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Two giants in the U.S financial services sector said Wednesday the Securities and Exchange Commission’s proposed auditor independence rules are necessary and pose no real threat to the accounting profession. Paul A. Volcker, former chairman of the Federal Reserve Board, and John C. Whitehead, retired chairman of Goldman, Sachs & Co., were among dozens of witnesses who testified on the controversial proposal at an SEC hearing in New York. “Too often we are surprised by business failures or control breakdowns when the symptoms should have been detected and reported,” Volcker said to an audience that included SEC Chairman Arthur Levitt and the three other commissioners. Volcker became Fed chairman in 1979 during a period of high inflation in the U.S. “The SEC proposals are clearly designed to deal with one cause of such failures–a possible lack of diligence that may arise because of business incentives inherent in the way accounting firms are structured and compensated,” he said. Mandating a split in providing auditing and consulting services would be “disruptive” to the industry, Whitehead said. “But when it’s over … there will be no net effect on the industry,” he added. For every dollar of revenue an accounting firm gives up, some other firm will win, Whitehead said. “The rules are not as bad as they might look,” he added. “There is no other way to ensure integrity.” The SEC’s most controversial proposal involves the scope of services provided by audit firms. The rules would prohibit an accounting firm from providing both consulting and auditing services to the same client. One noticeable no-show at the hearing was Stephen G. Butler, chairman and chief executive of KPMG LLP. He was the only one of any of the Big Five accounting firms’ management set to speak, but he did not attend because of a scheduling conflict, a KPMG spokesman said. The SEC declined to accommodate Butler’s schedule, a KPMG spokesman said. Most of the Big Five accounting firms and their trade group, the American Institute of Certified Public Accountants, oppose the auditor independence proposal. The proposed rules constitute “a radical restructuring of the industry without due process of law,” Robert K. Elliott, AICPA chairman, said Wednesday prior to testifying before the commissioners. The group aims at “not having the proposal delayed, but to have it eliminated,” Elliott said. The SEC will hold its third public hearing on the auditor independence proposal Sept. 20 in Washington. Copyright (c)2000 TDD, LLC. All rights reserved.

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