We have a concern where an auditing firm that’s doing an external audit is also selling a package of services to a bank that would involve getting them up and running in the securitization business, for example, because of the lack of independent judgment on valuations.
COMMISSIONER UNGER: Right. And you’re saying your concern is heightened because of the change or the repeal of Glass Stegall and the fact that the banks will be entering into new types of businesses, perhaps?
HAWKE: I can’t say that we’ve seen an increase in the out-sourcing of loan review to external auditors because we’ve made our position on that pretty clear
MR. HAWKE: Well, I think the broader of range of activities that a banking organization installment loans in Marion is performing the moreimportant particularly the internal audit function becomes.
CHAIRMAN LEVITT: The staff has expressed concerns that when an auditor performs management functions in the banking arena, such as loan credit reviews or analysis, that that kind of service raises the independence issue again.
Mr. Chairman. We think that those are management functions as to which management can’t delegate its responsibilities. And where management functions of that sort are performed by the external auditor we concur that that does present a violation of the independence standard.
MR. Our concern, as I said before, is about how pressures to reduce costs are leading to the out-sourcing of a number of functions that really are management functions. Loan review is one of them.
CHAIRMAN LEVITT: Well, you’ve been really very helpful and forthcoming and characteristically on point. We’re very, very appreciative for you taking the time toexpress your views on this important subject.
Session 2
CHAIRMAN LEVITT: The next witness is J. Michael Cook, former chairman and CEO of Deloitte Touche, former head of the FAF, for years deeply involved in the profession and its relationship with the Commission and with the public. I’d like to welcome you back again, Mike, and we look forward with great interest to your views.
MR. COOK: Thank you, Mr. Chairman. Good morning to you and to your fellow commissioners and members of your staff. I appreciate your invitation to share some thoughts with you this morning on this very important matter.
To provide time for your questions, I would like to summarize my prepared statement and spend just a few minutes on what I consider to be two key issues; one, the need for Commission action with respect to this, and second, the possible effect on audit quality. For me, those are two very important issues.
There are four points in my written statement that I would just like to repeat without elaborating on them this morning. One is that restrictions on financial relationships with clients should, in my judgment, apply to every partner in a firm without exception.
Second, the Commission should be sensitive to anyconcerns that are expressed to you about possible gender bias in your proposed rules. I have no specific comments with respect to that, but I’ve heard that suggested. And certainly, if anyone raises that subject with you, I would think that you could give that careful consideration in terms of the opportunities for the profession to attract high talent men and women.
The definition of «advocacy» should be clarified, in my judgment, to exclude customary auditor/client relationships which do not threaten independence. And in this regard, I think of what are the normal byproducts of good audit recommendations from an auditor to the client to enhance their controls, improve the efficiency of their business, lawfully minimize the taxes they pay.