NYSSCPA Testifies Before State Senate Committee on Post-Enron CPA Regulation

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NYSSCPA Testifies Before State Senate Committee on Post-Enron CPA Regulation

NEW YORK -- A panel representing the New York State Society of CPAs (NYSSCPA) said they would support state efforts to restore trust in the accounting profession, which has been severely damaged by the collapse of energy giant Enron Corp.

"The Enron matter has caused great concern among our members," said Marilyn Pendergast in testimony before the New York State Senate Higher Education Committee Wednesday. "Many organizations…(are going to) do some soul-searching about what went wrong….The primary concern for the Society is what we need to do, if anything, in New York.

"What we can do to protect, strengthen and maintain the faith the public has in capital markets is important," Pendergast said.

Pendergast was part of a three-person panel of NYSSCPA members to testify during an all-day hearing on the purpose of accounting firms and the independence of CPAs in the wake of the Enron collapse. New York is the first state to hold such hearings, even as federal agencies and congressional committees investigate how the country's one-time largest corporation came to grossly misreport its earnings in financial statements with the official approval of an outside auditor. Testimony from CPAs, state regulators and academics, however, presented widely varied perspectives regarding the fine line between consulting services and auditor independence, the role of the state in policing the profession, and the steps that should be taken to streamline the Byzantine hierarchy of regulating bodies.

During their testimony, society members advocated designating more power to the State Board of Public Accountancy to enforce regulations, and offering aid in developing a more effective form of peer review. They agreed with the frequently trumpeted notion that auditors should not be allowed to perform some non-audit functions for their clients, though they stressed that clients -- the small companies that represent the bulk of NYSSCPA members' clients -- rely on firms for services they cannot afford to maintain in-house.

State Sen. Kenneth Lavalle, chair of the committee, led the hearing and questioned NYSSCPA members on what other means there might be to preserve the integrity of audits. Such ideas included requiring companies to rotate auditors every seven years, prohibiting CPAs from seeking employment with former auditing clients for at least two years after an engagement and exclusively limiting CPAs to audit engagements.

"The profession is somewhat unique with respect to who comes into it," said Allen Fetterman, a partner with Loeb and Troper in New York City, responding to the two-year rule. "If we limit their ability to move into the private sector … the ramification is we are limiting their careers. It might hinder the profession from attracting qualified students."

Fetterman, and fellow witness Vincent Love, a partner with Kramer and Love, reiterated the need for the state to take more concerted effort in regulating the profession, while leaving the large, national corporations to the Securities and Exchange Commission. Pendergast added that the state should use its licensing power to regulate the profession.

"If after due process (a firm is found to violate regulations) they should no longer be licensed," she said. "There are, I believe, a few bad apples."

LaValle said the legislature was working on new legislation regarding the profession-though he would not divulge details about it, except there would be continued hearings on the matter -- and reaffirmed the State's legislative role in regulating accountants. "It would surprise me if the 2002 season ended without a legislative response (to Enron)," LaValle said.

The War of Independence

The bulk of the hearing focused on defining the meaning of auditor independence, with some witnesses arguing that non-audit services bolstered the independence of audit engagements, and others said there were obvious conflicts of interest when auditors take huge fees for some services from the companies they are auditing.

Louis Lowenstein, Professor Emeritus of Law at Columbia University, told the committee that companies pay more for non-audit engagements -- at about $2.69 for every $1 in auditing fees --as firms use the intimacy of the audit as a convenient marketing mechanism for other services. In the wake of the Enron collapse, some argued, there have been inconsistencies in the definition of what is and what is not a traditional service audit-related service.

"It is critical to note a widespread misconception about services," said Larry Leva, a partner with KPMG. Many non-audit services, he said, are "closely related to the audit (that) only the auditor can provide it."

Representatives of the Big Five firms, nevertheless, testified that their companies plan to or have already separated their consulting services from their auditing services, especially in the Information Technology field.

Richard I. Miller, the general counsel and secretary for the American Institute of CPAs (AICPA), testified that the profession was prepared for "unprecedented change", adding that the AICPA supported SEC Chairman Harvey Pitt's recommendation for a profession oversight board with investigative and disciplinary powers.

Frank Nusspickel, an audit partner with Andersen, also testified about the complexity of auditing a company the size of Enron, echoing CEO Joseph Berardino's announcement of new safeguards and processes to ensure audit quality, and favoring reform.

"We need to thoroughly understand the issues," Nusspickel said "If we rush to regulate by just nibbling at the edges, three, four years from now, we'll be back here again.

Later, a panel of representatives from the New York State Education Department testified on the need to improve state oversight of the profession.

Other witnesses testifying included Richard L. Miller of Ernst & Young, Larry Leva of KPMG, Wayne Kolins of BDO Seidman, Edward Nusbaum of Grant Thornton, Robert Sohr of Deloitte & Touche and Michael O. Gagnon of PricewaterhouseCoopers.

For a complete transcript of the NYSSCPA and AICPA testimony, visit http://ww.nysscpa.org.

-- Simon Eskow