Changing the U.S. capital market system.

• Author: Simko, David A.
• Position: A message FROM THE CHAIR

The U.S. capital markets are poised for a face lift in the wake of a new report from the U.S. Chamber of Commerce recommending a variety of changes. As business advisors, we should be leading conversations on this issue. At the very least, we should be prepared in case someone else introduces the topic.

The recommendations from the U.S. Chamber of Commerce include:

* Update the federal government's regulatory approach to financial markets and market participants.

* Persuade domestic and international policy-makers to address the risks of catastrophic litigation faced by public auditing firms and also allow national audit firms to raise capital from private shareholders other than audit partners.

* Make the Sarbanes-Oxley Act of 2002 (SOX) part of the Securities Exchange Act of 1934, thereby giving the Securities and Exchange Commission (SEC) the flexibility to address issues relating to SOX implementation.

* Increase retirement plan participation by introducing a simpler, consolidated 401(k) program and connecting employers with 21 or more employees to a financial institution that will offer retirement arrangements for such employees.

* Convince public companies to stop issuing earnings or move away from quarterly earnings guidance with one earnings per share (EPS) number to annual guidance with a range of EPS numbers.

The impact on the profession

While some of the recommendations affect CPAs indirectly as part of our role in the business machine, others affect us very directly, especially those in the audit field.

As a partner at Ernst & Young, I am especially interested in the proposal for greater protection for audit firms against catastrophic litigation. A healthy, stable auditing profession is the foundation to flourishing financial markets. Yet the report points out several factors that threaten the stability of the audit profession:

* Unrealistic expectations on the level of assurance provided by an audit

* Inherent limits on an audit's ability to detect fraud

* The precedence of indicting an entire firm rather than responsible audit partners

* The inability to secure necessary insurance coverage to protect against litigation

* Barriers to interstate and global service

The report also calls for allowing a limited number of national audit firms to raise capital from non-partners in hopes of generating the birth of a fifth...