SEC Open Forum - Accountants Voice their Opinions
[Gail Perry] On behalf of AccountingWEB, I'd like to welcome everyone here today to our workshop room, where we hope to provide a forum for questions and answers, debate and ideas regarding the proposed auditor independence rulings under consideration by the SEC.
[Gail Perry] I'd like to introduce Gary Shamis, of Saltz, Shamis & Goldfarb, Inc. Mr. Shamis is the chairman of the Leading Edge Alliance and also the chairman of the AICPA Management of an Accounting Practice Committee.
[Gail Perry] In his recent remarks to the SEC, Mr. Shamis indicated his concerns that if proposed rules are adopted, clients would be denied access to services previously provided by their CPA firm. Firms have evolved over the past decades to provide higher level - value added services to clients. In addition to limiting services, the new rules would most likely end the associations of accounting firms that are necessary to services clients in different geographic areas around the country and around the world. We believe that the current independence rules can be improved, enhanced, and updated, but not at the expense of damaging the individual firm units, the clients of the firms, and the future of the accounting profession.
[Gail Perry] I'd also like to introduce Steven Gaylord. partner in charge of the audit department of Katz, Sapper & Miller in Indianapolis
[Gail Perry] and Frank Minter, president of the Institute of Management Accountants
[Gail Perry] Thank you all for joining us here today
[Gail Perry] Do any of you have any opening remarks?
[Gary Shamis] No remarks- what questions do you have?
[Gail Perry] If the SEC goes forward with its plans to limit the scope of services, how will that affect the audits as we know them today?
[Steven Gaylord] As a firm serving entrepreneurial middle market clients, Katz, Sapper & Miller ,LLP is very concerned that the SEC rule may establish a precedent for other regulators that have jurisdiction over firms like KSM
[Gail Perry] For example?
[Gary Shamis] Regarding the audits- I believe the quality of auditors may be impacted.
[Steven Gaylord] The DOL and the various state boards of accountancy.
[Frank Minter] One of the major concerns of audit firms would be the loss of top talent if firms are restricted to audit activities only. The best and brightest will move on to other activities.
[Gail Perry] Without trying to give ideas to other agencies, what sort of additional limitations do you think could be on the horizon?
[Gary Shamis] I agree with Frank- we all know how difficult it is to hire today if we were reduced to merely an audit practice what type of talent would we find?
[Steven Gaylord] I agree that we will have trouble attracting the best students. They have always been attracted to the situation that they could learn to be consultants while honing their auditing skills.
[Michael Platt] Mr. Minter, what is the overall feeling among the members of the IMA towards the whole auditor independence issue. Is it an issue for them?
[Gary Shamis] The proposed limitations are enough for right now
[Frank Minter] One of the matters that is unclear, at least to me, is whether tax preparation and advice would be prohibited under the proposed rules
[Gary Shamis] Tax prep would not but an advocacy position re: a tax situation would be limited.
[Michael Platt] Financially, how would this affect firms like Katz Sapper Miller and other non-Big 5 firms?
[Frank Minter] Michael, IMA's position on this whole issue is that these issues should be addressed by the Independence Standards Board.
[Michael Platt] Frank - do you get the feeling that your members have an issue with auditors providing consulting advice?
[Gary Shamis] That is also AICPA's position and at one time it was the SEC's position.
[Frank Minter] I have not read Financial reporting release 50 from the SEC but I understand it delegates such matters to the ISB
[Gary Shamis] It did but the SEC trumped that relationship
[Michael Platt] We have spoken with controllers of several Fortune 500 companies and none wanted to speak "on the record" about how their companies view this issue. Any insight from any of our panelists on their true feelings?
[Steven Gaylord] Financially, it could be devastating because our larger clients tend to be our audit clients who also tend to produce the largest consulting engagements.
[Frank Minter] I don't know why companies are afraid to talk unless its fear of retribution from the SEC
[Michael Platt] That’s exactly the reaction we had - that this issue is too politically charged and as a registrant they did not want to speak.
[Gary Shamis] at the hearing last week- 2 fortune 500s were represented- my sense is that their testimony was not what the SEC expected- they felt that the audit committees could place a big role in this issue
[Michael Platt] Please elaborate Gary...
[Gary Shamis] an effective audit committee could limit services provided by their auditors other than the audit and they should
[Frank Minter] My personal view is that this proposal falls in the same category as a WW2 book entitled, "A Bridge Too Far" I think the SEC has gone beyond what is necessary for independence
[Gary Shamis] no question in my mind- but how do you stop them or convince them of that- they seem to be on a mission
[Michael Platt] Has this turned into a crusade against the profession by key SEC executives?
[Michael Platt] A "win at all cost" proposition?
[Frank Minter] I heard on CFO state that any consulting job proposed by their outside audit firm had to be specifically approved by their audit committee
[Gary Shamis] some think so- see the current issue of business week it addresses the issue you bring forward
[Gail Perry] The SEC has opened up one more day for hearings, and most of that scheduled testimony (4 hours, I believe) will be from members of the Big Five - do you think that the SEC is really interested in what the Big Five or any other members of the accounting profession have to say on this matter? Mr. Levitt's press conference yesterday would indicate that he has definitely made up his mind on this issue already.
