The Purpose and Mission of 21st Century Accounting Firms and the Independence of Certified Public Accountants in the Post-ENRON Era.
Mr. Chairman and other members of the committee, the National Conference of CPA Practitioners thanks you for the opportunity to appear before you today. I am
Robert L. Goldfarb, CPA, the National Issues Committee Chair and Immediate Past President of the National Conference of CPA Practitioners (NCCPAP). NCCPAP has been in existence for over twenty-two years. The former Chairperson of the Securities and Exchange Commission has described NCCPAP as "a group which I believe represents the very soul of America's accounting profession - the small, independent practitioner." Since our creation in 1979 we have been both adversarial as well as pro-active in the accounting profession but, at no time did we ever lose the tenets that we live by: objectivity, integrity and independence. We remain steadfast to our basic principles and policies:
1. To be sensitive and responsive to NCCPAP's importance to the profession, and to the special needs of individual CPA practice units and local regional CPA firms.
2. To encourage a commitment to quality, integrity and public responsibility within the public accounting profession.
3. To enhance the status of the Certified Public Accountant, and make commitments to further excellence as a profession as we work in the Twenty-First Century.
Our membership is made up of CPA firms nationwide, with a large concentration in New York State where we have four very active chapters. The chapters are located in Nassau County on Long Island, Suffolk County on Eastern Long Island, New York City and in the Westchester/Rockland area.
On November 16, 1999, we testified before Chairman Sullivan's Committee on Higher Education expressing our opposition to the proposed Uniform Accountancy Act (UAA). Additionally, my partner and I attended a hearing on the UAA in Albany which was hosted by this committee's Chair on March 8, 2000. As part of our testimony, we stated that one of the primary reasons we opposed the UAA was because the proposal permitted ownership of CPA firms to include up to 49% ownership of CPA firms by non CPAs. Our organization has always opposed the concept of Non-CPA ownership of CPA firms and we circulated a petition to force a vote of the membership of the AICPA on this issue. Our position is very clear: all areas of accounting, consulting and financial matters should be performed by a CPA, in a firm which is owned only by practicing CPAs. CPAs are licensed by their State, having passed a rigorous examination and having acquired valuable experience while working for at least two years for a CPA firm. The local and regional CPA firms work with the public each day gaining their trust and at the same time, solving their financial problems. We understand the needs of our clients and the needs of the public and we react to them. The knowing public has always had the utmost trust for a CPA because the public correctly feels they will receive fair, honest and objective answers to tough questions regarding all phases of their individual and business lives.
When clients and the public deal with a CPA firm they know and expect the utmost professional service as well as independence, integrity and objectivity. They have come to know that the professional CPA will act without a conflict of interest. CPAs have performed within these guidelines with pride and will continue to work for their clients and the public with independence, integrity and objectivity no matter what the nature of the work is that they perform - whether directly or through third parties. In light of the ENRON collapse, where an affiliated firm of the auditing firm received significant fees from consulting services, there is, at a minimum, the appearance of a lack of independence and objectivity.
In the words of the former Chair of the Securities and Exchange Commission who recently stated that "the high-quality work of this country's accountants creates the very bedrock of our financial reporting system. It has sustained for America the highest level of investor confidence in the world. But when integrity, credibility and reliability form the foundation of this trust, we simply must do anything and everything to protect these ideals in the eyes of the public."
According to Paragraph 9 of the Statement on Quality Control Standards No. 2 (QC20.09) "Policies and procedures should be established to provide the firm with reasonable assurance that personnel maintain independence (in fact and in appearance) in all required circumstances, perform all professional responsibilities with integrity, and maintain objectivity in discharging professional responsibilities. According to Merriam Webster, independence is "being free of control by others." There is no question as to what "independence" is!
During the Fall of 2000 the accounting profession, the AICPA and Chairman Arthur Levitt of the SEC debated the issue of what is independence for CPA firms that audit financial statements of public companies. We took the bold stance of disagreeing with the AICPA in support of Mr. Levitt. I attach exhibit "A" which is a letter that I wrote to Mr. Levitt on September 25, 2000 supporting his position on independence in auditing. This letter was introduced into the Congressional Record as part of Mr. Levitt's testimony before Congress. We are not opposed to regulations on independence for auditing of publicly held companies - we endorse them! Since our inception, we have attempted, unsuccessfully, to convince the American Institute of CPAs, the defacto representative and leadership of the accounting profession, to put teeth into its well-publicized "self-regulation". NCCPAP was the first professional accounting organization to support Mr. Levitt in his efforts.
