The firms have clearly said their viability will not be threatened by the separation

Session 3

CHAIRMAN LEVITT: Okay. Before we begin this next panel, I’d like to say that with the experience of the first two witnesses it’s apparent to me that in order to stay on schedule we’re going to have to save some of the questions we had for witnesses and present them subsequently in writing to follow-up.

I’m particularly looking forward to this panel: Rick Antle, Professor of Accounting at Yale School of Management; John C. Coffee, Jr. — who from my earliest days at the Commission has been enormously helpful to me personally and I think every Commission in terms of wise counsel — he’s Professor of Law at the Columbia University Law School; and Paul B.W. Miller, Professor of Accounting atthe University of Colorado at Colorado Springs, who has long been familiar with these matters, has written a classic work on the FASB. Welcome, and we’re anxious to area from you.

MR. ANTLE: Thank you, and I thank the Commissioners for hearing from us. I have co-authored several publications on independence and scope of services.

More recently, I’ve worked with the SEC Practice Section of the AICPA and the Big 5 firms on a couple of matters related to the ISB. I know some of the staff knows my relationships with the firms.

I wanted to underscore the fact that today I’m here as an informed and concerned citizen. I’m not representing any person or not being compensated for my appearance today.

I want to confine my remarks to independence and the scope of services. In my view — I’m going to begin, I guess, by a confession.

Having done my dissertation on auditor independence, I think I’ve been confused by this issue for probably more than 20 years now, ever since I first looked at it, things seem to swirl around. I think it’s a very confusing set of issues. I think I’m beginning to figure out why, and that’s one reason I wanted to talk to you today.

With the scope of services, there are really two major issues I think that we all ought to keep our eyes on. One is the integrity of the U.S. financial reporting system, and the other is the value added by non-audit services.

As you said, I’m a professor and associate dean at the Yale School of Management

When I think about the integrity of the U.S. financial reporting system, to me, it comes down to this: We want auditors to have good incentives. And we can talk about what those good incentives are.

We want them to conduct thorough audits. We want them to reveal things that they think are incorrect. We want them to stand up to clients when they think that there’s a reason to, but the bottom line is we want them to have good incentives.

When we think about the value added by non-audit services, I think we want to think about the fact that we’d like everyone in the economy to produce value added goods and services. That’s what drives economic efficiency and economic growth, and we all have an interest in that as well. My understanding is that the Commission is charged only with protecting the integrity of financial reporting, but I hope that somewhere in this game that overall efficiency is an issue as well.

I want to talk just about those two issues. I’ll begin with value added by non-audit services. I think that there’s just a prima facie case that accounting firms haveadded a tremendous amount of value to the economy by providing non-audit services. There are a lot of different measures of this I’ve looked at.