Showdown with the SEC

Representatives from CPA firms, educational institutions, and accounting regulatory agencies will present testimony today before the Securities & Exchange Commission in an attempt to have their say about the proposed guidelines to limit the auditors’ scope of services. The SEC has proposed rule amendments regarding auditor independence that would particularly affect firms that offer consulting services to audit clients.

In a press conference Tuesday, representatives from the Big 5 firms who will appear at the hearings cast some rather unfavorable opinions about the recent actions of the SEC.

Joseph Berardino, Arthur Andersen’s Managing Partner for Assurance and Business Advisory Services of North America, began the conference by stating, “We believe the accounting profession should be allowed to evolve to meet client needs in the New Economy. We do not believe regulatory intervention will enable us to adequately service the needs of investors.”

Claiming that the SEC proposal is based on an unfounded premise that investors are being harmed (by firms that provide both auditing and consulting services to clients), Berardino asserted that a “broad scope of practice enhances audit quality. The more you know about your client, the better you can do your audit.”

Berardino is convinced that consulting services performed by an auditing firm enable the firm to perform a more thorough and knowledgeable audit. “If I were trying to perpetuate a fraud, I would want my auditors to know less about me.” Berardino also threatened that enactment of the SEC guidelines would reduce competition among the Big 5 by encouraging the firms to consider mergers as they are forced to cut back on services.

Terry Strange, KPMG’s Global Managing Partner of Assurance Services agreed with Berardino’s statements and added that he was puzzled at the short window of time that the SEC has offered for hearings and presentations. “There are some 400 questions to be dealt with and 75 days for response time.” Strange believes the amount of time for responding to the proposed guidelines should be “significantly extended.”

Bob Garland, Deloitte & Touche’s National Managing Partner for Assurance and Advisory Services for the U.S. stated that his firm believes, “The restrictions on scope of services are not in the public interest and should not be adopted by the commission.” He also stated, “It would be irresponsible to take on the considerable risks surrounding the proposal. It would be like doing radical surgery on a healthy patient.”

Garland presented three reasons why he and his firm feel the proposed rules should not be enacted:

1. The proposed changes are not in the public interest. There is no evidence that there is a problem with the broad scope of services; in fact there is significant evidence to the contrary.
2. There seems to be an unreasonable rush to regulate; the SEC is extremely hurried
3. There will be unintended consequences if these rules are enacted. Audits will become costlier and corporate access to high quality audit services will be reduced.

When asked if there was any speculation as to the reason behind the SEC’s decision to look into the auditor independence issue, all three conference participants expressed confusion. “I’m not sure I know what triggered their thinking around this proposal,” KPMG’s Strange replied when specifically asked if he thought his firm’s recent spin-off of KPMG Consulting could have gotten the SEC thinking about a separation of services. His firm’s decision had more to do with an opportunity to raise capital rather than being driven by regulations.

Joseph Berardino also admitted he was “confused by the proposal.”

Some folks don’t seem at all confused by the SEC proposal. Take Ernst & Young, for example, noticeably absent, along with representatives from PricewaterhouseCoopers, from the press conference. In a press release issued Tuesday by Ernst & Young, the Big 5 firm basically takes the credit for encouraging the SEC to look into this matter.

“In the May 9 letter, prompted by an SEC request for advice from Ernst & Young, Laskawy [Ernst & Young Chairman] urged the SEC to draft a rule prohibiting auditors from providing some lucrative consulting services. These included designing information systems, reviewing the books for internal audits, appraising a company's assets, and acting as a broker-dealer.”

PricewaterhouseCoopers is laying low for now, having incurred the wrath of the SEC for recent disclosures of partners owning interests in audit clients. Neither Ernst & Young nor PricewaterhouseCoopers will be sending representatives to the SEC hearings.

In conclusion, the conference participants once again voiced their frustration at the speed with which the SEC seems to ramrodding this proposal through the public hearing process, and reiterated their belief that the limitation of services rules would not be in the public interest.

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