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INTRODUCTION
The challenges to the future of financial reporting have never been greater. As Chief Accountant of the Securities and Exchange Commission, I view these challenges from the perspective of the investing public, and from that perspective, I believe that the resolution of certain issues is especially critical if financial reporting is to continue to meet the needs and expectations of investors and our capital markets. One of those issues is auditor independence. It is a complex issue with far-reaching implications for both the public accounting profession and the public.
ROLE OF THE INDEPENDENT AUDITOR
The financial reporting and disclosure framework established under the securities laws more than 60 years ago assigns primary responsibility for the accuracy of financial statements filed with the Commission to the registrant and its management. The auditor's role is to attest independently to the reliability of those statements-to express an independent opinion as to whether the financial statements prepared by management comply with accepted standards and fairly present the financial condition and past performance of the registrant.
I recently reread the 1933 Congressional testimony of Colonel Arthur Carter, then President of the New York Society of CPAs, on the proposed legislation that would become the Securities Act of 1933 (U.S. Senate 1933). Colonel Carter testified in support of adding a provision to the proposed legislation that would require audits by independent accountants of the financial statements of companies issuing securities to the public. At the time, consideration was being given to establishing a corps of government auditors for that purpose, and the dialogue with Colonel Carter focused on the role of the public accountant as an independent check on the financial statements prepared by management.
While there surely were many factors that were weighed in considering Colonel Carter's proposal, I think the Congressional testimony makes clear the critical focus that was placed on independence and the important distinction drawn between the role of the independent auditor and the role of management. The testimony suggests clearly to me that independence was a critical factor in Congress' decision to accept Col. Carter's proposal and to look to the public accounting profession to examine the financial statements of SEC registrants.
Fundamental to the decision by the Congress in 1933 to require an independent...