Pointing the Big Guns at Auditing Issues

Treasury Secretary Paulson asks Arthur Levitt and Donald Nicolaisen to study the impact of shrinkage in the audit-firm ranks and propose changes.

Treasury Secretary Henry Paulson asked Arthur Levitt and Donald Nicolaisen to head a non-partisan committee to address the implications of auditing-firm concentration and search for ways to strengthen the industry’s financial soundness and help it attract and retain qualified people.

In an opinion column published in today’s Financial Times, Paulson said former Securities and Exchange Commission chairman Levitt and former SEC chief accountant Nicolaisen would co-chair a group that would offer a public forum to investors, advocates, and companies to “present a wide range of views, engage in informed debate and provide recommendations.” The effort by Treasury reflects Paulson’s concern that, even as the Sarbanes-Oxley Act of 2002 improved the integrity of financial reporting, “new challenges arose,” including shrinkage in the number of major accounting firms that raised “legitimate questions about the sustainability of the auditing profession’s business model.”

Said Paulson, a former Goldman Sachs chief: “A strong auditing profession is essential for a well-functioning reporting system. The auditor’s role is key: to examine financial statements and express an opinion that conveys reasonable, but not absolute, assurance as to the truth and fairness of those statements.”

He added, “Our capital markets are the best in the world and so is our financial reporting system. We must work to keep them that way.” Paulson characterized the appointment of Levitt and Nicolaisen to head the new committee as one of “several important steps to ensure we preserve an efficient financial reporting system that provides reliable information, is supported by a sustainable auditing industry, and has enhanced compatibility with foreign reporting standards.”

The other steps, he said, involved Treasury’s commissioning of a study of the sharp rise in financial restatements by corporations, which Paulson said reflect the increasing complexity of the financial reporting system. A third action by the department, he said, would involve taking further steps, which the secretary did not identify, to move toward international accounting standards.

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