Rotation of auditors should be good for the accounting profession and good for the public interest. KPMG (formerly Peat Marwick Mitchell) has been the "independent accountant" for General Electric for over 100 years. Deloitte & Touche has been the "independent accountant" for General Motors for over 85 years - those facts speak for themselves.
PricewaterhouseCoopers audits 670 companies listed on the New York Stock Exchange. Ernst & Young audits 618 companies listed on the New York Stock Exchange. Deloitte & Touche audits 561 companies listed on the New York Stock Exchange. KPMG audits 424 companies listed on the New York Stock Exchange. The Big Four audit over 97 percent of the 2,341 companies listed on the New York Stock Exchange.
Is this good for the accounting profession? Is this good for the shareholders? Do the shareholders deserve better than this extreme concentration by the Big Four?
Over the years, two of the Big Four firms have been suspended by the Securities and Exchange Commission for six-month periods from accepting new public company clients. Two of the Big Four are now under investigation by federal grand juries for peddling tax-shelter scams. Should the accounting profession be proud of this situation? No! Perhaps it may not be elegant or discreet, but in the twilight of my career, I would rather be right.
The contention by some that rotation of engagement partners can solve the problem is absurd. Firms make policy, partners do not. We know that David Duncan, Enron's engagement partner in Houston, received his instructions from Andersen in Chicago. When Xerox was displeased with the engagement partner on its audit, KPMG changed the engagement partner.
Sarbanes-Oxley missed a golden opportunity when it considered rotation of auditors but avoided a needed reform and shunted it to the Government Accountability Office for study. The GAO has always been considered an effective and independent arm of Congress under such notable comptroller generals as Charles Bowsher and Elmer Staats. The current comptroller general and head of the GAO is David Walker, CPA, a former Arthur Andersen partner. Pursuant to the terms of Sarbanes-Oxley, the GAO submitted a report on the rotation of auditors to members of the Senate Committee on Banking, Housing and Urban Affairs and to members of the House Committee on Financial Services.
Questionnaires were sent by the GAO to 92 members of the SEC Practice Section of the American Institute of CPAs, which constituted almost all firms auditing public companies. In addition, the GAO sent questionnaires to financial managers of publicly traded companies. The questionnaires were designed to determine whether the 92 accounting firms and the financial managers of public companies favored rotation of auditors. What would you expect and how do you think they responded? Surprise - they did not favor rotation of auditors.
In a hearing conducted by the Senate Committee on Banking, Housing and Urban Affairs, Dr. John H. Biggs, chairman, president and chief executive of TIAA-CREF and a trustee of the Financial Accounting Foundation, made a strong case for rotation of auditors. He stated that for TIAA-CREF rotation of auditors was successful and energizing. His testimony was widely publicized and when I asked one of the authors of the GAO report if they were familiar with the testimony of Dr. Biggs, she responded, "Yes."
I then followed with, "Did you send Dr. Biggs a questionnaire?"
She replied, "No. We did not."
The argument is frequently made that only the Big Four have the international capacity to audit large public companies, but this ignores the capabilities of many qualified firms that belong to excellent groups of international accountants.
At one time, this writer served as president of CPA Associates International, which currently has representation in 92 countries. Another group, SC International, has representatives in 51 countries. Still another group, Baker Tilly International, has representatives in 78 countries. These excellent groups, as well as other groups, can audit large publicly held companies with international presence. The signature to the audit report could be that of the international association, which soon might be preferable to Big Four accreditation.
Of course, there are other items to be crystallized, including liability coverage, the designation of the independent accountant, etc. The names of the individual firms affiliated with the various associations would become known in international circles.
There is no mystique concerning the auditing of publicly held companies. A firm or group of firms capable of performing proficient audits can audit a public company. Midsized firms currently auditing public companies may be concerned about being rotated out of certain engagements, but under the new system they could double or triple the number of their public audits.
The question of who should audit public companies took place in a spirited dialogue when Sen. Alban W. Barkley queried Col. Arthur Carter (then president of the New York State Society of CPAs) in 1933 during a Senate hearing as to who should conduct the audits of public companies. Sen. Barkley, with a twinkle in his eyes, hinted that perhaps the U.S. government should conduct the audits. Col. Carter stoutly argued that the accounting profession should conduct the audits, and when Barkley asked what assurance there was to guarantee the quality of the audits, Carter responded, "Our conscience."
What happened to our conscience? Who was responsible for the decline in our esteem? Rotation of auditors could provide a breath of fresh air, a new level of competence, and needed democracy in the accounting profession.
Eli Mason is a past president of the New York State Society of CPAs, a past chairman of the New York State Board for Public Accountancy, and a past vice president of the American Institute of CPAs. He is the recipient of the American Accounting Association's Exemplar Award. He recently took time off to write a book, "Conscience of the Profession."
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