New Senate Banking Chair Believes Independent Financial Statement Audit Key to Investor Confidence

Senator Christopher Dodd (D-Conn), the new chair of the Senate Banking Committee, has a long history of involvement in federal securities regulation, particularly in areas involving financial accounting and the audits of public companies. His main guiding principle has been that investor confidence in the accuracy of the outside audit of corporate financial statements is absolutely crucial to the successful functioning of the securities markets. In his view, transparent, accurate and unbiased financial information, and investor access to such, are the crucial ingredients for the proper functioning of free markets. Senator Dodd was a principal architect of Title I of the Sarbanes-Oxley Act, which created the PCAOB and endorsed the standard-setting role of an independent FASB under a secure funding scheme.

Over a number of years, Sen. Dodd has been either the chair, or the ranking Democrat, of the Securities Subcommittee of the Banking Committee. In that capacity, he has worked very closely on a variety of issues affecting the securities industry.

He believes that audit firms have a federal mandate to provide an accurate and independent audit of the financial statements of public companies. Acting on this belief, he has actively worked to strengthen the independence and objectivity of financial audits. At the same time, he believes that outside audits should be done by private audit firms, albeit with PCAOB and SEC oversight. He rejects direct federal audits of public companies by some government agency or a huge division within the SEC. (See Cong. Rec., Jan 23, 2002, p. S9).

In his view, the accounting and auditing profession deserves credit for the incredibly important role it has played in ensuring investor confidence by providing a seal of approval on corporate financial statements. But he has cautioned that, once lost, that trust is difficult, if not impossible, to recover, at least in the short term. He has said that conflict of interest, even the perception of conflict, undermines the confidence of the investing public.

As a precursor to Sarbanes-Oxley, Sen. Dodd introduced the Investor Confidence in Public Accounting Act of 2002 (S. 2004). The legislation would have created for the first time an independent regulatory organization to review audit quality and auditing standards under SEC oversight. It would have done other things as well, such as doubling the size of the SEC accounting staff and restricting accounting firms from providing non-audit services to a client while at the same time performing auditing services for the same client. It would also have banned any accounting firm from providing a public audit for a company whose CFO had worked for such firm in the previous two years. In addition, the bill clarified auditor independence standards.

Provisions in his bill were essentially incorporated into Sarbanes-Oxley, particularly the creation of the fully independent PCAOB. In addition the bill’s endorsement of an independent FASB secured by a steady funding source found its way into Sarbanes-Oxley. The new Banking Committee chair firmly believes that FASB should be the accounting standard setter. He rejects the idea that Congress should legislate accounting practices that the FASB would have to sanction. He described the idea that Congress would get into the business of legislating accounting standards as a ``frightening prospect.’’ He believes that FASB needs to remain independent and not be subjected to political pressure. See Cong. Rec., Jan 23, 2002, p. S10).

One issue that has greatly concerned Sen. Dodd is the independence of the outside auditor. He recognizes the inherent conflict in the fact that the auditor's compensation is paid for by the very company being audited. We cannot change that, he adds, but that is why independent and objective financial statement audits are so critical to investor confidence.