CHAIRMAN LEVITT: You’re right on there in terms of this is very, very subtle, and it’s a combination of lots of small things. And I think it would be a terrible mistake to look away from it merely because there isn’t a so-called smoking gun. Now, the representatives from the Controller’s Office, Jerry Hawke, this morning was very concerned about the out-sourcing of the internal audit function, which some of the representatives of the firms felt was absolutely essential once again to performing better audits.
MR. JOHNSON: Similar to Bob Denham I think that the internal audit function is, basically, an arm of management to try and actually make sure that systems are working and that the organization is functioning properly, but it’s still a tool of management.
CHAIRMAN LEVITT: Might it be different with a small country bank that already was hard-pressed to have any such thing as an internal audit, and it’s an option between out-sourcing or not doing it?
Now, I’ve been involved in audit committees and chaired audit committees, and the internal auditor reports –in the experience I’ve had reports separately to the audit committee, and the audit committee tries to hold itself separate from management.
The ones I’ve been involved on don’t involve management and outside board members. Nevertheless, we’ve always viewed internal audit function as part of the internal operations of the firm and reports to the top management, and we’ve always treated it as such.
And I think to out-source that to accounting firms that are providing the audit then certainly makes it an advocate of management in many ways. I think that you could change the audit function, internal audit function, and treat it more like an outside auditor, but you have an outside auditor. So I think it would be a problem.
MR. JOHNSON: I’d have to give that some thought, but certainly it’s a more difficult issue for small organizations, business organizations that they may not have the expertise. But I would still think that they could hire the services of an accounting firm that’s not the auditor.
MR. DENHAM: I’ve been on an audit committee. I’ve chaired an audit committee that decided to out-source. Itmade debit card installment loans Emporia sense, in my judgment, in that environment, but we didn’t — we never seriously considered out-sourcing with the attest firm.
MR. DENHAM: I’d like to address for one second, Commissioner Carey’s previous question. I think it’s a mistake to focus too much on the cases of major audit failure and try to draw lessons from whether independence played a role in those.
I think the better question for guiding the Commission, I would suggest, is what set of rules is more likely to produce better accounting, better financial reporting in the ordinary circumstances of the good companies, the companies that aren’t trying to engage in major fraud? What set of rules about scope of services is going to help produce an environment that will encourage better reporting?
COMMISSIONER CAREY: I would agree with you, Mr. Denham. I guess, in listening to your responses, it’s not the spectacular accounting disasters, but what we have to seek to prevent is the incremental impairment of accounting standards that would have an exponential impact on investorsand on the public.
Session 8
As I look at these faces in front of me, and I didn’t know you, and I wondered what you did for a living, I’d say you were a group of psychiatrists, but you are academics.
We have George Loewenstein, Professor of Economics and Psychology — that’s close — Carnegie Mellon; Max Bazerman, Professor from the Kellogg Graduate School of Management Northwestern and a Fellow at Harvard Business School; Douglas Carmichael, Professor of Accounting at the Baruch College, City University and former Vice President of the AICPA, and Curtis Verschoor, the Research Professor, DePaul University.