Additionally, on October 23, 2000, when Mr. Levitt was trying to add some bite to the independence rules, my partner and National Issues Committee immediate Past Chair Herb Schoenfeld participated in an open panel discussion regarding independence issues with Mr. Levitt, Dan Goldwasser, attorney, and Dan Dustin, Executive Secretary of the New York State Board of Public Accountancy. It has always been our belief that you are either independent with regard to a client or you are not. Nobody can be partially independent.
We understand that this committee is interested in determining the purpose and mission of 21st Century accounting firms and the independence of CPAs in the post-ENRON era. We are all acutely aware of the fact that NYS has not significantly modified the public accountancy law since 1947. In an attempt to modify these rules, this committee held public hearings considering the merits of a national Uniform Accountancy Act (UAA). NCCPAP was a part of those hearings. It is important to note that while we were opposed to the UAA in its then proposed form, we do support most of the provisions of the UAA and we recognize the need to amend the State's accountancy laws. We are most concerned about the public we serve and will support any provisions that meets that objective. We believe that there is a significant need in this state to update these accounting rules. Whereas the UAA, in its original form, is not the answer, we are eager to work with the legislature and the New York State Society of CPAs to create new accounting regulations that are meaningful.
NCCPAP also believes that there is a strong need in this State to implement a governmental required peer review program. Under the current provisions, a CPA firm practicing in NYS does not have any peer review requirements. If the CPA conducts any attest function of companies and the CPA is a member of the AICPA or if she/he is performing a governmental audit, only then is there any peer review requirement for the CPA in New York State. NCCPAP believes that this is inadequate. NYS should require all CPAs performing the attest function for New York companies to be subject to peer review. This will help to raise the standards of CPAs performing work in New York State.
As a result of the previous consideration of the UAA in New York by the legislature, accountants throughout the industry have focused on the issue of receiving consulting fees by CPAs. This discussion has been revisited due to the ENRON situation. A practicing CPA firm not only performs regulatory and traditional work but also performs different types of consulting for their clients. Let us not lose sight of the fact that CPAs have been doing consulting, business valuations, litigation support and other non-attest functions for clients for a very long time. We strongly believe that CPAs can perform consulting services for clients and maintain their independence. Unfortunately, we also believe that, among other factors, some CPAs may become conflicted if the fees for consulting services are so large in relation to the fees received for performing the attest function. We do not think that regulations should prevent CPAs who perform the attest function for a client to be precluded from performing consulting and other services for the same client. However, we are aware of the possible conflict that can occur and we believe that the rules in New York State, as well as the rest of the country, must properly address this issue. If the accounting profession is to return to the level of trust that it enjoyed before the ENRON disclosures, then the profession and the state must face this issue head on. We do endorse the concept that a special task force in New York State should be established in order to determine when, and if, performing consulting services will establish a "conflict of interest" for the CPA performing the attest function for that same client.
In a speech before our organization, Mr. Levitt told us that "the accounting profession is like no other. Its very existence is rooted in a mandate handed down by Congress, and all firms - both large and small - are bound in a covenant with America's investors: a covenant that says the auditor will remain inquisitive, skeptical, and rigorous; that he will remain free from arrangements that threaten his objectivity; that with the auditor's stamp, the numbers speak the truth. And, as part of this covenant, there is one principle that any firm, large or small, must never forsake - the integrity, both in appearance and in fact, of the auditor's independence." NCCPAP strongly agrees with Mr. Levitt on this issue, as it relates to publicly owned companies, and believes that nothing that the auditor can do should dwarf the concepts of independence, integrity and objectivity.
NCCPAP would encourage, and challenge, the New York State Legislature to raise the bar for the accounting profession and see to it that the accounting profession is required to maintain nothing less than the absolute highest level of competency possible. In light of the ENRON situation the public is looking for governmental involvement. This is not to say that we believe that an overall regulation by governmental bodies is required. In our opinion, it is extremely important that the legislature consider changing the curriculum in the schools regarding their business and accounting courses to stress the importance of auditing and other attest work. I am a senior adjunct professor for a local college on Long Island and I have witnessed the need to teach these fundamentals in greater detail. Because of the events of the past several months, the need for a more significant amount of time devoted to business ethics in schools is apparent. Courses stressing more auditing techniques and business ethics, including the concept of auditor independence, should be included in even the high school curriculums.
