This week, the Senate Banking Committee and the SEC took significant steps toward strengthening investor confidence, a goal that the accounting profession shares.

At its open meeting on Thursday, June 20, the SEC approved for public comment a proposal to create a Public Accountability Board (PAB). This private sector board, which would be "wholly independent" of the accounting profession, is designed to address "accountants' ethical lapses or competence deficiencies." Funding for the PAB would come from all public companies and their audit firms. The proposal calls for a Board consisting of nine members, at least six of whom must be public members. Practicing or retired accountants could hold the remaining three seats, but they would not be allowed to vote on any disciplinary matters.

In his remarks, SEC Chairman Harvey Pitt said, "This model sends a loud and clear message that the era of self-regulation of the accounting profession is over."

The SEC proposal followed on the heels of the Senate Banking Committee's approval of legislation creating a new Public Company Accounting Oversight Board with the authority to establish auditing and ethics rules.

The profession is committed to participating with the Congress, the SEC and the investment community to achieve needed reform that restores public confidence in the U.S. capital markets and financial reporting system. Among the reforms we advocated in our congressional testimony was the creation of a new Public Board to be responsible for discipline and quality monitoring for public company auditors. We support this unprecedented reform, moving from public oversight to public participation in these elements of regulation of public company auditors. We are pleased that the House of Representatives, the Senate Banking Committee and the SEC have all taken action that could lead to creation of such a Board. There are many other reforms we have advocated, which are contained in the submission we made to the Senate Banking Committee in connection with our testimony in March.

At the same time, we believe that the SEC may have gone too far in its current proposal, especially as it relates to standard setting. Both the Senate bill and the SEC's proposed rule, which we are still reviewing, raise some uncertainties about whether auditing professionals will continue to remain actively engaged in setting standards and whether auditors will have sufficient latitude to respond to the needs of both investors and public companies. We firmly believe that standard-setting is better done by individuals who have an in-depth, current and comprehensive understanding of auditing. In this regard, auditing should be treated no differently than medicine, law, engineering or actuarial science, where active professionals are responsible for setting standards.

In a letter written to the U.S. Senate, the U.S. Chamber of Commerce, speaking on behalf of small businesses in America, expressed similar sentiments: "Creation of a new board to enforce securities laws and establish an entirely new set of regulations and standards for the accounting profession will effectively create a government takeover of auditing and ethical standards and impose the risk of duplicative enforcement authorityBecause expertise is not a prerequisite for serving on this board, there is no assurance that professional standards will be set by individuals possessing necessary real-world experience."

We did note that SEC Chief Accountant Bob Herdman stated in the open meeting on June 20, that he expects the setting of auditing standards to be outsourced to the AICPA's Auditing Standards Board for at least for the foreseeable future and would continue under the oversight of the SEC. He further stated that auditing standards are not the problem, but rather the problem lies with compliance and execution in accordance with those standards.

We will continue to work with all interested parties to ensure that an appropriate resolution to these issues is found. The restoration of investor confidence is a goal to which we are deeply committed, and we believe that the profession can and should play a substantial role in the SEC's efforts to seek meaningful reform.

On another front, the verdict of guilt in the Arthur Andersen, LLP (Andersen) obstruction of justice trial was rapidly followed by the firm's decision to discontinue its audit practice on or about August 31, 2002. The Executive Committee of the AICPA's SEC Practice Section (SECPS) accepted Andersen's resignation as an SECPS member firm effective August 31, 2002 with certain immediate restrictions to be imposed.

The SECPS and Andersen have agreed that: (1) until August 31 the Executive Committee will continue to monitor the quality controls employed in Andersen's public company audit practice; (2) Andersen will cooperate with the AICPA's Quality Control Inquiry Committee (QCIC) in its ongoing analysis of reported cases, including Enron; (3) Andersen will cooperate with the Professional Ethics Division in its investigation of Andersen partners and employees who may have violated the code of professional conduct; (4) Andersen partners will immediately resign from SECPS committees, and (5) effective immediately, Andersen will not become principal auditor-of-record for any new SEC client.

The AICPA's QCIC ongoing investigation of a number of cases involving Andersen, including the Enron matter, commenced last December.

While we clearly face unprecedented challenges on several fronts, the AICPA continues to actively advocate for the more than 350,000 CPAs in this country doing the right thing, everyday. In this light, we will continue to speak out on any federal statutory or regulatory changes that could unnecessarily restrict the future opportunities of CPAs without meaningful protection of the public interest.

We will keep you informed on further developments and, as always, welcome hearing from you regarding any and all of these matters.

James G. Castellano, CPA
AICPA Chairman

Barry C. Melancon, CPA
AICPA President and CEO