May 2000

SEC Questions AICPA Commitment to Self-Regulation

Criticizes Cut in POB Funding, Proposes New Independence Initiatives

In a May 10 speech that addressed a number of auditor independence issues, Securities and Exchange Commission Chair Arthur Levitt criticized a recent move by the AICPA to suspend funding to the Public Oversight Board's initiative to conduct special independence reviews of the nation's eight largest accounting firms.

"This development is a significant setback to self-regulation and independent oversight," Levitt said. "Indeed, it raises serious questions as to the profession's commitment to self-regulation."

On May 3, David Brumbeloe, director of the AICPA's SEC Practice Section, sent a letter to POB Executive Director Jerry Sullivan stating that the AICPA will not authorize any additional funding for the special reviews until the SEC Practice Section and the POB determine that the reviews will take place and all parties agree on a work plan. The AICPA issued a statement on May 9 confirming this position.

"Because the AICPA has incurred initial, substantial costs associated with this project, funding was temporarily suspended pending agreement with the SEC, POB, and other interested parties upon a course of action such as the scope, timetable, and work plan of the project," the statement said.

Levitt proposed several measures to improve auditor independence, including support for a POB plan to enhance its powers and responsibilities; SEC rulemaking to clarify activities that may be inconsistent for an independent auditor of financial statements to perform for audit clients; and a self-evaluation by major accounting firms of past compliance with the SEC's and the profession's financial investment rules and their system of internal controls for monitoring those investments.

Proposed SEC Rules

Levitt announced that the SEC will propose rules on how to alleviate the conflicts created by the profession's increasing consulting and other nonaudit work to its public company audit clients. The proposed rules also will examine conflicts caused by affiliations with other businesses and strategic alliances.

In addition, Levitt commended the Independence Standards Board's recent efforts to modernize certain financial investment rules that prohibit investment by firm professionals in an audit client. He said the SEC intends to issue complementary, modernizing rule changes by early summer on topics such as mutual fund investments, family relationships, and dual-income families. Levitt also called for the ISB to reorganize itself to include majority representation by individuals outside the accounting profession. (The board currently consists of equal representation of members from inside and outside the profession.)

Call for Voluntary Firm Reviews

In light of recent events that found major violations by a Big Five firm of the profession's and the SEC's independence rules prohibiting investments in audit clients, Levitt challenged the profession's leaders to work with the commission to develop a plan for constructively assessing the firms' past compliance over the last 15 months. He called for voluntary internal reviews and said that the profession should continue to enhance its compliance systems and procedures and internal controls, under POB oversight. Levitt said he was concerned about "continuing industry resistance" to the POB efforts in this area.

"Can you really deny the POB the right to have 'no strings' funding and the authority to conduct appropriate special reviews of firms' practices that come into the public arena?" he said. *