[Frank Minter] Does anyone know what the appeal process is if Levitt insists on going ahead?
[Gary Shamis] sure seems that way- at the hearings Commissioner Unger was upset that the AICPA took the battle to capitol hill
[Gary Shamis] no appeal process- the only way to change the rules is an act of congress
[Gail Perry] So we need to elect some CPAs to Congress!
[Tim Johnson] As a "newcomer" to the profession, this whole auditor independence issue seems to pop the bubble on the desire many of us have to serve clients in an all-around business mode. It's fairly disheartening to many younger people entering the ranks.
[Steven Gaylord] With Chairman Levitt's recent appeal to smaller firms to support the SEC proposal, it would seem that the SEC is primarily on a crusade to punish the Big 5. the Big 5
[Gary Shamis] there are a few- but every member of congress has a CPA- think about that
[Frank Minter] There has to be some process to hold the SEC accountable and in check- if Congress is the only way
[Michael Platt] Wouldn't that open up a whole new can of worms though?
[Gary Shamis] the AICPA will attempt to obtain a restraining order and fight the battle in the courts and at the same time push congress for help
[Gail Perry] Why do you think the SEC would want to punish the Big Five?
[Gary Shamis] this is about the big 5- but as a senatorial aid said to me they will be throwing the baby out with the bath water
[Michael Platt] Gary and Steve, both of you are vocal opponents of these proposals and have undertaken a grass roots effort to let your voices be heard. Can you elaborate on what you have done and what you would encourage others to do to support their position?
[Gary Shamis] Levitt is trying to leave a legacy- he is most likely out of business in a few months
[Steven Gaylord] Several of those firms have apparently flaunted the traditional independence rules and have refused to admit their sins.
[Frank Minter] Keep in mind that the SEC is on a crusade to improve financial reporting and disclosure and much of what they have done is probably in the best interest of the investor. The three new Staff Accounting bulletins will correct some abuses and lack of consistency, but this one simply goes beyond any idea of reasonableness
[Gail Perry] If these rulings are adopted, what will happen to the mid-sized firm that has been building a consulting practice - a split into two related firms? a complete divestiture of the consultancy work? Or perhaps a move more toward consultancy and away from auditing?
[Gary Shamis] I have done as much as I can- the list is too long to type- others should contact their congressman and write the sec today
[JSV] I don't have a specific questions but one thing is clear, I the proposal goes through, that's going to affect a lot of our clients
[Frank Minter] Don't forget that the proposal will only apply to firms with SEC clients. A firm might decide not to take on any public companies in their practice.
[Gary Shamis] the big issue is whether or not individual state boards will join in- in my testimony I predicted they would Levitt called my testimonial hypothetical- the next group was 4 state boards- 3 of which said they would seek to adopt the rules
[JSV] Thanks Frank, I thought it applies to all clients
[Gail Perry] won't most of the state boards go along with the SEC without questioning the proposals
[Steven Gaylord] We can't be sure that the state boards will not adopt rules similar to the SEC's .
[Gary Shamis] this will effect all firms!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
[Michael Platt] Steve - the staffing issue you raised is interesting. Can you further describe your firm's views on how this will affect a regional firm such as yours in the recruiting arena?
[Frank Minter] I have no feel for what the state boards will do
[Gary Shamis] read my comment 3 out of 4 boards at the hearing said they would adopt the sec rules- also at the hearing the biggest proponent of the change was NASB
[Michael Platt] Gary, Steve and Frank - can we get your assessment of what a WORSE CASE SCENARIO might be?
[Gary Shamis] the 4 boards at the hearing were NY, California, Colorado, S Carolina
[Steven Gaylord] We have been particularly effective in attracting students who would like to develop consulting and tax careers while they learn the basics of business in their early years as an auditor. This avenue of recruitment could be closed to us.
[Gary Shamis] I don’t want to even think about it
[Michael Platt] You obviously have - really, what COULD happen?
[Frank Minter] Worst Case- I think the quality of audits would decline as the best people migrate to the more interesting and exciting work and leave behind those who can o
[Gail Perry] Ms. Kidwell - I notice you have logged on from Niagara University - do you have a view on how accounting education might be affected by these proposed changes?
[Gary Shamis] my firm will have to disengage from 1750 client engagements- terminate 30-40% of our staff, loose millions of $s of invested capital in our MDP approach
[Steven Gaylord] All firms would have to make a decision about whether they want to continue to provide audit services.
[Gary Shamis] or value added consulting services
[Gail Perry] Steven - to me this seems like the most frightening scenario - that accounting firms might consider giving up audit services
[Michael Platt] But without audit services (the protected monopoly) would accountants be competing in a much more populated environment with a whole host of other consultants?
[JSV] My firm is a mid-size CPA and we have a lot of clients that we do Audit for. I wonder what's going to happen with them and also with us if we stop providing this service to them?
[Gary Shamis] yes- the clients will be hurt the most- who is best to serve and identify their business needs.
