1. Yale School of Management July 26, 20001 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”

2. Yale School of Management July 26, 20002 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

3. Yale School of Management July 26, 20003 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.

4. Yale School of Management July 26, 20004 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

5. Yale School of Management July 26, 20005 Source: “Analysis of Data Requested by the Independence Standards Board from the Five Largest Accounting Firms," Antle & Gitenstein

6. Yale School of Management July 26, 20006 Source: “Analysis of Data Requested by the Independence Standards Board from the Five Largest Accounting Firms," Antle & Gitenstein

7. Yale School of Management July 26, 20007 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

8. Yale School of Management July 26, 20008 Integrity of Financial Reporting: Auditor Incentives Auditors’ incentives originate from many sources –Reputation –Competition & market pressures –Regulation & professional discipline –Civil litigation and criminal laws

9. Yale School of Management July 26, 20009 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.

10. Yale School of Management July 26, 200010 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