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Comments in rebuttal to the rationale offered for extra services by attesting CPA's: About forty years ago (era of the Big Eight), I was a general partner of the firm of Smith and Harder, CPA's. We were national in scope and served, among others, the U. S. Philips Trust and performed attest audits of all of the affiliates within the continental United States. Through a series of mergers, Smith and Harder's clients ended up with KPMG. Prior to Smith and Harder, I had served on the staff of Andersen and reentered auditing after serving as controller of a medical center. Smith and Harder set billing rates (and adjusted salaries) on the basis of billing at two-and-one-half to three times the person's salary. If any write-offs were made, it was before the billing process. We identified and voluntarily eliminated our inefficiencies. Our practice included assembling an independent consolidation of the ninety companies that were then compared and reconciled with the company's effort at the consolidated level. We also made independent tax accruals that were also reconciled to the company's consolidated tax return. We retained our independence and our integrity. Our firm was small but highly respected. Several clients were listed on the NYSE. We performed an interim audit on the first half year and were capable of delivering our calendar year audit report in February each year. On each company audited, we developed a practice of identifying problem areas encountered in the field during the audit. We interrupted our audit work while we clearly state the problem and its impact on our audit. We issued an information letter to Mr. Smith and he in turn informed the Chairman of the Board by a written communication. We did not consider this to be an area of additional revenue. This heads-up service was very valuable to the Board Chairman. Big-Eight firms offered to take over one local audit at one-fifth of our charges without success. This service was possible because the Board Chair represented the interests of the owners, not the operating management. The need for Boards to be independent of the operating management is made clear by what has happened in recent history. When I approached a founding partner, George R. Smith, about doing systems work for one of the clients in my locale during slack periods, he observed that our reputation would suffer severely from any missteps in that process. He firmly believed and convinced me that it is the responsibility of management to resolve their problems in their own way. If management needs help, let them hire another firm with expertise in that area. If the problem persists, it is fair game to restate the problem is ensuing audits. I have come to believe that the investor or the investor's representatives need to take a long-term view of all of their investments. They need to ensure that the CEO is not the Board Chair and they need to determine that not only are the Audit Committee Members independent, but they also need to have an auditor's perspective, a healthy skepticism. [They could even be old audit warhorses like me.] Based upon my personal experience and the recent unsavory events, any effort to combine services beyond audit functions by the attest audit firm is suspect. I predict that once firms realize that they cannot be low-balled on fees to gain the extra services bonanza, the rapid trend toward bigness and the combination of auditing and other services will subside. Smaller firms with integrity can do a great job on the attest function. One thing we need to keep in mind is that only CPA's are capable and authorized to do attest audits. Anyone can call himself or herself a consultant. An attest audit that is well done in a timely fashion is a satisfying accomplishment. In my opinion, CPA's who are licensed to perform the attest function should be barred from encroaching upon the consulting practices of others. My logic is that everyone needs an audit and consulting work is optional to the management team. Since the CPA has a lock on doing the attest function, let him live with his chosen occupation. We did it that way for years. When I worked for Arthur Andersen & Co., they followed the practice of issuing a "blue-back" of recommendations on every engagement. I remember a senior who finished the audit assignment and in a few months he accepted the controllership of the company. I followed him as senior and on review; I found he had adopted only one of the eighteen recommendations he had composed. Auditors do not always appreciate the operating management's perspective. Reading between the lines, you can see that I do not agree with many of the stated positions of the AICPA as cited by Messrs. Ezzell and Melancon. But then, I have many more years of experience and I have had to watch Mr. Arthur Andersen's dreams being bashed to smithereens by irresponsible people. God rest his soul.
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