The package that you have presented in the proposals I think is a logical integrative one and one that flows from those basic principles.
I do want to point out, however, that there is evidence that consulting services have impaired independence going back to the Cohen Commission report issued in 1978. The Cohen Commission, an independent group composedof people from outside the profession and practicing public auditors, expressed the conclusion that in the Westec case providing consulting services had, in fact, impaired audit independence, and that involved providing merger and acquisition consulting, structuring deals, giving advice on how they would be treated as pooling or purchase and then coming in and making independent judgments on those things in the audit.
The Cohen Commission did conclude that there was an impairment. I would suggest that merger and acquisition consulting be added to your list of prohibited services for the same reasons that the Cohen Commission found an impairment in the Westec case.
Now, I’m not suggesting, I want to make clear I’m not suggesting that one case over 30 years ago should be the basis for your setting policy today. I do think it’s significant, though, that every AICPA committee and every POB committee that has spoken on the topic since 1978 has refused to recognize that the Cohen Commission clearly did point to a case in which consulting services, in their judgment, did impair independence.
I’d also like to add that the realities of litigation today make it very unlikely that there is going to be a smoking gun that clearly proves that impaired independence has been caused by consulting services.
In the case of Teachers Management and Investment Corporation, which was audited by KPMG Peat Marwick, there were allegations in the complaints filed of a lack of independence
The basic reasons are, first, that most cases are settled, and second, that a lack of independence is not usually even alleged in cases where there’s clear evidence for good reasons. Let me elaborate on that.
And one of the MO title loans bases for those allegations was lucrative consulting work for the client and the prospect of future consulting assignments. The case was scheduled for trial early in 1998, but it was settled, as most cases are, shortly before going to trial.
I don’t believe the detailed evidence that consulting services have actually impaired independence should be a prerequisite for restrictions of those services much for the same reasons that others have told you
The case of AUSA versus Ernst Young is my illustration of the other factor. I don’t know whether you’ve had an opportunity to read the decision. It was a bench trial, so there’s a decision by a federal judge. I’ve never seen a judge lay into an independent auditor the way that judge did to the firm.
He referred in very creative ways to the partner of the firm lacking backbone in most creative phrasing, referred to invertebrate flexibility and, in a sentence I chose to quote said, „Obviously, an audit becomes a pointless exercise if the auditor, after discovering substantial errors in a publicly-owned company’s financial statements supinelyacquiesces in the client’s refusal to correct the errors and certifies the statements.”
Anyway, in that particular case, there were consulting services provided, but, in the trial, those issues simply were not raised. And I did go back and I asked the attorney that presented the case and the expert witness that testified why they didn’t do that, and they said, „Well, simply, it was the case that we had a home run presenting a case based on poor quality of the audit.