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United States General Accounting Office: 


Comptroller General of the United States: 
United States General Accounting Office: 
Washington, DC 20548: 

May 3, 2002: 

The Honorable Paul S. Sarbanes: 
Chairman, Committee on Banking, Housing, and Urban Affairs: 
United States Senate: 

Subject: Accounting Profession: Oversight, Auditor Independence,
and Financial Reporting Issues: 

Dear Mr. Chairman: 

This letter responds to your recent request that we provide our views 
regarding what steps the Congress should consider taking to strengthen 
oversight of the accounting profession, auditor independence, and 
selected financial reporting matters. The sudden and largely unexpected 
bankruptcy of the Enron Corporation (Enron) and other large 
corporations' financial reporting restatements have raised questions 
about the soundness of the current self-regulatory and financial 
reporting systems and resulted in substantial losses to employees, 
shareholders, and other investors. These events have also raised a 
range of questions regarding how such dramatic and unexpected events 
can happen and the role and capacities of various key players under the 
existing systems. 

The issues surrounding the accounting profession's current self-
regulatory system for auditors involves many players in a fragmented 
system that is not well coordinated, involves certain conflicts of 
interest, lacks effective communication, has a funding mechanism that 
is dependent upon voluntary contributions from the accounting 
profession, and has a discipline system that is largely perceived as 
being ineffective. (Enclosure 1 serves to illustrate the complexity of 
the current system of regulation and oversight and the stakeholders who 
rely on the system.) 

Simply stated, the current self-regulatory system is broken and 
oversight of the self-regulatory system by the Securities and Exchange 
Commission (SEC) has not been effective in addressing these issues to 
adequately protect the public interest. As a result, given the 
important role that independent auditors play and various inherent 
problems in the current self-regulatory system, direct government 
intervention is needed to statutorily create a new body to oversee the 
accounting profession's responsibilities for auditing public companies. 
This step is necessary in order to increase the effectiveness of the 
audit process and to rebuild public confidence. The new body should be 
independent of the accounting profession, have significant standards-
setting, oversight, and disciplinary authority, be adequately resourced 
to fulfill its responsibilities, and have sufficient operating 
flexibility to attract and retain quality leadership and supporting 

On the other hand, the concerns relating to the timeliness, relevancy 
and transparency of the financial reporting model may be best addressed 
through the SEC working more closely with the Financial Accounting 
Standards Board (FASB), assuring that the FASB has an adequate and 
independent source of funding for its operations, and reporting 
periodically to the Congress in connection with certain FASB matters. 
If such an approach is not successful in achieving the expected 
improvements in the financial reporting model in a timely and effective 
manner, the government can then take further action. 

The areas of oversight of the accounting profession, auditor 
independence, and financial reporting are important on their own, but 
they also represent interrelated keystones to protecting the public's 
interest. Failure in any of these areas can place a strain on the 
entire system. Consequently, potential actions should be guided by the 
fundamental principles of having the right incentives for the key 
parties to do the right thing, adequate transparency to provide 
reasonable assurance that the right thing will be done, and full 
accountability if the right thing is not done. These three fundamental 
principles represent a system of controls that should operate in
conjunction with a policy of placing special attention on areas of 
greatest risk. 

New Body Needed To Regulate And Oversee The Accounting Profession: 

Enron's failure and a variety of other recent events have brought a 
direct focus on the ineffectiveness of the current system of regulation 
and oversight of the accounting profession. Independent auditors have a 
key role to play in protecting shareholders and the public's interest 
in our capital market system. They hold a public trust and their 
actions or inactions can have significant implications on investors, 
creditors and other users of financial reports. In this regard, 
auditors must place additional emphasis on whether financial statements 
are "fairly presented in all material respects" in addition to their 
traditional emphasis on whether such financial statements are prepared "
in accordance with generally accepted accounting principles." Fair 
presentation requires providing reasonable assurance that major value 
and risk elements are appropriately reflected in the financial 
statements and related notes in an understandable fashion. It also 
requires employing an "economic substance" versus "transaction form" 
approach to important accounting and reporting issues. 

