Consumers Union appreciates the opportunity to offer testimony regarding sunset review of the Texas State Board of Public Accountancy. I am Rob Schneider, Senior Staff Attorney at Consumers Union's Southwest Regional Office.

Half of U.S. households have funds in the stock market, many in investments for retirement. So, investor confidence and protection affects many Texans. Independent, reliable audits are a crucial element of investor confidence and investor protection.

This is an important time for restoring investor confidence, given the financial scandals that have damaged it. Consumers Union supports both state and federal measures to protect the public from any further accounting disaster, and we support changes to strengthen oversight to restore investor confidence and assure investor protection. It is important to improve oversight by the Board of Public Accountancy of regulated public accountants, and to remove the financial conflict of interest for auditors who are licensed as public accountants under Texas law.

Improving Oversight by the Board of Public Accountancy

We support the recommendations made by the Sunset staff designed to strengthen the Public Accountancy Act. Particularly, we agree with excluding non-board members from membership on policymaking committees (Recommendation 2.3), and requiring the Board to make detailed information about disciplinary actions available to the public (Recommendation 3.4).

We support changing the makeup of the Board to include majority public membership. Public governance of regulatory agencies assures the agencies policies are more independent of the regulated industry. In addition, we support whistle-blower protections to the Public Accountancy Act to protect individuals who report fraudulent accounting practices.

We also recommend additional evaluation of the peer-review system. The peer-review system assures that accountants are performing audit functions properly by having other accountants review their work. Though the Board has a hand in establishing the standards for review, there is no point at which a regulator -- solely charged with protecting the public interest -- actually performs a review.

In other areas where public confidence in the stability and solvency of companies is at stake, banking or insurance, for example, audits are performed by state regulators. Under Sarbanes-Oxley, an inspection process for accounting firms that audit nationally traded corporations will be implemented. We understand this is a major function of the Board's oversight program. However, Texas should carefully scrutinize the peer-review system to be sure it promotes the highest standards of review of auditing functions.

Eliminating Financial Conflict of Interest for Auditors Licensed as Public Accountants

Audit Fees May Undermine Auditor Independence

An analysis by the Wall Street Journal shows that audit firms are collecting non-audit fees of nearly three times the size of their audit fees. The analysis examined 21 of 30 companies in the Dow Jones Industrial Average who filed proxy statements by early April 2002. These companies paid total fees of $725.7 million to their audit firms. Only 27% of the total was paid for audit services, the other 73% was paid to audit firms for non-audit services. Auditors Still Perform Nonaudit Services, WALL STREET JOURNAL, April 3, 2002, p. C1.

According to Business Week: "That accountants have become increasingly dependent on consulting is clear. In 1993, 31% of the industry's fees came from consulting. By 1999, that had jumped to 51%." An academic study of the first 563 companies to file financials after February 5, 2001, found that "on average, for every dollar of audit fees, clients paid their independent accountants $2.69 for nonaudit consulting." One company, Puget Energy, is reported to have paid its auditor, PriceWaterhouseCoopers, "only $534,000 for its audit, but over $17 million in consulting fees." Nanette Byrnes, et. al., The Enron Scandal, Accounting in Crisis, BUSINESS WEEK, Jan. 28, 2002, p. 44.

The possibility that reliance on income from non-audit functions might influence the outcome of auditing services exists whenever the same accountant or accounting firm provides both services to a company. Restoring investor confidence and assuring investor protection strongly argues for the separation of non-audit from audit services.

We recommend that the law be changed to prohibit accounting firms from providing non-audit services to audit clients. There may be limited exceptions necessary, for example for 'mom-and-pop' companies, but with few exceptions, the functions should be separate.

In addition, we recommend that there be mandatory rotation of audit firms every four years. Rotating audit firms further assures independence of the audit services and that there will be a fresh look at a company's books on a regular basis.

Auditors Take Jobs With Companies They Have Just Audited

When Global Crossing filed for bankruptcy amid allegations of improper accounting, the firm's senior vice president for finance had been the engagement partner on the audit for Andersen before joining Global Crossing, according to the Washington Post. Kirstin Grimsley, Auditors Pushed into "Revolving Door," WASHINGTON POST, Feb. 19, 2002.

According to the Washington Post, the senior audit manager from PricewaterhouseCoopers solicited a job as chief financial officer of a subsidiary of MicroStrategy while conducting an audit of MicroStrategy. MicroStrategy later admitted, in the words of the Washington Post, that "it hadn't made the profits it reported," and investors lost billions. Accounting partners now start looking for new jobs in industry when they reach their forties, according to the Washington Post.

When auditors leave to take jobs with the companies they have just audited, it erodes investor confidence that the audit was truly independent, that the auditor did her job without regard to future employment with the audited company. We recommend Texas put into place auditor revolving door prohibitions that would keep responsible members of an audit team from accepting employment as a financial officer of a company they have audited.

Conclusion

We support the recommendations made by the Sunset staff designed to strengthen the Public Accountancy Act. (Support Recommendations 1.1 -- 1.6, 2.2 -- 2.3, 3.4).

We recommend:

• changing the makeup of the Board to include majority public membership.

• adding whistle-blower protections to the Public Accountancy Act to protect individuals who report fraudulent accounting practices.

• performing additional evaluation of the peer-review system.

• changing the law to prohibit accounting firms from providing consulting services to audit clients.

• requiring mandatory rotation of audit firms every four years.

• adding auditor revolving door prohibitions.

We appreciate the opportunity to provide comments to the Sunset Commission on the Texas State Board of Public Accountancy.