SEC Renews Push for More Oversight of Auditors
In early May, SEC Chairman Arthur Levitt returned to the speaker's podium at what has become for him a familiar venue--New York University. It was there, in September 1998, that Levitt charged the accounting profession with failing to ensure the 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 services, have been overlooking flaws, such as earnings misstatements, in those companies' financial reports to the 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 the speech, the SEC practice section of the AICPA division for firms wrote a letter to the Public Oversight Board, an independent body of observers that monitors the profession's self-regulatory activities. In it, the SECPS said it would discontinue funding of the POB's review of auditor independence at the eight largest accounting firms until the SECPS, the POB and the SEC all agreed to the scope and nature of the review. The SEC had requested the review after it found PricewaterhouseCoopers auditors had substantially violated rules restricting their investments in the securities of audit clients. The immediate result was a storm of protest, despite the SECPS's explanation that the POB's funding was only temporarily suspended, not terminated. Levitt said the SECPS's action raised "serious questions as to the profession's commitment to self-regulation." Congressman John D. Dingell (D-Mich.), ranking member of the House Commerce Committee, offered Levitt his support in "getting needed reforms in place." Soon after the SECPS letter was sent, the AICPA took steps to ensure the POB could continue its work. According to John Hunnicutt, AICPA senior vice president, funding has been fully reinstated. In a related development, Hunnicutt said the POB had received comments from the AICPA board of directors on a draft of a new charter the POB had designed for itself. Following possible modifications by the POB, the AICPA board, which is a signatory of the 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 the 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 the Big Five. "To the extent that the 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 the Independence Standards Board, sent the Big Five a questionnaire concerning auditor independence. Antle collaborated with Mayer, Brown & Platt, a Washington, D.C., law firm the Big Five engaged to analyze their responses to the ISB, a body jointly created by the SEC and the SECPS in 1997 to address long-standing auditor independence issues. Mayer, Brown found the firms' gross margin for auditing services was larger than that for consulting services, before compensation. This finding, which measured profitability, differed from the statistics Levitt cited, which measured consulting services revenue. Mayer, Brown also reported the 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. …