Following the stock market crash of 1929 accountants were entrusted with a new profession and a new mandate to pore over the books of public companies to ensure that the financial records accurately reflected their health.
Certified public accountants quickly gained status as a profession and were respected for their financial acumen and moral leadership as a hedge against unscrupulous companies who might try to hoodwink an unsuspecting public.
In those days, accountants were beholden to no one. Public corporations were required by law to pay their audit fees, and they diligently set out to perform their task as a service to investors.
The arrival of the computer on the corporate scene in the late 1950s changed everything. Since accounting was the first application used in the business world, a firm's CPA was the natural shoulder to turn to in understanding this new contraption. IT consulting - which has since boomed into a multi-million dollar industry for accounting firms - was born.
From the start, critics felt uneasy about CPAs' now dual role for their clients. Baruch College Professor Emeritus Abe Briloff touched on the issue in his 1965 doctoral thesis, and over the years the American Institute of CPAs and regulators have critically examined this relationship, but ended up doing nothing. This was at least partly due to the inability of anyone to definitively prove that providing consulting work for audit clients eroded an accounting firm's independence.
To this day, Big Five firms remain firm in their public statements, at least, that their top executives, and the auditors examining client books, are above reproach, and would never compromise an audit just because they also reaped consulting revenue from the same client.
Such an attitude is either bluster or naivete. It fails to take into account that auditors are human beings, and as susceptible to corruption as any other human.
"The problem is that they underestimate the forces of pressure that come up on them when they both audit and consult," says Accounting Professor Ed Ketz. "The pressure that if you don't let me do the accounting the way I want to, I'm going to take away your consulting contracts."
While these threats are most probably implied, "Everyone understands they're there," Ketz said.
The Big Five may never admit as much, but Congress and the public see right through them, and will make sure better safeguards are soon in place to protect them from themselves. And maybe once that's accomplished the accounting profession can return to its original mandate - ensuring the veracity of a company's financial statements.
-Tracey Miller