Many proposals are before the Congress to establish a new body to 
regulate and/or oversee accounting firms that audit public companies. 
In our view, the Congress should consider the following key factors or 
criteria in establishing this new body, each of which is critical to 
its likely effectiveness. 

Functions of the New Body: 

The new body should have direct responsibility and authority for 
certain critical functions in connection with public accounting firms 
and their members who audit public companies. These include: 

* establishing professional standards (independence standards; quality 
control standards, auditing standards, and attestation standards). The 
new body should be authorized to issue professional standards. In that 
respect, the new body should also be authorized to affirmatively adopt, 
at its discretion, professional standards, in whole or in part, 
promulgated by another standard-setting body. In the area of new 
standards, the new body may choose to require auditor reporting on the 
effectiveness of internal control over financial reporting in 
connection with audits of public companies, which is currently not 
required under existing auditing standards. It may also decide not to 
affirmatively adopt a standard developed by another standard-setting 
body but instead issue a modified version of the standard. 

* monitoring public accounting firms for compliance with applicable 
professional standards. For efficiency, except for quality reviews of 
the largest firms and those firms in which the nature of the audits 
they perform pose a higher level of risk as determined by the new body, 
the new body should be authorized to use contractors or accounting 
firms to perform quality reviews in accordance with standards and 
processes set by the new body. However, the new body should have final 
approval authority in connection with any quality review engagements
performed by any contractors or accounting firms. 

* investigating and disciplining public accounting firms and/or 
individual auditors of public accounting firms who do not comply with 
applicable professional standards. Investigations and disciplinary 
actions of the new body should be in addition to existing investigatory 
and disciplinary authority that already exists with the SEC and state 
boards of accountancy. 

* establishing various auditor rotation requirements for key public 
company audit engagement personnel (i.e., primary and second partners, 
and engagement managers). Related to this function, we believe the new 
body should undertake a study and report to the Congress on the pros 
and cons of any mandatory rotation of accounting firms that audit 
public companies before taking any action with regard to establishing 
requirements for any mandatory rotation of accounting firms. 

Funding for the New Body: 

The new body should have independent sources of funding by virtue of 
mandatory, not voluntary, payments. Public accounting firms and audit 
partners that audit financial statements, reports, or other documents 
of public companies that are required to be filed with the SEC should 
be required to register with the new body. The new body should have the 
authority to set annual registration fees and fees for services such as 
peer reviews of public accounting firms. The fees should be set to 
recover full costs and sustain the operations of the new body. 

Reporting Requirement of the New Body and GAO Access to Records: 

The new body should report annually to the Congress and the public on 
the full range of its activities, including coordination with other 
standard-setting bodies whose standards it so chooses to adopt, setting 
professional standards, peer reviews of public accounting firms, and 
related disciplinary activities. Such reporting also provides the 
opportunity for the Congress to conduct oversight of the performance of 
the new body. The Congress also may wish to have GAO review and report 
on the performance of the new body after the first year of its 
operations and periodically thereafter. Accordingly, we suggest that 
the Congress provide GAO not only access to the records of the new 
body, but also access to the records of other entities that the new 
body has chosen to rely on, such as other standard-setting bodies, and
contractors or public accounting firms that conduct quality reviews, to 
the extent GAO considers necessary to assess the performance of the new 

Structure of the New Body: 

The new body should be created by statute and should be independent of 
the accounting profession. To facilitate operating independently, the 
new body's board members should be highly qualified and should have 
authority to set and approve its operating rules. The new body should 
have independent decision-making authority; however, it should 
coordinate and communicate its activities with other parties such as 
the SEC, the various state boards of accountancy, other standard-
setters, and GAO, as appropriate. The new body should set its own human 
resource and other administrative requirements and should be given 
appropriate flexibility to provide compensation that is competitive to 
attract highly competent board members and supporting staff. The new 
body should also have adequate staff to effectively discharge its 

