[Congressional Record Volume 143, Number 19 (Thursday, February 13, 1997)]
[Senate]
[Page S1412]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 AUDITOR RESPONSIBILITIES UNDER THE 1995 PRIVATE SECURITIES LITIGATION 
                               REFORM ACT

 Mr. WYDEN. Mr. President, when a certified public accountant 
provides an opinion on a company's financial statements, investors and 
consumers rely on that statement. This role is vital to the efficient 
workings of our capital markets, which are the envy of the world. To 
keep our markets the best, investors must have confidence in them. That 
is why I have worked over the years for stronger rules to protect 
investors from corporate fraud.
  In recent years, corporate fraud has been perpetrated in the health 
care arena, military contracting and in the savings and loan fiasco, 
costing taxpayers billions of dollars. As a Member of the House and as 
a new Senator, I have worked to put in place clear procedures for early 
detection of fraud and illegal acts so as to protect the public from 
huge losses of their hard-earned tax dollars.
  To strengthen the fight against fraud, I worked as part of a 
bipartisan coalition that was successful in adding a new Section 10A to 
the Securities Exchange Act of 1934. I wish to take a moment today to 
update my colleagues on the status of that section's implementation.
  Since the enactment of this law in December 1995, I have been 
interested in how the Securities and Exchange Commission (SEC) and the 
accounting industry would respond to the new requirements and the 
spirit of the law. I am pleased that both the industry and the 
Securities and Exchange Commission have taken positive steps to assure 
that both the letter and the spirit of the law are fully adhered to. 
Within the industry, I would note that the American Institute of 
Certified Public Accountants (AICPA) last year issued a revised 
statement of Auditing Standards (SAS) Number 82 ``Consideration of 
Fraud in a Financial Statement Audit.'' The new SAS supersedes 
Statement of Auditing Standards (SAS) Number 53 relating to ``The 
Auditor's Responsibility to Detect and Report Errors and 
Irregularities.'' The previous AICPA Statement of Auditing Standards 
Number 53 required auditors to report errors and irregularities. The 
new SAS takes an important step forward by making clear for the first 
time an auditor's responsibility to detect material fraud in financial 
statements and by offering various fraud risk factors to be considered 
in planning and performing all audits. The new revised SAS, read in 
conjunction with the AICPA's SAS Number 54 relating to an auditor's 
responsibility to detect illegal acts, is not only consistent with 
Section 10A but also promotes the intent of that provision to put 
procedures in place to help detect fraud early.
  To date, the SEC has only limited experience with Section 10A because 
it becomes effective in two stages. For companies that file selected 
quarterly financial data with the SEC, Section 10A applies to annual 
reports for fiscal years beginning on or after January 1, 1996. For 
companies that do not file these reports, the provision applies to 
annual reports for fiscal years beginning on or after January 1, 1997. 
Many financial reports are filed at the end of the calendar year, 
meaning that most company audits for the 1996 fiscal year have not yet 
been completed. The SEC has assured me that it will evaluate and report 
on its experience with implementation of Section 10A in a timely 
manner.
  In addition, I wrote SEC Chairman Arthur Levitt seeking his views on 
whether the AICPA's new SAS Number 82 and existing SAS 54 relating to 
illegal acts are consistent with the purpose and intent of Section 10A. 
In his reply, Chairman Levitt states: ``We believe that both these 
standards improve the ability of auditors to detect management fraud 
and are consistent with the purposes of Section 10A.''

