Reform should pass the public interest test - From the Chair - accounting - Brief Article

California CPA, May, 2002 by David L. George

Our profession is in the midst of a crisis. The turmoil isn't likely to go away soon, but as media hoopla and emotional energy surrounding the Enron collapse subside, we will enter a new phase that will require leadership from all of those who are realistic in their expectations for reform nationally and in California.

EMBRACING REFORM

CalCPA embraces professional reform where a demonstrated need exists. Public protection is--and should remain--our highest priority, but changes to accounting laws and regulations should be considered based on whether they meet the needs of all users and investors. At the same time, we should be mindful that reform should consider a system that is manageable and reasonable, not one that creates public confusion or unnecessary expense.

Currently there are more than 50 proposals on the table in Washington D.C. and many are expected in California. While most of these legislative and regulatory proposals are well-intentioned, it is crucial that we understand the details contained within each proposal, otherwise the result could be an unintended consequence.

NATIONAL AND UNIFORM

To begin with, reform should be national and uniform--as opposed to local and whimsical. While we recognize the well-intentioned efforts of our state and national legislators and regulators, we must caution them.

Their focus should remain on what is best for the public, as opposed to what may be perceived to be good or politically correct.

What is best for the public is national and uniform reform. A hodge-podge of state and federal regulations will create enormous public confusion that will not serve the public interest and will likely cause further negative impact to investor confidence.

Reform must recognize the fundamental differences in services delivered by CPAs to public companies and those rendered for private companies. A CPA who serves a privately held company is frequently the only accounting professional a client may know who has the skill set to advise them on complex transactions.

It also should be recognized that CPAs who work with private companies, work directly with stakeholders--banks, lenders, insurers and others--who are sophisticated enough to perform their own due diligence.

This is in sharp contrast to publicly held companies, where reports are filed in a public forum, and investors and shareholders often have no direct contact with the CPA. CPAs who work with public companies have a clear and distinct duty to protect investors who are distant and relatively uninformed and who generally have no capacity to perform their own due diligence.

This is where national reform is focused, and appropriately so, because investors in public companies are the most vulnerable to risk. But as reform is contemplated and analyzed, it also should be tested to determine if it serves the public interest in fact, not just in appearance.

CRITERA FOR REFORM

Reform should satisfy the following criteria:

* Help investors make informed investment decisions;

* Enhance audit quality and the quality of financial reporting;

* Increase public confidence in the capital markets, the financial reporting system and the accounting profession; and

* Support economic growth and general prosperity.

Tested against these criteria, CalCPA believes that the following specific national reforms, which have been discussed at recent federal hearings, meet the "public interest test":

* Creating a new national, private sector regulatory body. One that is independent of the accounting profession, includes public participation, and is charged with professional discipline of public company auditors and quality review of their audits.

* Real-time financial reporting. Moving to more rapid disclosure of material events and general financial information so investors can learn more quickly about opportunities and risks.

* Making audit committees more independent of management. Grant audit committees authority to approve their companys financial statements.

* Supporting corporate truthfulness. Making it unlawful to improperly influence or mislead auditors.

CalCPA has developed a comprehensive legislative and communications strategy for California reform. Join us in our quest to obtain the best balance of regulation that serves the public interest and is reasonable to the profession and the business community.

Enron's collapse has made it clear that reform is in order. But it must pass the test of true public interest.

David L. George, CPA/PFS, a partner with Irvine-based Soren McA dam George Investment Advisory Services LLP, is Ca/CPA 's chair. He can be reached at davidgeorge@attglobal.net