Despite the horrendous problems created by the ENRON situation, NCCPAP urges the legislature not to overreact. The ENRON story was caused by a public company being audited by one of the five largest accounting firms in the world. The fallout from the ENRON situation has the potential to permanently tarnish the reputation of every Certified Public Accountant in America. We are concerned not only for the enormous financial losses suffered by ENRON employees and shareholders, but for honest certified public accountants across the country.
Our concern is that the SEC's investigation, as well as your investigation, will likely focus on failures in the auditing procedures of CPAs and not the failures in the auditing practices of one firm and its client. The assumption will be that the controls that failed to protect investors in the ENRON collapse run rampant through the business community. This is not the case!
I cannot stress enough that the small and regional accounting firm is fine! No one knows whether the acceptance of the consulting fees or the acceptance of the consulting engagement had anything to do with the resulting ENRON bankruptcy and accounting shortfalls. The ENRON situation could have been caused by any number of factors including staff auditors who were not adequately or properly trained for an audit of that magnitude. The small and local CPA firms have always been proactive advocates for their clients. The CPAs in the small and regional firms are on the cutting edge of technological advances in the profession and on top of the new accounting pronouncements and auditing standards.
At what dollar amount do fees received for consulting services make an "accounting" fee so meaningless that it would create an independence problem for the auditor? Whereas we do not have a solution for this question today, perhaps a task force should be established to review this issue. The task force could be charged with considering whether there should be a list of consulting engagements that can not be performed by a CPA firm performing the attest function on the same client. Perhaps it can consider whether a CPA firm performing the attest function for a client should be totally prevented from engaging in a consulting arrangement with the same client.
NCCPAP applauds this committee, the Assembly's counterpart and the entire leadership of the Legislature on its desire to see to it that New York remains the leader in the accounting profession. New York should never be placed in a position where it will follow what other states do. New York took the bold step of not endorsing the UAA as originally proposed. New York did not follow the other states that endorsed the UAA and has once again proven that we can show the rest of the country what is proper. Other states accepted ownership of CPA firms by non-CPAs but New York stood its ground. Congratulations are owed to this committee and the entire legislature. New York must maintain its leadership role regarding independence for CPAs performing the attest function. These hearings, we believe, will keep New York in its leadership position.
We are grateful for the opportunity to present our recommendations, issues and concerns to you today. We are also gratified that you had the foresight to establish this very significant hearing in light of the most recent historic events occurring in our profession. Because of hearings like this one, we are confident that the State will recognize the need to establish meaningful regulations which will recognize the differences among firms that provide the attest function for public clients, governmental bodies and privately-held clients.
In conclusion, I would like to sum up our recommendations:
1. NCCPAP believes that a task force should be established to investigate, and resolve, at least the following three issues:
a. Determine when, or if, a CPA firm (or any of its affiliated business entities) performing the attest function for a company should be able to perform consulting service.
b. Consider when, or if, a CPA firm (or any of its affiliated business entities) should ever be entitled to receive commissions.
c. Consider the impact of any independence regulations on the smaller CPA practice unit.
2. A review of both the secondary school and higher education curriculums should include more courses on business ethics, independence and objectivity.
3. A review of SEC's Proposal to Modernize the Rules Governing the Independence of the Accounting Profession issued June, 2000 when a special concentration of the ten proposed rules identifying non-audit services that they considered inconsistent with independence. A copy of these ten proposed rules is attached as Exhibit "B".
Thank you for the time to present our thoughts to you. We stand ready, willing and able to discuss these concepts with you in more detail.
Robert L. Goldfarb, CPA, Issue Committee Chair and Immediate Past President
Herbert Schoenfeld, CPA, Past President and Past Issue Committee Chair
Alan Feldstein, CPA, President
The Securities & Exchange Commission's Proposal to Modernize the Rules Governing the Independence of the Accounting Profession - June 27, 2000
The Securities & Exchange Commission's report proposed rules to identify particular non-audit services that they believed were inconsistent with independence under the four basic principles articulated in the proposed rule. The report stated that certain services, such as advising on internal accounting controls and risk management, do not impair an auditor's independence. The proposal covered certain aspects of the following types of services, several of which are already precluded under SEC, AICPA and SECPS membership rules:
1. Bookkeeping or other services related to the audit client's accounting records or financial statements.
2. Financial information systems design and implementation.
3. Appraisal or valuation services, fairness opinions or contribution-in-kind reports where there is a reasonable likelihood that the accountant will audit the results.
4. Actuarial services.
5. Internal audit outsourcing.
6. Management functions.
7. Human resources.
8. Broker-dealer, investment adviser, or investment banking services.
9. Legal services.
10. Expert services.