Regardless of what you decide I believe there is a third point in your proposal that has not been adequately addressed, and that is the power of disclosure.
I encourage you to require the auditor and themanagement for each registrant to each file separate positive statements in which they affirm why they believe they are independent, and that disclosure should include the evidence that supports that conclusion.
In closing, I want to say that I believe you currently possess the authority and the power to forbid ownership and incompatible services. You also have the authority and the power to require managers and auditors to more fully inform the markets on these issues.
It’s clear from the context that has brought us together today that you need to act on these issues in a way that protects and promotes the public’s interest, and I think you have the obligation to produce these requirements despite being threatened by some constituents and harassed by some members of the Congress.
The irony is that you’re being harassed over trying to do something that is for the best of the auditors.
BECKER: Professor Coffee, I’m just wondering if you would — how you regard the change in the late ’90s,in the mid-’90s to the RICO statute, the Racketeer Influenced and Corrupt Organizations Minnesota cash company Act, that eliminated securities fraud as a predicate offense for treble damages
MR. COFFEE: I have conflicting reactions because I’m glad to have seen that change. RICO was being overused particularly in that context, but it is one more respect in which it’s a fit indication that the legal liabilities facing the accountant for possibly shirking its duties as a monitor have radically been reduced, and that creates this problem about are they still the classic gatekeeper in terms of the existing economic incentives.
MR. COFFEE: Essentially, any RICO complaint cannot assert violations of either the federal securities laws or conduct that could have been asserted to be a violation of the federal securities laws, so treble damages have been removed where, in the past, treble damages were often asserted in anti-fraud securities cases.
COMMISSIONER HUNT: I guess it’s still morning, so good morning. Professor Antle, you talked about a study of the economies of scope. Do you think that study ought to be done before we act?
It could be a fairly good case if the economies of scope turn out to be small, then you might well, on balance, decide that whatever perceived improvement in the financial reporting system you might get from banning certain types of non-audit services might be worth it
MR. ANTLE: Yes, I do, because we don’t have any idea of the magnitudes of the benefits that we might bedestroying.
On the other hand, if they’re fairly large, then that’s a different story. I did a little back-of-the-envelope calculation while I was sitting here by your own numbers that there are about $15 billion worth of non-audit services provided by the Big 5 in the United States in 1999, about 10 percent of that for audit clients, you said.
Some of my estimates were that about 20 percent of that number is, let’s say, gross profit. So that’s in the neighborhood of about 300 million a year just for the accounting firms.
If you double that just to naively assume the client gets equal benefit from the accounting firms, that’s about a half a billion dollars a year in benefits that are produced by auditors providing non-audit services to their audit clients. Now, again, that’s about as rough as you could get, but at least it’s somewhere to start.