Ethics -- First Item to Audit in New World of Accounting

Article excerpt

Accounting firms have adjusted their eye shades in recent years to explore a broad array of businesses. Companies may hire them to tally the books. Corporations may tap their expertise in technology to help prevent computers from crashing when the year 2000 arrives or solicit their advice about the impact of mergers on them. The firms' partners may even chair a creditors' committee.

But should these same accounting firms also audit the company's financial statements and provide the essential "second look" at the numbers that lets investors sleep at night?

The wave of mergers in the accounting profession, as Coopers & Lybrand tries to couple with Price Waterhouse and as Ernst & Young gets together with KPMG Peat Marwick, multiplies the conflicts and makes questions over whether auditors can remain truly independent from their other roles even more pressing. This is the challenge before the Independence Standards Board, the group created by the Securities and Exchange Commission and the accounting profession earlier this year. Composed of a mix of eight executives from the accounting industry and the public, the board's first task is to decide what problems need to be fixed. "Whether there is a problem and what the problem is is the first question people can disagree about," said William T. Allen, a former chancellor of the Delaware Court of Chancery, who serves as chairman of the the new board and will help steer its initial course. Ask the accountants, who made their view known in a report to the board in late October, and the problem is the current tangle of regulations and rules about auditor independence. Playing down the notion that their increased menu of services pose any real threat to their independence, they suggest adopting some broad principles and allowing each firm to develop individual codes of conduct. The firms would then decide for themselves if they were crossing any lines. Ask officials from the SEC, who are scheduled to submit their opinion within the next few weeks, and they say a greater need exists to clarify the lines separating activities. The prospect of four giant firms, with so many fingers in so many different consulting and accounting pies, makes conflicts more likely. "You have to draw the line some where," said Michael H.Sutton, the chief accountant for the SEC. Regulators are already seeing an increasing number of enforcement cases involving firms that serve as consultants as well as auditors. The concern, shared by some members of the Independence Standards Board, is that investors could lose faith in the integrity of the public audit. "If the confidence in the public audit is jeopardized, the capital markets would suffer and capital formation would suffer," said John C. Bogle, the chairman emeritus of the Vanguard Group, a mutual fund company, who fills one of four slots on the board reserved for the public. The accountants contend that their consulting arrangements only enhance their skill as auditors. Having a better understanding of a company and its strategic plan "helps you perform a better audit," said Barry C. …


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