Candidates for the new body's board membership could be identified 
through a nominating committee that could include the Chairman of the 
Federal Reserve, Chairman of the SEC, the Secretary of the Treasury, 
and the Comptroller General of the United States. This approach would 
help to assure the qualifications and independence of all board 

The number of board members could be 5 or 7 and have stated terms, such 
as 5 years with a limited renewal option, and the members' initial 
terms should be staggered to ensure some continuity. Ideally, the 
members of the board should be presidential appointees who are 
confirmed by the Senate (PASs). However, if the board members are not 
PASs, the board should be actively overseen by and accountable to a body
that is composed of PASs, such as the SEC, in order to assure adequate
accountability to the Congress and the public. At a minimum, the chair 
and vice-chair should serve on a full-time basis. None of the board 
members should be active accounting profession practitioners, and a 
majority of board members should not have been accounting profession 
practitioners within the recent past (e.g., 3 years). 

There are several alternative structures that the Congress could choose 
from in establishing the new body, including creating (1) a new unit 
within the SEC, (2) an independent government entity within the SEC, 
(3) an independent government agency outside the SEC, or (4) a non-
governmental private-sector entity overseen by the SEC. Each of the 
above alternative structures have various pros and cons that should be 
considered in order to assure the credibility and effectiveness of the 
new body in protecting the public interest. We believe that each of the 
alternative structures provides an organizational foundation for 
managing and operating the new body that potentially is workable. For 
the following reasons, we favor alternatives two and three and believe 
they have a greater likelihood of success. 

Under alternatives one and four, the new body's functions (e.g., 
establishing professional standards, monitoring, and discipline) would 
be subject to SEC approval in order to assure that all actions are in 
the public's interest and appropriate accountability to the Congress 
and the public. This, however, would increase the SEC's responsibility 
as well as its workload, for the agency and the Commissioners, both of 
which are already overloaded. Also, under alternatives one and four the 
new body's board members would not likely be PASs since under 
alternative one the SEC Chair and other Commissioners are PASs, and 
since alternative four involves a nongovernmental entity. Therefore, 
under alternatives one and four, the new body would have less direct 
accountability to the Congress and the public than a body with board 
members who are PASs. This limitation could be mitigated to some extent 
by ensuring that regardless of the structure of the new body that board 
members are selected from candidates provided by an independent and 
appropriately qualified nominating committee as previously discussed. 

Although a structure that provides direct accountability to the 
Congress and the public is important in our view, a more critical 
question regarding the structure of alternatives one and four is 
whether the SEC has the capacity to effectively take on such an 
additional workload. Clearly, the SEC has the culture and potential to
perform an active oversight role and this would be in line with its 
current mission. But, does it realistically have the capacity to do so? 
From a historical perspective, while the SEC has had authority for over 
70 years to regulate the public accounting profession under the federal 
securities laws and regulations related to public companies, it has 
largely relied on the public accounting profession to regulate itself.
It is now apparent that this model has not adequately protected the 
public's interest. Therefore, the SEC would need to institute a new 
function within its organization, as called for in alternative one, or 
a new oversight structure for a private-sector entity outside the SEC, 
as called for in alternative four, both of which would require 
additional resources and a significant increase in priority to more 
directly regulate the accounting profession at a time when the SEC is 
already facing a range of challenges in fulfilling its current 
responsibilities. Further, we believe that the SEC also needs to 
increase the amount of time and attention that it allocates to 
interacting with the FASB, the stock exchanges, and the investment 
banking/analyst community. 