[Frank Minter] For several years we had urged that no firm perform internal audit services for their audit client but the AICPA would never support that position. We felt it was an internal control issue. Perhaps, if that had been done we could point to how the profession handled these matters.
[Steven Gaylord] Firms must weigh which type of service means more financially. If a firm is already 75% consulting, it would make sense to abandon auditing.
[Gary Shamis] this was discussed at the hearing- the AICPA position is that internal audit was ok as long as they did not act as management
[Michael Platt] For those of you who have been in the trenches, is the AICPA prepared to "go all the way" on this issue?
[Frank Minter] I did not see the answer to whether tax services could be done for audit clients under the SEC proposal
[Gary Shamis] what is all the way?
[Gary Shamis] tax services yes - tax advocacy no
[Michael Platt] Protect the freedom for firms to exercise professional judgment in serving their clients in a way that they feel is most beneficial.
[Frank Minter] I am not a tax person but how do you perform services without being available for advocacy?
[Gary Shamis] I believe the AICPA will go all the way- I am personally expecting them to
[Steven Gaylord] Where do you draw the line between tax services and tax advocacy? This will be very difficult in practice.
[Gary Shamis] frank- ask Mr. Levitt
[Martin Haft] As a consumer of CPA services as well as an accountant, I would want my CPA to handle everything they can for me. I wouldn’t want anyone or any regulatory body restricting that!
[Gary Shamis] the entire proposal is vague broad and filled with ambiguities
[Frank Minter] Mr. Levitt is not happy with me right now since we objected to the way they directed the appointment of the new IASC Chairman
[Gail Perry] Can you envision a future scenario in which a whole new crop of strictly audit focused firms arises from the ashes of the demise of the Big Five as we know it today?
[Gary Shamis] we have something in common
[Gary Shamis] that was the proposal that was turned down by congress in the 1930s
[JSV] That will be awful
[Frank Minter] Establish a new US government agency to perform audits of all public companies???
[Gail Perry] Great - more government regulation - just what we all need!!!
[Steven Gaylord] Strictly focused audit firms won't happen -there will be no quality people wanting to do this.
[Gary Shamis] that is exactly what congress turned down and created the sec
[Gary Shamis] I discussed this in my testimony- hypothetical
[Gail Perry] What do you anticipate as the next step after the SEC (presumably) makes these regulations official
[Gary Shamis] an attempt by the AICPA to get an injunction TRO for the new rules- however no guarantee this will succeed
[JSV] we are going to have way to many unhappy clients and accounting firms if SEC proposal goes through, is it really worth it?
[Gary Shamis] my wish is for the sec to understand and acknowledge the controversy and negotiate a change in their proposal
[Gail Perry] And if the proposed rules go into effect, how will accounting firms and educational institutions proceed?
[Frank Minter] Gary: How would you change the proposal?
[Gary Shamis] let the isb do their job- they were moving toward a conclusion that I believe would be more agreeable to firms
[Gail Perry] Steven - why would there be no quality people wanting to do strictly focused audits? Isn't this what accounting training was once all about?
[Frank Minter] As I had indicated earlier, that is IMA's official position. Let the ISB do its work
[Martin Haft] It sounds like we all have a big job on our hands. Hats off to those of you taking the lead in this area. Your efforts are much appreciated!
[Gary Shamis] please pass the word time is critical- all comments are due the sec by Monday
[Frank Minter] Gail- to your point about quality people. Accounting students have declined some 25% in the past 5 years and many who would pursue accounting are moving into finance and information technology majors.
[Steven Gaylord] In smaller firms, very few people are exclusively auditors. Also, technology has reduced the role of most auditors. It's just not as desirable now.
[Gail Perry] We have only a few minutes left - do any of you have any summarizing statements that you would like to make at this time?
[Frank Minter] I believe the SEC has overstepped in this case and must be reined in.
[Steven Gaylord] The SEC should revisit the findings of the panel on Audit Effectiveness. There is no real problem!
[Frank Minter] Steven: The Panel did not take a position on this issue, as you know.
[Gary Shamis] thanks for your time and please do what you can in the remaining few days- a grassroots effort if our best case- I don't believe the sec believes they are impacting smaller firms and small business in general- Levitt said that during my testimony- he is wrong and we need to let him and your reps in dc know.
[Teresa Jones] You've got our support on this - let's keep fighting!
[Gail Perry] I want to thank all of you very much for joining us today and sharing your views. The complete transcript of this session will be made available on the AccountingWEB site for all interested readers and additional comments will be encouraged. Thank you for your time and insights!
Voice of the Editor
Which isn’t completely true. I mean, occasionally I drop by when I manage to sneak out of the nonstop frat party over at Going Concern, but I’m mostly a wallflower over there. I’m happy to say that I’ve been given express permission (or explicit orders, if you like) to wander over here to AccountingWEB more often.
Why is that, you might ask? My job is to replace the irreplaceable Gail Perry as Editor-in-Chief. What does that mean? I don’t really know! I think it’ll be fun getting a feel for things, throwing in my own thoughts here and there, and listening to the discussions you’re having about the accounting profession.