July 26, 2000 1

Yale School of Management

Personal Data: Rick Antle• Professor of Accounting & Associate Dean ,Yale School

of Management

• Authored several academic publications on auditor independence, auditor incentives and the scope of services

• Co-authored the economic analysis for AICPA’s, Serving the Public Interest: A New Conceptual Framework for Auditor Independence

• Co-authored “Response to the Independence Standards Board’s Request for Information from the Five Largest Accounting Firms”

July 26, 2000 2

Yale School of Management

Terms of My Appearance Today

• I am here today as an informed and concerned citizen.

• I am NOT a representative of any body, nor am I being compensated for my appearance today.

• My remarks are confined to the issue of independence and the scope of services

July 26, 2000 3

Yale School of Management

Two Major Issues with Scope of Services

• Integrity of the U.S. financial reporting system– We want auditors to have good incentives.

• Value added by non-audit services– We want everyone in the economy to produce value-

added goods and services.

– It is my understanding that the SEC is charged only with protecting the integrity of financial reporting, but I would hope efficiency is a concern as well.

July 26, 2000 4

Yale School of Management

Value Added by Non-audit Services

• Prima fascia case that accounting firms have added a lot of value to the economy by providing non-audit services.

• The firms make money offering these services, and we should presume the clients also receive benefits

July 26, 2000 5

Yale School of Management

Big Five U.S. Consulting Revenues (Excluding Andersen Consulting)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1990 1991 1992 1993 1994 1995 1996 1997 1998

Year

Bill

ion

s o

f 19

96 U

S$

Source: “Analysis of Data Requested by the Independence Standards Boardfrom the Five Largest Accounting Firms," Antle & Gitenstein

July 26, 2000 6

Yale School of Management

Gross Margin before Partner Compensation (U.S. only) in 1998

0%

5%

10%

15%

20%

25%

30%

Assurance Consulting

Source: “Analysis of Data Requested by the Independence Standards Boardfrom the Five Largest Accounting Firms," Antle & Gitenstein

July 26, 2000 7

Yale School of Management

Economies of Scope: The Key Issue• Economies of scope are the values of the

synergies generated by bundling services

• There is no systematic evidence of their magnitude.

• Firms have been successful incubators:– Firms have achieved high growth in their consulting

businesses

– Arthur Andersen re-grew consulting after Andersen Consulting split

July 26, 2000 8

Yale School of Management

Integrity of Financial Reporting: Auditor Incentives

• Auditors’ incentives originate from many sources– Reputation– Competition & market pressures– Regulation & professional discipline– Civil litigation and criminal laws

July 26, 2000 9

Yale School of Management

Incentives are a Joint Product• It is impossible to isolate one feature and

call it independence

• Results:– Problem of auditor’s overall incentives is too

often forgotten in favor of moralizing about “independence”

– “Concerns” are substituted for evidence.

July 26, 2000 10

Yale School of Management

Requests

• A thorough, systematic attempt to estimate the magnitude of the economies of scope should be undertaken before serious restrictions on the scope of services are imposed

• Whatever rules are adopted should balance the value of the economies of scope against the potential financial reporting costs