January 17, 2001
The Honorable David M. Walker Dear Mr. Walker: In September 1996, the General Accounting Office (GAO) released a seminal two-volume report, The Accounting Profession Major Issues: Progress and Concerns (GAO/AIMD-96-98), in response to my request concerning the status of recommendations made to the accounting profession over the prior two decades by major study groups to improve accounting and auditing standards and the performance of independent audits under the federal securities laws. GAOs principal finding was that, while the accounting profession had been responsive in making changes to improve financial reporting and auditing of public companies, the actions of the profession had not been totally effective. The most significant weaknesses were found in the areas of auditor independence, auditor responsibility for detecting fraud and reporting on internal controls, public participation in standard setting, the timeliness and relevancy of accounting standards, and maintaining the independence of FASB. Recent events, in particular last years bitter fight over maintaining auditor independence, suggest that GAO needs to take another look at the accounting profession. The AICPAs move to block funding for the Public Oversight Board (POB) to conduct the special reviews requested by the Securities and Exchange Commission raises a number of troubling questions about the integrity and effectiveness of the professions current governance system. Critics also contend that the peer review process is too clubby and too slow and that disciplinary actions are inadequate and ineffective. This is difficult to judge since the process is not transparent, thereby compounding the growing suspicions about ineptitude and collusion. In 1998, the POB appointed a panel of eight members, charging it to throughly examine the audit model. In his remarks to the panel at its public hearings, SEC Chairman Levitt asked: "has the accounting profession become so big and complex that perhaps we need a full-time SRO [self-regulatory organization]? Are the alphabet of regulatory bodies ... really workable?" The Panel on Audit Effectiveness (the so-called OMalley Panel) submitted its report and recommendations on August 31, 2000. I am transmitting Chapter 6 Governance of the Auditing Profession, and requesting that GAO answer Chairman Levitts question by reviewing the current governance structure, the Panels proposed system of governance (which appears to call for retention of the current list of entities reporting to an enhanced POB), the status of the professions response to the Panels recommendations, and the likelihood that the reforms, if implemented, will be effective. This is a matter of great importance affecting the reliability of financial statements, and I thank you for your prompt attention to my request. Sincerely, JOHN D. DINGELL cc: The Honorable W. J. "Billy" Tauzin, Chairman
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