SEC Renews Push for More Oversight of Auditors (2000)

In early May, SEC Chairman Arthur Levitt returned to speaker's podium at what has become for him a familiar venue--New York University. It was there, in September 1998, that Levitt charged accounting profession with failing to ensure independence of auditors. This and related issues are being examined from several perspectives, four of which are discussed elsewhere in this article. In his recent speech, Levitt reiterated his view that auditors, in their reluctance to displease clients to whom their firms could provide consulting have been overlooking flaws, such as earnings misstatements, in those companies' financial reports to SEC. Too many auditors are being judged not just by how well they manage an audit, but by how well they cross-market their firm's nonaudit services, he said, citing statistics showing that accounting firms' consulting revenue has eclipsed their income from auditing services. Oversight funding questioned The week before speech, SEC practice section of AICPA division for firms wrote a letter to Public Oversight Board, an independent body of observers that monitors profession's self-regulatory activities. In it, SECPS said it would discontinue funding of POB's review of auditor independence at eight largest accounting firms until SECPS, POB and SEC all agreed to scope and nature of review. The SEC had requested review after it found PricewaterhouseCoopers auditors had substantially violated rules restricting their investments in securities of audit clients. The immediate result was a storm of protest, despite SECPS's explanation that POB's funding was only temporarily suspended, not terminated. Levitt said SECPS's action raised serious questions as to profession's commitment to self-regulation. Congressman John D. Dingell (D-Mich.), ranking member of House Commerce Committee, offered Levitt his support in getting needed reforms in place. Soon after SECPS letter was sent, AICPA took steps to ensure POB could continue its work. According to John Hunnicutt, AICPA senior vice president, funding has been fully reinstated. In a related development, Hunnicutt said POB had received comments from AICPA board of directors on a draft of a new charter POB had designed for itself. Following possible modifications by POB, AICPA board, which is a signatory of charter, will review it once more in July. Meeting a higher standard In his remarks at NYU, Levitt said that if investors are to have confidence in auditors' assessments of financial statements, they first must perceive auditors as independent. But some think objective criteria must be established to ensure such independence. Professor Rick Antle of Yale University's School of Management recently analyzed auditor independence issues for Big Five. To extent that SEC's allegations are about perceptions, he said, the firms can't be sure they can do anything to respond effectively. In 1999, William T Allen, chairman of Independence Standards Board, sent Big Five a questionnaire concerning auditor independence. Antle collaborated with Mayer, Brown & Platt, a Washington, D.C., law firm Big Five engaged to analyze their responses to ISB, a body jointly created by SEC and SECPS in 1997 to address long-standing auditor independence issues. Mayer, Brown found firms' gross margin for auditing services was larger than that for consulting before compensation. This finding, which measured profitability, differed from statistics Levitt cited, which measured consulting services revenue. Mayer, Brown also reported firms said that, since assurance services are a consistent source of revenue, they will continue to work on improving audit performance and ensure consulting services do not jeopardize auditor independence and assurance revenue. …