SEC Concerned with Changes in the Public Accounting Profession The SEC and the former Chairman Arthur Levitt Jr. were extremely concerned that the public accounting firms were violating the auditors independence rules addressed through the Securities Exchange Acts. Auditing firms now had dual citizenship in public companies: (1) they issued opinions on audited financial statements and (2) they participated in various consulting engagements for those same companies. Levitt's solution was to split auditing and consulting. The former Chairman was concerned that the public would lose confidence in the financial markets
and the whole system would be jeopardized.
Public Accounting Revenues vs. Consulting Revenues by 1999
By 1976, audit fees accounted for approximately 70% of total revenue earned by any accounting firm in general. According to the Public Accounting Report, an Atlanta newsletter, the auditing and assurance services revenues dropped to 30% and tax services business accounted for 19% of the total revenues earned in 1999. Mathematically speaking, this means management consulting services accounted for approximately 51% of the total revenue being earned in 1999 by public accounting firms.
Fact: According to The Business Journal's Book of Lists, PwC had $75 million in South Florida billings in 1998 to place third among accounting firms.
SEC Auditors' Independence Rule
The independence rules require that auditors refrain from investing in companies that they audit, to ensure objective, truthful reporting and opinion. The rule applies to all auditors, their relatives, spouses, dependents, non-dependents, and, in some cases, associates must disclose all holdings.
On the September 25, 2002 issue of BusinessWeekOnline.com, the Accounting Wars Powerful auditor-consultants are the target of Arthur Levitt's crusade articles defined "Independence to mean, CPAs cannot audit their own or their partners' work
..clear and honest information is dependent on the CPAs independence
an auditor must not have any financial stake in the health, or even survival, of a client company."
There are those in the profession that believe this rule is archaic and does not hold any value in today's financial world. Barry Melancon, President and CEO of the American Institute of Certified Public Accountants stated, "The SEC has a right to expect the profession to adhere to the rules; however, the profession has a right to expect the regulatory environment to remain modern."
Fact: In 1933, when Congress first required public financial reports, lawmakers debated whether audit fees would taint auditors' independence.
PriceWaterhouseCoopers LLP is a public accounting firm formed through a merger between Coopers & Lybrand LLP and Price Waterhouse LLP, which was consummated on or about July 1, 1998.
Fact: The merger resulted in making PwC the largest accounting firm in the world.
The SEC Targets the C&L Tampa Office for possible violations During 1997, the SEC received an anonymous letter from a whistle blower at the Southeast Regional Office in Miami. The letter alleged that audit staff in the Tampa office of C&L owned stock in the companies they were auditing, which clearly violated the SEC's independence rule. In 1998, the SEC ordered an investigation into the allegations of auditor conflicts of interest at Coopers & Lybrand's Tampa office, now known as PwC.
Fact: Upon merging, both accounting firms (partners and staff) were required by the independence rule to divest all shares owned in companies audited by each other. The independent study revealed that this never took place and in fact PwC had committed an independence violation at that location.
SEC Charges PwC with Auditors' Independence Rules
The "auditor independence" issue came to the forefront on January 14, 1999. The SEC issued an Opinion and Order Pursuant to Rule 102(e) of the Commission's...
Bibliography: 1. Tampa Bay Business Journal – February 15, 1999: SEC issues auditors new independence guidelines by Carol Cronan: http://tampabay.bizjournals.com/tampabay/stories/1999/02/15/newscolumn2.html
2. CFO Magazine – March Issue 2000 – CFO.com: Policing the Auditors There are rumbles in the industry that more than one Big Five accounting firm will be found in violation of independence regulations by Leslie Schultz: http://www.cfo.com/article.cfm/2988508/c_3046533?f=insidecfo
3. Accounting Education.com: Independent Consultants Finds Widespread Independence Violations at PriceWaterhouseCoopers – January 10, 2000 by Andrew Priest: http://www.accountingeducation.com/news/news779.html
4. South Florida The Business Journal – April 7, 2000: SEC keeping close eye on accountants ' independence by Jim Freer: http://www.bizjournals.com/southflorida/stories/2000/04/10/focus3.html?t=printable
5. The CPA Journal: The SEC 's New Auditors Independence Standard by Dan L. Goldwasser Esq. http://nysscpa.org/cpajournal/2001/0400/features/f041801.htm
6. Business Week Online.com – September 30, 2002 – Arthur Levitt 's Crusade http:businessweek.com/print/magazine/content/02_39/b3801097.htm/
7. The Auditor 's Report Volume 23, No. 2, Winter 2002 – An Update on Auditor Independence by Douglas F. Prawitt, Brigham Young University http://www.accounting.rutgers.edu/raw/aaa/audit/Pubs/Audrep/00winter/item04.htm
8. Business Week Online.com – September 25, 2002 – Accounting Wars Powerful auditor-consultants are the target of Arthur Levitt 's crusade http://businessweek.com/2000/00_39/b3700001.htm?scriptFramed
9. TheStreet.com: Report on PriceWaterhouseCoopers Violations Has Some Critics by Robert Kowaiski and Tracy Byrnes Staff Reporters http://thestreet.com/pf/funds/taxes/856161.html
10. The Motley Fool – Fool.com: Who 's Auditing the Auditors? by Yi-Hsin Chang http://www.fool.com/news/2000/foth000110.htm
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