As we recently reported,[Footnote 1] the SEC's ability to fulfill its 
mission has become increasingly strained due, in part, to significant 
imbalances between the SEC's workload (such as filings, complaints, 
inquiries, investigations, examinations, and inspections) and staff 
resources. Although additional resources could help the SEC do more, 
additional resources alone would not help the SEC address its high 
staff turnover, which continues to be a major challenge for the agency. 
About 40 percent of the SEC's staff left the agency between 1998 and 
2001 and, as a result, the average level of experience at the SEC has 
been declining. For example, in 2000, 76 percent of the SEC's examiners 
had been with the agency less than 3 years. However, we also reported 
that the SEC has not made effective use of strategic planning and 
information technology to leverage its limited resources. In addition to
putting more strain on the SEC's capacity, alternatives one and four 
would also likely be less efficient models for the new body to operate 
under by requiring additional time and attention from the SEC. 

Alternative two, which calls for the creation of an independent 
government entity within the SEC, and alternative three, which calls 
for the creation of an independent government agency outside the SEC, 
do not pose the same capacity challenges for the SEC, especially at the 
Commissioner level, as alternatives one and four. Also, alternatives 
two and three both meet each of the critical factors outlined above for
the structure of the new body. We recognize there may be concern over 
adding more political appointments that have to be Senate confirmed, as 
called for under alternatives two and three, given the recent 
challenges of filling positions that are PASs. However, having an 
independent entity overseen by PASs serves to significantly enhance the 
entity's accountability to the Congress and the public. 

Of these two alternatives, we favor alternative two as having a greater 
likelihood of success because the new body would be housed within the 
SEC and, therefore, could receive administrative support from the SEC, 
including human resources, payroll, and other administrative support. 
More importantly, this alternative should better facilitate 
communication and provide for maximum coordination with the SEC, while
also allowing the new body the independence to design its own policies 
and procedures and systems as it deemed appropriate. In addition, 
alternative two would not require the Congress to create a separate 
federal entity. Alternative two would also facilitate a consolidation 
of the new entity under the SEC in future years if such a consolidation 
was deemed to be both desirable and appropriate. Therefore, we believe 
that alternative two has the greatest likelihood of success in terms of
potential effectiveness, efficiency, and accountability of the new 
body. However, as previously stated, each of the alternative structures 
has merit and can potentially work if properly designed and 

Auditor Independence: 

For over 70 years, the public accounting profession, through its 
independent audit function, has played a critical role in enhancing a 
financial reporting process that has supported the effective 
functioning of our domestic capital markets, which are widely viewed as 
the best in the world. The public's confidence in the reliability of 
issuers' financial statements, which relies in large part on the role 
of independent auditors, serves to encourage investment in securities 
issued by public companies. This sense of confidence depends on 
reasonable investors perceiving auditors as independent expert 
professionals who have neither mutual, nor conflicts of, interests in
connection with the entities they are auditing. Accordingly, investors 
and other users expect auditors to bring to the financial reporting 
process integrity, independence, objectivity, and technical competence, 
and to prevent the issuance of misleading financial statements. 

Enron's failure and certain other recent events have raised questions 
concerning whether auditors are living up to the expectations of the 
investing public; however, similar questions have been raised over a 
number of years due to significant restatements of financial statements 
and certain unexpected and costly business failures, such as the 
savings and loan crisis. Issues debated over the years continue to 
focus on auditor independence concerns and the auditor's role and
responsibilities. Public accounting firms providing nonaudit services 
to their audit client is one of the issues that has again surfaced by 
Enron's failure and the large amount of annual fees collected by 
Enron's independent auditor for nonaudit services. 

