The one question I did want to ask was what impact do you think, Mr

So I appreciate that perspective and perception which, as we have talked about a lot today, is part of thereality of what we’re looking at.

Goldwasser, the firms that now have separate consulting firms or are in the process of separating out their consulting services, what impact do you think that would have on the firm overall?

MR. GOLDWASSER: It’s hard so say. I’m concerned. My concern is the quality of people who will do tomorrow’s audits. There is no question in my mind that the consulting services are viewed as value-added services.

That means that they provide more value to the client, at least in the client’s eyes, and therefore, the client is willing to pay more on an hourly basis for those services.

If you take those services away from the firm, you make the firm less profitable. And I disagree with some of the gentlemen who spoke earlier from the accounting firms. I think they’re also the faster-growing services.

It’s a younger market. It’s a more wide-open market, and the audit service market is actually a fairly filled market; it’s a mature market. So I think that there is going to be more growth there.

The key factors in attracting good quality young people are is the firm going to be profitable? Is it going to have a position of partnership for me down the road? Andgrowth and profitability are the key to those particular decisions.

So I think that there will be a negative impact in the long run on the quality of person that goes into the audit firm if you divorce the consulting firms out.

COMMISSIONER UNGER: So you think, then, that audits would suffer overall because the talent won’t be at the firm where the consulting practice isn’t?

COMMISSIONER HUNT: Mr. Goldwasser, would you be concerned if they could do consulting work for non-audit clients so that, you know, they have this — or do you think that would be less efficient?

MR. GOLDWASSER: No. I think that’s fine, and I would love to see them do that. My concern in that regard is what one of the gentlemen from the accounting firms said this morning.

That is, if you’ve got a consulting practice that can only service 75 percent of the market, as opposed to 100 percent of the market, will they stay around? Is it not worth more to be separate? And my answer is it’s probably worth more to be separate.

Such arrangements introduce a number of risks, including, as the Commission has noted, questions about the independence of the external auditor both in fact and appearance

MR. KING: In terms of responding to your comment about attracting and retaining staff, we are competing with the Big 5 firms for attracting and retaining staff. And thefact that we don’t have this vast array of services has not impinged on us in any way whatsoever.

By the same token, the Big 5 firms don’t seem to have had any trouble in attracting people to their valuation staffs, so I’m not sure this is a real issue.

CHAIRMAN LEVITT: And there hasn’t been a single witness or a single panel today that hasn’t, in some way, impacted my thinking about this issue. We owe you an enormous debt of gratitude. Thank you very much.

Auditor independence is a crucial component of the financial reporting system that lies the foundation of our market strength. That said, the primacy of our position in the world of quality financial reporting cannot be assumed as a given.

In particular, I agree with the Commission’s initial view that a blanket prohibition on providing any consulting or non-audit services to financial statement audit clients may be unduly broad given the considerable expertise that audit firms can provide their clients.

I’m not aware of any bias whatsoever

We did a survey in the Northeast region, and a third of our banks in the Northeast region out-source audit, and half of those out-source to the same firm that does theexternal audit.

Also, we found that some auditing firms, in their consulting capacities, have worked with banks, particularly smaller banks, to get them into lines of business either through turnkey packages or consulting advice like securitizations and sub-prime lending where the issue of valuations becomes very important.

Those could, in a broad definition of “advocacy,” be swept in. I think those relationships and those activities are entirely appropriate and do not affect independence.

For me, the second key issue to be addressed is the potential effect on audit quality. I believe the Commission must, and I’m sure you will, give very careful attention to the possible effects of rule-making on audit quality. And as my statement indicates, I see three aspects of this issue.

And I would not assume that they took those things into consideration in measuring audit effectiveness, but the challenges that are being made to the quality of auditing certainly is a matter that does need your attention.

Many companies that I know of, perhaps most companies in America, simply don’t employ their auditor to provide some of these services. Do you think that has impacted the quality of their audits in any way? Are theyless well-served than companies that use the same person or the same firm that provides those services?

But I would say that to say that we should only be concerned about that, the appearance in fact, and not givedue concern to the appearance of independence would just not be the appropriate view. I think you need to listen, as you have, to differing views about the impact of this on the appearance of independence.

If you can reconcile all these issues, that would be a marvelous achievement, but I wouldn’t rest on that possibility.

If anybody brings to your attention a particular situation which they believe would have that impact, I would urge you to give very careful consideration to it. My own experience has been things that I would never think of having that effect sometimes do. I have nothing specific to offer, though.

MR. COOK: Well, I think the appearance problem comes into play on an individual client situation. I mean, there is nothing inherently inconsistent with having consulting and auditing in the same entity, services offered by the same entity.

I don’t know the answer to that question. I think you have to be very close to the workings of these firms on a day-to-day basis to know the intensity of the pressures for separations, the ability to recruit in the marketplace, the impact that these changes are having on that, the ability to retain key people in the consulting organizations.

Fees generated by non-audit services by these firms; I think in your document you even say that in 1999 it was $15 billion. In one of the responses that I made to the ISB, one of the figures that we had to produce or that Chairman Allen asked us to produce was, sort of, the gross margin per dollar of revenue for non-audit services.