My name is Barry Melancon, and I am President and CEO of the American Institute of Certified Public Accountants. I would like to thank you for the opportunity to be heard today on an issue of paramount importance to our 340,000 members -- in industry and public accounting, in firms and companies of all sizes throughout America.
Although I am honored to appear here before this Committee and am deeply grateful to you for holding this hearing, I cannot help feeling that this is an appearance I wish I had no reason to make. The SEC and the profession are natural allies. We each want a system that upholds auditor independence and protects the public interest. We are each committed to ensuring that our capital markets have the highest quality of audited financial information. And, we have succeeded. The fact is that our capital markets are the most efficient, liquid and flexible in the world.
The AICPA is proud of its history of action to uphold auditor independence.
· It is a core value of the accounting profession, and has been for over 100 years. The reputation of all auditors demands it. And, the public interest requires it.
· The AICPA has initiated or supported numerous efforts over the years to strengthen the financial reporting system and the profession's independence requirements. The AICPA formed the Public Oversight Board, and played a leadership role with the SEC in creating the Independence Standards Board. We supported the SEC's commendable initiatives to enhance and improve the performance of audit committees. And, we have contributed importantly to the work of the many high-level bodies which have from time to time studied various issues relating to audits.
· In addition to these accomplishments, we support fundamental change. That is why we have been so enthusiastic about the ISB, which is tackling the job of developing a principles-based conceptual framework for auditor independence.
As you know, the SEC is rushing through a proposed rule which in our view threatens these accomplishments and imperils the ability of the accounting profession to meet its responsibility to the public in the New Economy. The Commission is doing this without any showing of need, with no demonstration that auditor independence has actually been compromised by non-audit services, no studies or empirical evidence establishing that non-audit services are causally connected to audit failure, no reason for believing that the public perceives that such a connection exists and no crisis of confidence in the accounting profession. This proceeding has all the hallmarks of regulation by hunch, rather than evidence and reasoned decision making.
The stakes are high. The risks of doing the wrong thing are real. The potential for unintended and disastrous consequences from precipitous action is great. The accounting profession needs to have the flexibility that the SEC's proposed rule would deny in order to protect the public interest over the long term.
Consider the impact on our robust system of self-regulation of the profession, which has served the public interest so well for over 100 years. The proposed rule would severely erode that system by imposing on the profession a highly intrusive network of detailed, command and control government regulations.
Worse still, at a time when the profession and the SEC urgently need to be collaborating to design the new business reporting model for the New Economy, the rule will deprive firms of the talent they must have to do this highly demanding work and divert energy from this critical undertaking by disrupting their operations. While we prefer not to be in disagreement, we have certain fundamental concerns about the profession's ability to continue to meet the public interest in the future under this rule proposal.
As I mentioned, the profession wants change. The AICPA is proud to be the SEC's partner in creating the ISB. It has extraordinary public members. It has done excellent work in the three years since its formation, including a standard mandating the disclosure to audit committees of information bearing on auditor independence and exposure drafts on various subjects. It is on the threshold of producing its cornerstone project - the new conceptual framework for a modernized system of regulating auditor independence. I am disappointed that apparently the SEC is pulling back from its commitment to the ISB, which we view as one of Chairman Levitt's important accomplishments. Rather than undermining the ISB, the SEC should work with the profession to address whatever problems have lead the SEC to withdraw its support.
The AICPA has a long tradition of working with the SEC. In that spirit, we always have and always will commit to dialogue with the SEC to see whether we can find common ground. I am determined to work with the SEC, and attempt to find a solution which preserves our system of self-regulation and ensures the profession is able to meet the needs of our dynamic New Economy in the long term.
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