Auditors have the capability of performing a range of valuable services 
for their clients, and providing certain nonaudit services can 
ultimately be beneficial to investors and other interested parties. 
However, in some circumstances, it is not appropriate for auditors to 
perform both audit and certain nonaudit services for the same client. 
In these circumstances, the auditor, the client, or both will have to 
make a choice as to which of these services the auditor will provide. 
These concepts, which we strongly believe are in the public's interest, 
are reflected in the revisions to auditor independence requirements for 
government audits,[Footnote 2] which GAO recently issued as part of 
Government Auditing Standards.[Footnote 3] The new independence 
standard has gone through an extensive deliberative process over 
several years, including extensive public comments and input from my 
Advisory Council on Government Auditing Standards.[Footnote 4] The 
standard, among other things, toughens the rules associated with 
providing nonaudit services and includes a principle-based approach to 
addressing this issue, supplemented with certain safeguards. The two 
overarching principles in the standard for nonaudit services are that: 

* auditors should not perform management functions or make management
decisions, and, 

* auditors should not audit their own work or provide nonaudit services 
in situations where the amounts or services involved are significant or 
material to the subject matter of the audit. 

Both of the above principles should be applied using a substance over 
form doctrine. Under the revised standard, auditors are allowed to 
perform certain nonaudit services provided the services do not violate 
the above principles; however, in most circumstances certain additional 
safeguards would have to be met. For example, (1) personnel who perform 
allowable nonaudit services would be precluded from performing any 
related audit work, (2) the auditor's work could not be reduced beyond 
the level that would be appropriate if the nonaudit work were performed
by another unrelated party, and (3) certain documentation and quality 
assurance requirements must be met. The new standard includes an 
express prohibition regarding auditors providing certain bookkeeping or 
record keeping services and limits payroll processing and certain other 
services, all of which are presently permitted under current 
independence rules of the AICPA. However, our new standard allows the 
auditor to provide routine advice and technical assistance on an 
ongoing basis and without being subject to the additional safeguards. 

The focus of these changes to the government auditing standards is to 
better serve the public interest and to maintain a high degree of 
integrity, objectivity, and independence for audits of government 
entities and entities that receive federal funding. However, these 
standards apply only to audits of federal entities and those 
organizations receiving federal funds, and not to audits of public 
companies. In the transmittal letter issuing the new independence 
standard, we expressed our hope that the AICPA would raise its 
independence standards to those contained in this new standard in order 
to eliminate any inconsistency between this standard and their current 
standards. The AICPA's recent statement before another congressional
committee that the AICPA will not oppose prohibitions on auditors 
providing certain nonaudit services seems to be a step in the right 
direction.[Footnote 5] 

The independence of public accountants is crucial to the credibility of 
financial reporting and, in turn, the capital formation process. 
Auditor independence standards require that the audit organization and 
the auditor be independent both in fact and in appearance. These 
standards place responsibility on the auditor and the audit 
organization to maintain independence so that opinions, conclusions,
judgments, and recommendations will be impartial and will be viewed as 
being impartial by knowledgeable third parties. Because independence 
standards are fundamental to the independent audit function, as part of 
its mission, the new statutorily created body, which we previously 
discussed, should be responsible for setting independence standards for 
audits of public companies, as well as have the authority to discipline 
members of the accounting profession that violate such standards. 

Financial Reporting: 

Business financial reporting is critical in promoting an effective 
allocation of capital among companies. Financial statements, which are 
at the center of present-day business reporting, must be timely, 
relevant, and reliable to be useful for decisionmaking. In our 1996 
report on the accounting profession,[Footnote 6] we reported that the
current financial reporting model does not fully meet users' needs. 
More recently, we have noted that the current reporting model is not 
well suited to identify and report on key value and risk elements 
inherent in our 21st Century knowledge-based economy. The SEC is the 
primary federal agency currently involved in accounting and auditing 
requirements for publicly traded companies but has traditionally relied
on the private sector for setting standards for financial reporting and 
independent audits, retaining a largely oversight role. Accordingly, 
the SEC has accepted rules set by the FASB -- generally accepted 
accounting principles (GAAP) -- as the primary standard for preparation of 
financial statements in the private sector. 

