August 2, 2002

Dear Fellow CPA:

This is a time of unprecedented change for the CPA profession. Scrutinized on Capitol Hill and under attack from the media following Enron, WorldCom and other high profile business failures, our profession's self-regulation and sacred trust have been called into question. In the wake of this turbulent environment, President Bush signed into law on July 30, 2002, the most significant legislation affecting the accounting profession since 1933-- the Sarbanes-Oxley Act of 2002.

This new legislation brings uncharted waters for the CPA profession, particularly in the areas of standard setting and quality review. The AICPA has been studying these changes and is here to provide you with the information you need to navigate this complex situation. This e-mail highlights both our efforts during the past months and provides several items: (1) a summary of the new legislation, (2) a list of the provisions that will most affect the accounting profession, and (3) an overview of resources to help you understand the legislation and its impact on the profession. You will continue to receive similar updates in the months ahead.

One of the resources we have created to help members work through the legislation is a toll-free number. Members who have questions about the new law and how it will impact their firm or company, should call 866-265-1977. The hotline will be staffed Monday through Friday for the remainder of 2002. More details, as well as a list of other resources, are available later in this e-mail.

As we move forward to address these developing issues, let us be clear. We are determined to restore the public's faith, and the faith of our members, in the honorable credential of CPA. Our profession's core values always have been and will be: integrity, competence, and objectivity. As the vision statement that grew out of the grassroots efforts of CPAs across the nation asserts, CPAs are the trusted professionals who enable people and organizations to shape their future.

Hundreds of thousands of CPAs serve the public interest each and every day. We cannot allow a handful of CPAs and the fierce search for blame to taint the 340,000 CPAs in this country who stand by our values and make hard, ethical decisions without hesitation.

Unfortunately, the media, political and legislative fervor have frequently drowned out our simple and unshakeable message: This profession and its professional association cannot and will not tolerate any member in corporate America who seeks to commit fraud. Nor will we tolerate any AICPA member who performs substandard work and veers away from the fundamental code of ethics and responsibilities that have defined the CPA profession for over a hundred years. These are values we have labored long and hard to communicate to the press, to the public and to our membership.

We have walked a difficult road these past few months, determined to do the right thing by the public and by the honorable men and women in this profession. Developing meaningful reforms that protect the public interest and restore confidence in the accounting profession has been our primary focus. Thousands of volunteer and staff hours have been committed to educating and testifying before Congress, working with the media, analyzing the issues and identifying new reforms. In the end, the new legislation recently signed by President Bush does reflect our influence in measures that distinguish between auditors of publicly traded companies and those of private entities.

The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 dramatically affects the accounting profession and impacts not just the largest accounting firms, but any CPA actively working as an auditor of, or for, a publicly traded company or any CPA working in the financial management area of a public company.

Essentially, the Act creates the five-member Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control, and ethics (including independence) standards for public companies. It is also empowered to inspect the auditing operations of public accounting firms that audit public companies as well as impose disciplinary and remedial sanctions for violations of the board's rules, securities laws and professional auditing standards.

Other provisions affecting the profession include requiring the rotation of the lead audit partner and reviewing audit partner every five years and extending the statute of limitations for the discovery of fraud to two years from the date of discovery and five years after the act (previously one year and three, respectively). The bill restricts the consulting work public company auditors can perform for their public audit clients and establishes harsh penalties for securities law violations, corporate fraud and document shredding. To read a detailed description of the Sarbanes-Oxley Act, go to http://www.aicpa.org/info/sarbanes_oxley_summary.htm.

The ramifications of some of the provisions in the Sarbanes-Oxley Act will become known only as the SEC and the new Public Company Accounting Oversight Board begin implementing the bill. We will continue to analyze the legislation and keep you informed of how it will impact the profession. These are the areas you should be aware of:

• Consulting Services. The Act lists eight types of services that are "unlawful" if provided to a publicly held company by its auditor: bookkeeping, information systems design and implementation, appraisals or valuation services, actuarial services, internal audits, management and human resources services, broker/dealer and investment banking services, and legal or expert services related to audit services. It also has one catch-all category authorizing the board to determine by regulation any service it wishes to prohibit. Other non-audit services-including tax services-require pre-approval by the audit committee on a case-by-case basis. Pre-approved non-audit services must be disclosed to investors in periodic reports.

• Implications for CPAs with Tax Practices. "Expert" services are not defined in the Act and we do not know how broadly the board or the SEC will define this term. It is conceivable that some tax services we view as traditional may be construed as "expert" services, and not permitted by any firm providing audit services to publicly held audit clients. We will work with the board or the SEC to help them understand the importance of auditors providing tax services for publicly held audit clients. In addition, tax services performed by an auditor for a publicly held company would require pre-approval by the client's audit committee.

