Accounting firms have adjusted their eye shades in recent years
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
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
to clarify the lines separating activities. The prospect of four
giant firms, with so many fingers in so many different consulting
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
"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
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. …