We found that despite the continuing efforts of FASB and the SEC to 
enhance financial reporting, changes in the business environment, such 
as the growth in information technology, new types of relationships 
between companies, and the increasing use of complex business 
transactions and financial instruments, constantly threaten the 
relevance of financial statements and pose a formidable challenge for 
standard setters. A basic limitation of the model is that financial 
statements present the business entity's financial position and results 
of its operations largely on the basis of historical costs, which do 
not fully meet the broad range of user needs for financial 
information.[Footnote 7] Enron's failure and the inquiries that have 
followed have raised many of the same issues about the adequacy of the 
current financial reporting model, such as the need for additional 
transparency, clarity, more timely information, and risk-oriented 
financial reporting. 

Among other actions to address the Enron-specific accounting issues, 
the SEC has requested that the FASB address the specific accounting 
rules related to Enron's special purpose entities and related party 
disclosures. In addition, the SEC Chief Accountant has also raised 
concerns that the current standard-setting process is too cumbersome 
and slow and that much of the FASB's guidance is rule-based and too 
complex. He believes that (1) a principle-based standards will yield a 
less complex financial reporting paradigm that is more responsive to 
emerging issues, (2) the FASB needs to be more responsive to accounting 
standards problems identified by the SEC, and (3) the SEC needs to give 
the FASB freedom to address the problems, but the SEC needs to monitor 
projects on an ongoing basis and, if they are languishing, determine 

We generally agree with the SEC Chief Accountant's assessment. We also 
believe that the issues surrounding the financial reporting model can 
be effectively addressed by the SEC, in conjunction with the FASB, 
without statutorily changing the standard-setting process. However, we 
do believe that a more active and ongoing interaction between the SEC 
and the FASB is needed to facilitate a mutual understanding of 
priorities for standard-setting, realistic goals for achieving 
expectations, and timely actions to address issues that arise when 
expectations are not likely to be met. In that regard, the SEC could be 
directed to: 

* reach agreement with the FASB on its standard-setting agenda, 
approach to resolving accounting issues, and timing for completion of 

* monitor the FASB's progress on projects, including taking appropriate 
actions to resolve issues when projects are not meeting expectations; 

* report annually to the Congress on the FASB's progress in setting 
standards, along with any recommendations, and the FASB's response to 
the SEC's recommendations. 

The Congress may wish to have GAO evaluate and report to it one year 
after enactment of legislation and periodically thereafter on the SEC's 
performance in working with the FASB to improve the timeliness and 
effectiveness of the accounting standard-setting process. Accordingly, 
we suggest that the Congress provide GAO access to the records of the 
FASB that GAO considers necessary for it to evaluate the SEC's 
performance in working with the FASB. 

The FASB receives about two-thirds of its funding from the sale of 
publications with the remainder of its funding coming voluntarily from 
the accounting profession, industry sources, and others. One of the 
responsibilities of the FASB's parent organization, the Financial 
Accounting Foundation, is to raise funds for the FASB and its standard-
setting process to supplement the funding that comes from the FASB's
sale of publications. Some have questioned whether this is the best 
arrangement to ensure the independence of the standard-setting process. 
This issue has been raised by the appropriateness of certain accounting 
standards related to consolidations, that the FASB has been working on 
for some time, applicable to Enron's restatement of its financial 
statements as reported to the SEC by Enron in its November 8, 2001, 
Form 8-K filing. However, the issue has previously been raised when the 
FASB has addressed other controversial accounting issues, such as 
accounting for stock options. We believe that the FASB should have 
mandatory sources of funding to remove the appearance of any 
independence issues related to funding FASB. Therefore, the Congress 
may wish to task the SEC with studying this issue and identifying 
alternative sources of mandatory funding to supplement the FASB's sale
of publications, including the possibility of imposing fees on 
registrants and/or firms, and to report to the Congress on its findings 
and actions taken to address the funding issue. 

