Opening Statements of Committee Members


Opening Statement of Chairman Paul S. Sarbanes (D-MD)

Hearing on "Accounting and Investor Protection Issues Raised
by Enron and Other Public Companies:

Oversight of the Accounting Profession, Audit Quality and Independence,
and Formulation of Accounting Principles."

10:00 a.m., Thursday, March 14, 2002 - Dirksen 538

This morning, the Committee continues its hearings on auditing, accounting, financial reporting, and investor protection.

We have not been talking just about the problems of one company. Our interest is in fashioning an effective response to what appears to be a structural and systemic problem. The problem is summed up by the fact that, in addition to a well-publicized series of financial failures, public companies restated their earnings 607 times in the past three years, more than in the entire previous decade. Against that background, our objective is to strengthen audit quality, auditor independence, financial reporting, and, above all, investor protection.

Each of the country's federal securities laws - the 1933, 1934, 1935, and 1940 Acts - requires comprehensive financial statements that must be prepared, in the words of the Securities Act of 1933, by "an independent public or certified accountant." Professor Benjamin Graham's seminal text book for securities analysts gives the reason:

"Prior to the SEC legislation it was by no means unusual to encounter semi-fraudulent distortions of corporate accounts almost always for the purpose of making the results look better than they were, and it was generally associated with some scheme of stock-market manipulation in which the management was participating."

The statutory independent audit requirement has two sides. It grants a franchise to the nation's public accountants - their services, and only their services, and certification, must be secured before an issuer of securities can go to market, have the securities listed on the nation's stock exchanges, or comply with the reporting requirements of the securities laws. But the franchise is conditional; it comes in return for the CPA's performance, as the Supreme Court noted some years ago, of "a 'public watchdog' function [that] demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust."(1)

The significance of that public trust was recognized from the beginning of the consideration of the Securities Act by this Committee almost 70 years ago. On April 1, 1933, Colonel A.H. Carter, the President of the New York State Society of Certified Public Accountants and senior partner of the firm that was then named "Deloitte, Haskins & Sells," testified before the Committee. He argued successfully that requiring an opinion by an independent accountant as to the "correctness" of financial statements of registrants was preferable to creating a corps of government auditors at the Federal Trade Commission. He explained that independent auditors were in a different position than "corporate controllers":

"We audit the corporate controllers. [The corporate controller] is in the employ of the company. He is subject to the orders of his superiors. He is not independent. [CPAs should be empowered to check the accounts] because it is generally regarded that an independent audit of any business is a good thing."(2)

When Senator Barkley asked Col. Carter "who audits you?" he replied "our conscience."

We have heard during these hearings from former Chairmen and Chief Accountants of the Securities and Exchange Commission, Former Federal Reserve Board Chairman Volcker, who testified as Chair of the Trustees of the International Accounting Standards Committee, the current Chair of the International Accounting Standards Board, the Chair of the Financial Accounting Standards Board from 1988-98, leaders of prior efforts to address accounting abuses and lagging standard-setting, and experts in corporate governance. Virtually every witness has recommended basic changes in the regulation of auditing under the federal securities laws. It is appropriate that we today hear the views of representatives of the accounting industry.

The American Institute of Certified Public Accountants, called the AICPA, was established in 1887 and now has 350,000 members. Among its many activities, its committees promulgate auditing and ethical standards for accountants, and review claims of violation of professional ethics. The AICPA represents the interests of the accounting profession before the Congress and the nation's regulatory agencies.

The AICPA has itself recognized that "investor confidence, already shaken by significant volatility in the capital markets, has been further unsettled by highly publicized restatements of financial statements, which have generated questions about the quality of financial reporting, the effectiveness of the independent audit process, and the efficacy of corporate governance."(3)

We look forward today to hearing the accounting industry's recommendations for dealing with the situation. We also look forward to hearing from two economists who have studied aspects of current accounting issues.

I will introduce each of our witnesses in turn.


1. United States v. Arthur Young, 465 U.S. 805, 817-18.

2. Securities Act, Hearing on S. 875 Before the Senate Comm. on Banking and Currency, 73rd Cong., lst Sess. 58 (1933) (Statement of Col. A.H. Carter). (Emphasis supplied.)

3. "Impact of the Current Economic and Business Environment on Financial Reporting" 1
(Distributed by the AICPA and the nation's five largest accounting firms and posted on the AICPA Web Site at http://ftp/aicpa.org/public/download/news/risk_factor.doc).