The audit concept is a test check concept

It is not dealt with by any of the Commission’s rules, and therefore I must advise my client as to how to treat the problem. Well, the guiding principle that says if you have a conflicting interest with your client, then that violates independence.

And so for my money, the more the audit firm knows about the client the better the quality of the audit, and so I would look at those consulting services which actually adds to the auditor’s knowledge of the client’s management, the client’s internal controls and the client’s overall operations

Well, if there’s any conflicting interest, I’ve got to advise my client that this impairs his independence. That may not be the case, however. So as a guiding principle, it does not work very well because you don’t know where the guiding principles kick in and where they don’t kick in. So I think calling them a guiding principle is a problem.

I’d like to also talk about auditing your own work. I’m troubled by the concept because I look at, as an investor myself, what would I rather have.

So that underlies a lot of my concerns about the whole consulting area, and what I would think that you ought to do in the consulting area is you’ve got to look at the balance, because I think many consulting services actually improve the audit

Would I rather have certain judgments made about the accounting whether or not we should take a reserve for a particular contingency, should we have a reserve for a warranty, should that be made by a CFO who has a financialinterest in stock options, or whatever, or should it be made by somebody outside the firm; namely, an independent accounting firm?

My own money I would actually prefer that it be made in the first instance by the outside person, not by the CFO. Because if it’s made by the CFO, the outside administrator is only going to review it for reasonableness, is not going to simply put his own judgment on it.

And so the better determination, in my opinion, comes when the decision is made in the first place by the outside person, and so therefore the whole concept of auditing one’s own work bothers me because I can you get a more reliable set of financial statements if judgments are made in the first instance by somebody outside the company who does not have an interest.

As somebody installment loans in Illinois who has had to defend a lot of accountants’ liability cases, I can tell you that there are lots of things that slip by the audit. It is not one in which the auditor comes in and looks at every transaction, and therefore knowseverything from the fact that he has audited.

The auditor knows precious little. He has to make certain judgments about the financial statements based upon his test checks and his checks of a firm’s internal control. It doesn’t give you a great deal of assurance.

Those, in my opinion, would benefit the quality of the audit, and I would be very reluctant to throw those out too quickly simply to maintain the appearance of independence.

Independence, in my view, is a means to an end. It is a means to help achieve quality audits. The end, of course, is to achieve the quality audit, and where the independence rules conflict with getting quality audits I think independence as a concept must give way. That’s my own personal view.

MR. GOLDWASSER: Well, I do think that they conflict if you say that you’re auditing your own work, and therefore that impairs independence. I think there is aconflict there because I think there is a net plus, as I explained earlier, from doing some of the work by having the outside audit firm do some of the work in the first instance. I think that’s a conflict.