• Cascade Effect. Of particular concern is the cascade effect that the scope of services restrictions could have on small businesses and accounting firms. Our major concern is that the new legislation by Congress may become the template for parallel federal and state legislative or rule changes that directly affect both non-public companies that are subject to other regulations and the CPAs that provide services to them. As we write, several states are moving forward with legislation that could result in additional burdens for CPAs and possibly conflict with federal laws. The AICPA and the state CPA societies are monitoring this situation closely and will continue to keep you informed.

• Additional Burdens for CPAs in Business and Industry. CPAs working in the financial management areas of public companies will be directly impacted by the Act. These CPAs need to be aware of the new responsibilities of CEOs and CFOs, who are now required to certify company financial statements. They also have a greater duty to communicate and coordinate with corporate audit committees that are now responsible for hiring, compensating and overseeing the independent auditors. There are new requirements regarding enhanced financial disclosures as well. CPAs in non-public companies need to study the implications of the Act too. Many of the reforms could be viewed as best practices and result in new regulations by federal and state agencies-- the so-called "cascade effect."

AICPA Support for Meaningful Reform

There is no question that the provisions of the Sarbanes-Oxley Act are challenging. Shortly after Enron's collapse, we realized that the public who relies on the services of public company auditors no longer accepted our system of self-regulation and that we needed to take the lead in pursuing significant reform. We called for meaningful changes to strengthen the capital market system and increase public confidence. We advocated-

• Creating a new private sector regulatory body responsible for the discipline and quality monitoring of firms auditing public companies.
• Moving from public oversight to public participation in these elements of regulation of public company auditors.
• Restricting auditors of public companies from performing certain non-audit services that the public perceived as a conflict of interest.
• Limiting the composition of audit committees to individuals independent of management and knowledgeable and experienced in financial matters to ask insightful questions, engage in constructive dialogue and make informed decisions.
• Establishing penalties for executives who supply false information to or mislead their auditors.

Our calls were ultimately heard by Congress and many of our goals are reflected in the final Sarbanes-Oxley Act.

But it will take more than legislation to restore investor confidence in the capital markets and in the audit function. We continue to encourage the FASB to address the meaningfulness of the financial reporting model and the related disclosures. Also, fundamental changes are forthcoming to the audit risk model currently under consideration by the AICPA's Auditing Standards Board. In the near term, we expect the Auditing Standards Board to issue a new standard on fraud, which will significantly enhance the auditor's procedures and processes to detect material fraud in financial statements.

Your Professional Resource

To help you understand the ramifications of the Sarbanes-Oxley Act of 2002, the AICPA is developing several resources. A new toll-free number is available for any questions your firm or company may have about the legislation, how it will be implemented and how to comply. The hotline will be staffed Monday through Friday for the remainder of 2002. Call 866-265-1977 and select the option that is most appropriate for your firm or company. You will receive a response within twenty-four hours.

In addition, the AICPA will be creating periodic Webcasts to brief members on issues as they emerge, as well as short video clips and news alerts that will be sent to members through e-mail. To change your e-mail address, please call Member Satisfaction at 888-777-7077 or e-mail memsat@aicpa.org.

Firm leaders also are encouraged to attend "State of the Profession...Preparing Today for Tomorrow," scheduled for November 11-13 in Phoenix, Arizona. This symposium, developed by the AICPA MAP Committee, will discuss the reforms on Capitol Hill, the latest developments in the profession, perspectives from government and legislative leaders, as well as provide a forum for questions in an interactive Town Hall. Event highlights include an address by David M. Walker, Comptroller General of the United States, and a dialogue with Joseph Berardino, former CEO of Arthur Andersen. For more information or to register, please visit http://www.aicpa.org/conferences/crisis_profession.htm or call toll free 888-777-7077/direct 201-938-3000. PCPS member firms can also find information at www.pcps.org/member/member_resources.html.

We are also working to determine the appropriate role of the SEC Practice Section within the framework of the new oversight board and to work with the SEC to establish an orderly transition of SEC Practice Section activities. Additional regulations will be forthcoming from the SEC and the PCAOB. We will keep you informed as this process moves forward. In the meantime, all of our standard setting work will continue. There is important work that needs to be done and it is in the best interest of the public and the profession to keep those activities moving forward during this new era.

Our Council and Board of Directors have been our unwavering guide during the past months. With representatives from every segment of the profession-- seven from small firms; four from medium firms and two from large firms; four from business and industry; one each from government and education; and three public members-- the Board continues to be your voice, sharing your thoughts and concerns.

As the national professional home for CPAs, we share your deep concern over this situation and its effect on our business communities and profession. Rest assured that the AICPA will continue to be on the frontlines in the media and on Capitol Hill, sharing the profession's core values and the unwavering ethical commitment for which CPAs have always been known. We are dedicated to restoring the public confidence in the CPA as America's most trusted financial advisor and guardian of the public interest.

Yours sincerely,

James G. Castellano, CPA
Chair of the Board

Barry C. Melancon, CPA
President and CEO

Visit http://www.aicpa.org/info/index.htm for more information on federal and state legislation, the profession's response, exposure drafts, communications to members, financial reporting and other related issues.

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Thank You!