Closing Comments: 

The United States has the largest and most respected capital markets in 
the world. Our capital markets have long enjoyed a reputation of 
integrity that promotes investor confidence. This is critical to our 
economy and the economies of other nations given the globalization of 
commerce. However, this long-standing reputation is now being 
challenged by some parties. The effectiveness of systems relating to
independent audits and financial reporting which represent key 
underpinnings of capital markets and are critical to protecting the 
public's interest, has been called into question by the failure of 
Enron and certain other events and practices. Although the human 
elements can override any system of controls, it is clear that there 
are a range of actions that are critical to the effective functioning 
of the system underlying capital markets that require attention. In 
addition, a strong enforcement function with appropriate civil and 
criminal sanctions is also needed to ensure effective accountability 
when key players fail to properly perform their duties and 

The accounting profession's self-regulatory system has not effectively 
fulfilled its responsibilities. In addition, the current model whereby 
the SEC oversees various self-regulatory organizations in connection 
with financial reporting and auditing has not worked well, especially 
in connection with audits of public companies. Further, the SEC is not 
staffed to take on a more direct role in regulating the accounting 
profession nor has the SEC strategically managed its limited resources 
well. Therefore, we strongly believe that a new independent body, 
created by statute to regulate audits of public companies, is needed in 
order to better protect the public's interest. However, currently we do 
not believe that it is necessary or appropriate for the government to 
assume direct responsibility for financial reporting. We do, however, 
believe that the Congress should provide the SEC with direction to 
address the issues concerning financial reporting as we have previously 

In summary, Enron's recent sudden collapse, coupled with other recent 
business failures and certain other activities, pose a range of serious 
issues concerning the accounting profession and financial reporting 
that should be addressed. The fundamental principles of having the 
right incentives, adequate transparency, and full accountability 
provide a good sounding board to evaluate proposals that are advanced. 
In the end, no matter what improvements are made to strengthen the
oversight and independence of the accounting profession and enhance the 
relevancy and transparency of financial reporting, bad actors will do 
bad things with bad results. We must, however, strive to take steps to 
minimize the number of such situations and to hold any violators of the 
system fully accountable for their actions. 

We would be pleased to meet with you or other members of the committee 
to answer any questions that you may have or to provide further 

Sincerely yours, 

Signed by: 

David M. Walker: 
Comptroller General of the United States: 


[End of section] 

Enclosure 1: 

Figure: Complex diagram of the interrelationships among public 
interest, private sector regulation, and corporate governance in the 
accounting profession. 

[End of enclosure] 


[1] SEC Operations: Increased Workload Creates Challenges, [hyperlink,], March 5, 2002. 

[2] Government Auditing Standards: Amendment No. 3, Independence 
[hyperlink,], January 2002. 

[3] Government Auditing Standards was first published in 1972 and is 
commonly referred to as the "Yellow Book," and covers federal entities 
and those organizations receiving federal funds. Various laws require 
compliance with the standards in connection with audits of federal 
entities and funds. Furthermore, many states and local governments and 
other entities, both domestically and internationally, have voluntarily 
adopted these standards. 

[4] The Advisory Council includes 20 experts in financial and 
performance auditing and reporting drawn from all levels of government, 
academia, private enterprise, and public accounting, who advise the
Comptroller General on Government Auditing Standards. 

[5] Testimony of AICPA Chairman before the House Energy and Commerce 
Committee (Subcommittee on Communications, Trade and Consumer 
Protection), February 14, 2002. 

[6] The Accounting Profession: Major Issues: Progress and Concerns 
[hyperlink,], September 24, 

[7] The accounting and reporting model under generally accepted 
accounting principles is actually a mixed-attribute model. Although 
most transactions and balances are measured on the basis of historical 
cost, which is the amount of cash or its equivalent originally paid to 
acquire an asset, certain assets and liabilities are reported at 
current values either in the financial statements or related notes.
For example, certain investments in debt and equity securities are 
currently reported at fair value, receivables are reported at net 
realizable value, and inventories are reported at the lower of cost or
market value. Further, certain industries such as brokerage houses and 
mutual funds prepare financial statements on a fair value basis. 

[End of section]