Wednesday, Oct. 25, 2000 | 11:28 a.m.
Call it the accountants' version of detente.
Securities and Exchange Commission Chairman Arthur Levitt came to Las Vegas Tuesday to address the American Institute of Certified Public Accountants -- a group that has engaged Levitt in recent months in a bitter war of words.
The issue -- Levitt's push for a new SEC regulation that would prohibit what he sees as a conflict of interest: accounting firms offering both auditing services and consulting services to the same public company.
"I realize that for some, my presence may be a little like inviting (New York Yankees manager) Joe Torre to speak to the Flushing (N.Y.) branch of the Mets fan club," Levitt joked at the beginning of his speech.
But Levitt, who has been criss-crossing the country in an attempt to garner support for his controversial proposal, sounded a far more conciliatory tone at the event at the Venetian resort than in recent days. The SEC chairman didn't back off from his proposals, but appealed to the AICPA to work with him instead of battling him.
In an attempt to seize the moral high ground, Levitt suggested the measure was necessary to protect the integrity of auditors, "one of the most noble (professions) in our marketplace."
"I caution the profession against taking actions that may have the potential to negatively impact the credibility, integrity and respect the public has for three letters -- CPA," Levitt said, referring to the accounting profession designation "certified public accountant."
Rather than launching a verbal broadside, Levitt tried to convince attendees that the measure was necessary to continue the independent legacy of accounting.
"One generation of accountants passes on the light of independence to the next," Levitt said. "What you do with it will determine the future of this profession."
Though still in disagreement with the SEC chairman, AICPA officials didn't miss Levitt's conciliatory tone.
"The tone and expression of his points ... was reflective of his desire, which is also our desire, to work together," said Barry Melancon, president and chief executive of the AICPA. "I'm confident, in the long term, we will have a positive relationship with the SEC. We're going to hopefully work well together and find something that makes sense."
The timing of the softer talk is critical -- currently, Levitt and some of the nation's largest accounting firms are engaged in negotiations aimed at coming up with a compromise both sides can live with. Accounting industry forces have enlisted several members of Congress in this fight, who have put pressure on Levitt to delay the measure.
Within the accounting industry, the stakes in the fight are huge.
While auditing work still accounts for a big chunk of business for American accounting firms, the largest firms in the country derive as much as 70 percent of their annual revenues from consulting work. This consulting work covers a broad range of jobs, but is most often focused in the field of information technology.
That concerns Levitt, who argues that these huge consulting revenues could tempt accountants into dropping their vigilance in auditing a company's numbers, for fear a tough audit could jeopardize a lucrative consulting contract. In such cases at publicly held companies, Levitt said, the shareholders are the losers, since the auditor is failing to perform the task of making sure the numbers add up.
"It's the CPA who declares with his stamp (that) the numbers speak the truth," Levitt said. "Auditors are sometimes encouraged to go easy on a judgment call, or look the other way when it comes to accounting sleight-of-hand, all in the name of boosting revenues."
It is the latest shareholder-rights proposal championed by Levitt in recent months. Levitt has already successfully pushed for the introduction of "decimalization" in stock trading -- the use of decimals in stock price quotes, rather than fractions. This has helped investors by reducing brokers' spreads, or profit margins.
Levitt also pushed through "Regulation FD," a rule that bans company officials from releasing critical information to certain analysts or traders before releasing it to the general public.
But the AICPA, together with accounting giants KPMG International, Deloitte & Touche and Arthur Andersen, argues Levitt's latest proposal goes too far. They say there's no proof such conflicts of interest occur -- and that the SEC proposal, as worded today, would wipe out much of their consulting business.
"There are no cases where a CPA firm ... has in any way had a consulting (contract) interfere with the quality of an audit," said Geoffrey Pickard, spokesman for the AICPA."Objectivity, independence, integrity and high ethics are the bedrock of the profession."
Moreover, the AICPA argues that an SEC measure could have "trickle down" effects for small, independent accounting firms, even if the firms don't do work with public companies. Kathy Eddy, chair of the AICPA, said that could occur if state accounting boards adopted measures in their states modeled after the SEC proposal -- a move that would effectively extend the ban to private companies as well.
"I continue to have concerns about that," Eddy said. "That's still an issue we have to deal with."
Though Levitt expressed sympathy for these concerns Wednesday, he added that he didn't believe this concern was valid.
The benefits of offering both consulting and auditing services are obvious for an accounting firm. But some executives believe there are benefits for the client as well.
Glenn Christenson, chief financial officer of Station Casinos Inc. of Las Vegas, has seen both sides of the picture. Prior to joining Station, Christenson headed the gaming industry audit practice of Deloitte Haskins & Sells (now Deloitte & Touche).
While Christenson said Station's auditor, Arthur Andersen, doesn't perform consulting services for the company, he doesn't have a problem with the practice.
"The (auditing) firm has the institutional knowledge of how to fully service the client," Christenson said. "They know the personalities involved, they understand the business strategies and the goals set by management.
"There is some advantage to it. Each individual company needs to look at what their situation is."
This leads the consulting and accounting sides to sometimes share information on a client with each other, Christenson said, though he insisted consulting business never interfered with audits in his experience. However, he realizes that is the impression some outsiders have of the practice.
"The client needs to recognize the potential criticism," Christenson said.
Following his Las Vegas address, the SEC chairman will continue "earnest and ongoing" negotiations with accounting interests, perhaps in a less acrimonious atmosphere than has been seen before. It is possible, AICPA officials say, that the issue could be resolved within 30 days.
"If I had an option between imposing a rule on the industry, which is certainly within the power of the SEC, or reaching a consensus conclusion ... I would certainly opt for the latter," Levitt said after his speech. "Everyone is not going to be happy (with a negotiated settlement). Everyone in any kind of negotiation has to have room for flexibility."
Still, it isn't clear what Levitt is willing to give ground on.
"If you assume (a point) is a fundamental principle of integrity, then you can assume it's something I'm not going to budge on," Levitt said.
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