms involving expanded reporting, new distribution channels that recognize the Internet as a communications tool, and more timely reporting leading up to online real-time reporting.
Other witnesses supported the reforms proposed by legislators and provided testimony critical of AICPA. These witnesses include Roderick M. Hills, former chairman of the Securities and Exchange Commission (SEC), and Lynn Turner, former SEC chief accountant.
Mr. Hills said the overall system needs a complete overhaul because AICPA and the Financial Accounting Standards Board (FASB) are not tailored to be responsive to the type of accounting issues raised by Enron and other incidents. He also said it is increasingly clear that some number of audit partners are not able consistently to resist management pressures to permit incomplete or misleading financial statements.
In weighty and well-documented testimony, Mr. Turner pointed to the increasing number of earnings restatements, massive financial frauds, hundreds of billions of losses to investors and an almost daily parade of financial reporting issues. He said these trends raise serious questions about the quality of audits, and the multitude of organizations often referred to as "alphabet soup" do not yield an efficient or effective quality control process. He provided examples of areas in which he feels today's auditing standards have fallen short and have been written more to protect the interests of the firms than to ensure quality audits.
Mr. Turner also had harsh criticism for the FASB. Among other reforms, he supports the setting of audit standards by the new regulatory body and the creation of an independent "no strings attached" funding mechanism for the FASB. In closing, he told Congress their choice was between "more of the same for one out of two Americans who invest in the markets, or fixing a problem that has lingered for too long, cost too many too much, and that yearns for action, not further debate."
Download the testimony of Mr. Melancon, Mr. Hills, Mr. Turner and others.