First of all, I think that people rely upon the system in terms of audit independence
We heard Mr. Biggs earlier today talk about all the companies that he gets and how they have to rely on the financial statements and how they assume that the auditor who audits those financial statements is independent, and I think that’s true. They assume. What is he assuming? He is relying upon an overall system. He’s relying upon the integrity of this Commission. He’s relying upon the integrity of the audit firms. He’s relying upon the enforcement proceedings brought by this Commission and by state accountancy boards.
That’s what he’s relying upon, and to say that he’s relying upon any particular element such as whether somebody owns a stock or whether the accounting firm does so much in consulting services is nonsense. He’s relying upon a whole package.
The problem of saying, “Okay. We’re going to disclose this element as to how much non-audit services go,” is an unbalanced disclosure. It’s unbalanced because there may be lots of other factors within the accounting firm which may offset that.
The accounting firm may have systems itself that will offset that particular problem. And indeed, when you get into the whole question of how economically important the client is, you’re going to find that you have to have offsetting systems. This is something that Mr. Allen referred to earlier in his testimony.
So if you simply disclose one side of it, you’re not giving the investor balanced disclosure. But there’s a third problem with it.
The third problem is that this Commission and the Independence Standards Board or whatever standard-setting body has made a decision as to what is appropriate. Now you’re telling the reader that there are other things out there which are not comprehended by your rules.
I think the Commission has to act
What that really does is undermine the confidence of the reader and the financial statement user in the very system which you’ve established, and that bothers me. I think it undermines the system rather than enhances the system.
Lastly, I’d like to talk about the voluntaryprogram that you’ve got. I’m concerned about that. What concerns me is that here we have uncovered literally thousands of violations, and from my perspective this Commission has done nothing about it. The AICPA has done nothing about it. The state boards of accountancy have done nothing about it.
If it were one of my smaller-firm clients, they would have jumped on them. I think if this Commission is to maintain its credibility on the independence issue it must take action. And then to create a voluntary program on top of that whereby you’re going to excuse hundreds, maybe thousands more violations I think also undermines this Commission’s credibility. CHAIRMAN LEVITT: You’re referring to the independence violations involving the ownership of stock by family members? Is that the issue?
CHAIRMAN LEVITT: Well, I think I have to differ with you there only because if the rules have outlived their usefulness, even though those rules were accepted by all parties, we’ve got to move toward a better understanding and make some judgments in terms of which of those rules are relevant to today’s circumstances and which of those rules really are not.
All of this goes into the system
CHAIRMAN LEVITT: Because I think that it is apparent to us that all firms had Texas title loan locations similar problems. It isn’t just one firm. All firms had those problems. Again, it’s a question of allocation of resources.
Is it worthwhile for the Commission to engage in the kind of prolonged, searching, people-intensive process that was involved in Case No. 1 where we satisfied ourselves that a good deal of these violations were inadvertent and not venal, and the process we established was one where, in those instances where there was culpability, the firms were under an obligation to reveal them.