Now, let me confess at the outset that I’m not an accountant, although I’ve represented them in my professional career and have great respect for them both as individuals and as an aggregate group.
I am, therefore, going to limit my comments to the concept of the accountant as gatekeeper under the federal securities laws.
As Release 7870 reminds us, the world is changing rapidly
And from that perspective, I note that in its first couple pages Release 7870 starts out by saying that the federal securities laws make the auditor a gatekeeper for public investors.
Now, I would suggest to you that the concept of gatekeeper really refers both in law and economics to a kind of law enforcement strategy that understands that it’s often easier to deter and to police the agent of the corporation rather than the corporation itself or its internal management.
Why is that? Well, simply enough because the corporate client often expects very large gains or expects to avert very large losses from engaging in a certain type of impropriety and will, therefore, take much more legal risks than will the agents who work for it. The agents have reputational capital and have careers that aren’t wedded to that specific client.
Thus, the classic gatekeeper can be defined as someone who typically faces expected costs in the form of legal liabilities for not performing its duty that usually vastly are greater, that dwarf the expected benefits from any one client for, perhaps, shirking or perhaps acquiescing in management’s desire to engage in a possibly shady or irregular practice. I’m talking about irregularities, not pure fraud.
Now, that’s the classic gatekeeper, and the auditor typically fits that model. It had many clients. Theauditing revenues from any one client were small in proportion to its overall revenues, and it faced very significant legal liabilities if it didn’t perform its duty to investors in the market.
That’s the past. Now, Release 7870 focuses mainly on the changing revenues of diversified auditing firms that provide multi services to their clients, and it raises the possibility that as the majority of revenues come from non-auditing services more and more there’s a danger that the audit partner may become more of a marketer of consulting and advisory services for his firm than auditing.
Similarly, the Panel on Audit Effectiveness, in its discussion of compensation techniques, has noted that there is some change in compensation practices that may make the audit partner rewarded increasingly for his success at cross-selling services than for his skills at auditing per se.
All of those raise the expected benefits from possibly blinking at irregularities or possibly accepting practices in a field where standards are often somewhat inevitable and somewhat subjective.
That’s only half the story. What I want to focus you on where I don’t think it’s quite adequately covered in Release 7870 is that the legal risks, the liabilities, the expected costs facing the accountant who might be attemptedto shirk his duties in order to please management have vastly declined in just the last five or six years.
What I want to suggest to you is that once that concept of gatekeeper is understood and defined it does suggest there’s a strong need for the kind of limitationsyou’re talking about but perhaps some refocusing of those limitations that aren’t quite as categorical
In other words, what keeps the gatekeeper invulnerable, incorruptible in the past was the margin between the high penalties and the low gains from deferring to management and engaging in impropriety.
But that has all changed. Release 7870 does a better job than I can in talking about the possible benefits from selling these services that are subject to management’s pleasure and 
displeasure.