  Mr. President, the vast majority of accountants are honest, capable 
professionals. The number of audit failures is actually quite low 
compared to the amount of work they do. The AICPA's new revised SAS No. 
82 and section 10A are added protection for investors and corporations 
against such failures.
  I am pleased with both the work of the AICPA in clarifying the role 
of auditors in detecting fraudulent acts and with Chairman Levitt's 
reply assuring us that the SEC and AICPA procedures should work well 
together to promote the early detection of corporate fraud.
  I submit for the Record my letter to SEC Chairman Levitt and his 
reply of January 31, 1997, and ask that they be printed.
  The material follows:

                                                  U.S. Senate,

                                 Washington, DC, January 10, 1997.
     Hon. Arthur Levitt, Jr.,
     Chairman, Securities and Exchange Commission, Washington, 
         DC.0
       Dear Mr. Chairman: I am writing to seek your views as 
     Chairman of the Securities and Exchange Commission on the 
     status of implementation of Section 10A of the Private 
     Securities Litigation Reform Act of 1995 and particularly the 
     relationship between Section 10A and the American Institute 
     of Certified public Accountants' (AICPA) revised Statement of 
     Auditing Standards (SAS) Number 53 relating to fraud.
       As the sponsor of Section 10A of the legislation, my goal 
     was to clarify the auditor's role in detecting fraud in 
     financial statements and to put in place clear procedures for 
     early detection of fraud and illegal acts so as to avoid the 
     need for strike suits in the first place. I would appreciate 
     your views on whether the AICPA's revised SAS 53 and existing 
     SAS 54 relating to illegal acts are consistent with the 
     purpose and intent of Section 10A in seeking early detection 
     of illegal acts that are material to the financial statements 
     being audited. I would also appreciate knowing whether you 
     have encountered any problems in implementing and enforcing 
     the requirements of new Section 10A.
       I look forward to your prompt response to this request.
           Sincerely,
                                                        Ron Wyden,
     U.S. Senator.
                                  ____

                                                    Securities and


                                          Exchange Commission,

                                 Washington, DC, January 31, 1997.
     Hon. Ron Wyden,
     U.S. Senate,
     Washington, DC.
       Dear Senator Wyden: Thank you for your letter seeking 
     information on the implementation of section 10A of the 
     Securities Exchange Act of 1934, which was adopted as Title 
     III of the Private Securities Litigation Reform Act of 1995.
       In connection with this legislation, the American Institute 
     of Certified Public Accountants (AICPA) revised SAS No. 53, 
     entitled ``The Auditor's Responsibility to Detect and Report 
     Errors and Irregularities.'' To implement the reporting 
     provisions of section 10A(b), the Commission issued proposed 
     rules, a copy of which are enclosed. Final action is expected 
     soon.
       The AICPA's revised standard clearly requires auditors to 
     assess the risk of material misstatements in financial 
     statements due to fraud. In discharging this duty, auditors 
     must consider various fraud risk factors in planning and 
     performing the audit. It also requires that working papers 
     document both the auditor's assessment of those risk factors 
     and any responsive action taken.
       Additional guidance for auditors discharging their 
     responsibilities under section 10A(a) is found in existing 
     SAS No. 54, since this standard is not limited to fraudulent 
     conduct. SAS No. 54, as you know, served as a template in 
     drafting certain provisions of section 10A. We believe that 
     both these standards improve the ability of auditors to 
     detect management fraud and are consistent with the purposes 
     of section 10A.
       The Commission's experiences under section 10A have been 
     limited due to the provision's relatively recent 
     effectiveness.\1\ Section 10A becomes effective in two 
     stages, depending on whether a company files selected 
     quarterly financial data with the SEC. For those companies 
     who file this information, the provision applies to annual 
     reports for fiscal years beginning on or after January 1, 
     1996. For companies who do not file these reports, the 
     provision applies to annual reports for fiscal years 
     beginning on or after January 1, 1997. Since most companies 
     file at calendar year-end, the audit for the 1996 fiscal year 
     for most companies has not yet been completed.
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     \1\ During an enforcement investigation, however, an 
     accounting firm provided certain information and requested 
     that it be deemed to be submitted under section 10A.
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       After we have had time to evaluate our experiences for this 
     period, we would be pleased to furnish you with additional 
     information. Thank you again for your continuing interest in 
     these important issues.
           Sincerely,
     Arthur Levitt.

                          ____________________