Treasury Audit-Firm Study to Start This Fall

Group headed by Levitt and Nicolaisen will seek views from public companies, investors, and members of the auditing profession, undersecretary says.

The Treasury Department’s initiative to study issues caused by the shrinking number of auditing firms is expected to begin with a meeting this fall, after members are selected for the nonpartisan advisory committee headed by former Securities and Exchange Commission chairman Arthur Levitt and former SEC chief accountant Donald Nicolaisen.

The formation of the high-profile committee was announced in an opinion-page article in this morning’s Financial Times by Treasury Secretary Henry Paulson. Additional details were provided by Robert K. Steel, undersecretary for domestic finance, at a meeting of the Council on Competitiveness in Washington, D.C.

“This soon-to-be-chartered committee will develop recommendations to address challenges facing this profession, such as industry concentration, competition, financial soundness, and employee recruitment and retention,” Steel said. “We will solicit a broad range of individuals representing views from the auditing profession, public companies, investor community, and other financial market participants.”

Added Steel, “Of course, management is ultimately responsible for a company’s financial statements but requiring these companies to have their financial statements audited by an independent accounting firm enhances investor confidence. Strong, trustworthy auditing helps to encourage entrepreneurs and capital providers to take appropriate risks.”

A second Treasury initiative aims “to enhance financial reporting, make the presentation of financial information more meaningful and accessible to investors, and gain a better understanding of why financial restatements have increased over the past decade,” Steel said, although he didn’t give details. “We will also encourage managers, directors and investors to focus on long-term value creation while maintaining frequent and accurate financial reporting.”

Secretary Paulson also said in his opinion article that he was commissioning “a rigorous analysis of factors driving financial restatements, and their impact on investors and the capital markets.” That article noted that corporate restatements had ballooned to 1,876 last year, from 116 in 1997, and said that the complexity of the financial reporting system was partly to blame. “Restatements pose significant costs on our capital markets,” he wrote. “They have the potential to confuse investors and erode public confidence in financial reporting.”

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