Accounting profession, heal thyself: A matter of survival

CPA Journal, The, Aug 2003 by Mano, Ronald M, Mouritsen, Matthew L, Swearingen, James G

Personal Viewpoint

After the Enron debacle, which followed and was followed by several other cases of apparent audit failure, the accounting profession faced unprecedented scrutiny. When then-SEC Chairman Harvey Pitt recommended a government organization to supervise the accounting profession, the AICPA's Public Oversight Board voted itself out of existence. In July 2002, the Sarbanes-Oxley bill was passed, mandating the SEC to establish the Public Company Accounting Oversight Board.

There is a great need now for CPAs to step forward and show how serious we are about our own survival. NYSSCPA Executive Director Lou Grumet wrote last year in Accounting Today, "Now is the time for CPAs and their professional societies to lead change and to require higher standards, higher than required by law." He was right on target.

The CPA profession has the potential to be the single most important player in the financial well-being of the United States of America. On the other hand, if financial statements are not truthful, the auditing profession is worthless. Six actions must be taken if we are to survive as a viable and respected profession:

* We must totally commit ourselves to the fact that the public is our client regardless of whose signature is on the check.

* We must commit ourselves to the concept of strict independence.

* We must decide that the statement, "fairly presented ... in accordance with generally accepted accounting principles" is two statements rather than one statement; that is, "fairly presented" and "in accordance with GAAP."

* We must strictly avoid conflicts of interest in audits of publicly held companies.

* We must refrain from taking jobs with audit clients.

* We must recognize that we are de facto SEC auditors. There are two parts to this:

* We must be willing to complete an audit regardless of the findings, even if there is no prospect of being paid, and

* A publicly held client should not be allowed to fire the auditor before completion of the audit.

The Public Is the Client

This is not a novel concept to anyone who has completed a college-level introductory auditing course. We have always been taught that the ultimate client is the public; however, we, as a profession, have not taken this concept to heart. When auditors talk of the client, they almost always refer to the company and the company personnel.

There is nothing new in this proposal. In 1984, in United States vs. Arthur Young (which resulted from Arthur Young's audit of Amerada Hess), Chief Justice Warren Burger told the accounting profession, "The independent public accountant performing this special function owes ultimate allegiance to the corporation's creditors and stockholders, as well as to the investing public."

Strict Independence Is Essential

This profession has always claimed to be independent but has seldom practiced it. Strict independence means that auditors of publicly held companies should not do any sort of consulting for that client. They certainly should not be their outsourced internal auditors. They should not even do tax work for publicly held audit clients. Again referring to United States vs. Arthur Young, Chief Justice Burger said, "This 'public watchdog' function demands that the accountant maintain total independence from the client at all times and requires complete fidelity to the public trust" (emphasis added).

In this area the profession should, as Grumet said, go beyond what is now required by law. The Sarbanes-Oxley Act prohibits certain types of consulting, not including taxes, but only contemporaneously with the audit. We should also voluntarily prohibit tax work, and these prohibitions should apply to any audit client, regardless of whether it is contemporaneous with the audit. This does not mean that CPAs should not be allowed to do consulting, internal auditing, or taxes; the only restriction should be that they cannot perform them for their own publicly held audit clients.

What about that long-time problem we call "low-balling"? Were the profession to require strict independence, low-balling would end. What rational professional would use an audit as a "loss leader" when no other service revenue is permitted with that client and the client is required by law to be audited?

Two Statements, Not One

Past court cases involving audit failures can teach important lessons. But often, the accounting profession as a whole does not take such case law to heart. One such case is Continental Vending, which was settled in criminal court in 1968. In that case, two partners and a manager of Lybrand, Ross Brothers & Montgomery (now PricewaterhouseCoopers) were found guilty of criminal negligence.

All seven of the other then-Big Eight testified on behalf of Lybrand, supporting the position that the defendants had followed generally accepted auditing standards and that the financial statements were in accordance with GAAP. The judge was not persuaded, and instructed the jury that regardless of what the accounting standards say, the profession must be held to a higher standard than GAAP. The message was that auditors should evaluate the probable effect of disclosures on stockholders' investment decisions, and if the disclosures are likely to affect such decisions, disclosure is appropriate regardless of GAAP's requirements. Clearly, the judge was saying that "fairly presented ... in accordance with GAAP" are two statements, not one.