AICPA Announces Major Initiative to Strengthen Financial Reporting and Further Tort Reform Prospects
Miller, Stephen H., Journal of Accountancy
The American Institute of CPAs unveiled a historic initiative to bolster public confidence in financial reporting and to improve the climate for tort reform by expanding auditors' efforts to detect fraud, assuring auditors' independence and enhancing the reliability of information for users.
"This initiative represents the unified effort of the accounting profession," proclaimed AICPA board chairman Jake Netterville, who reported it was unanimously approved by the Institute's board of directors.
AICPA President Philip B. Chenok termed the project "one of the most significant initiatives put forward by the accounting profession during my 13 years as president of the AICPA."
Joining Chenok and Netterville at a Washington, D.C., press conference to announce the initiative were several leaders of the profession, representing both public accounting and commerce and industry.
The initiative, in part, is a response to economic changes that have placed new demands on the financial reporting system, even as some prominent business failures have reduced public confidence in that system. According to Netterville, decisive action is needed to solidify public trust by strengthening financial reporting.
"Fraud detection is our job," said Netterville. "The public expects auditors to uncover financial manipulation. Our goal is 100% detection, and we will continue to strive to meet it." Netterville noted, the AICPA has already endorsed the federal Financial Fraud Detection and Disclosure Act, which accelerates the auditors obligation to report suspected fraud to management and, ultimately, to government regulators. (See "AICPA Supports Fraud Detection Bill," JofA, May93, page 15.)
Other proposals - independence
"We are proposing that the revolving door between engagement partners of publicly accountable entities and their audit clients be closed," Netterville said. "We also believe that, when practical, audit committees of public companies and other organizations entrusted with other people's money should be composed entirely of independent directors."
The AICPA board believes public confidence in the existing disciplinary process has been undermined because it goes into action only after related civil litigation is concluded, said Netterville. "We intend to sharpen the teeth of the profession's self-regulatory program and remove the bad apples from our profession."
Confronting the liability crisis
J. Michael Cook, the chairman and chief executive officer of Deloitte & Touche, said pointedly, "The status quo just isn't good enough." Cook reported litigation-related expenses rose nearly 50% for the six largest accounting firms over the last two years and now consume 11% of their accounting and auditing revenues.
He also referred to an AICPA survey that showed claims against other firms rose by two-thirds between 1987 and 1991, helping to drive insurance premiums up threefold since 1985.
"For these reasons," Cook said, "we strongly support the restricting of joint and several liability as well as punitive damage awards to instances of |knowing fraud.' At the same time," he added, "we support the call for a new national disciplinary system to enhance the profession's ability to root out substandard performance and professional misconduct."
Cook said that, subject to appropriate regulatory oversight, sanctions should include fines and debarment from auditing public companies and other publicly accountable entities. …