Is there a difference between what some investors and lenders see as the role of the auditor of a public company and what it actually is? Yes. A number of investors see the auditor as responsible for uncovering fraud and accounting irregularities, while the auditor would probably argue they are only attesting to the companies' financial statements being prepared according to generally accepted accounting principles.
This resulting expectation gap means that when a corporate accounting scandal gets discovered, the attention eventually focuses on the auditors? Some in the accounting profession would argue that the public must be educated to understand the limited role that an auditor plays.
I wonder how well that argument works for the latest corporate accounting mess. It seems WorldCom allegedly mischaracterized $3.8 billion as a capital expenditure reporting profits of $1.4 billion for 2001 and $130 million for the first quarter of 2002. Without the expenses being booked as capital expenditures, the company would have posted a loss for 2001 as well as for the opening quarter of 2002.
This capital expenditure treatment was uncovered by the audit committee of WorldCom following the departure of its CEO and after the auditor was changed from Andersen to KPMG. Andersen issued a statement that said, "Our work for WorldCom complied with SEC and professional standards at all times. It is of great concern that important information about line costs was withheld from Andersen auditors by the chief financial officer of WorldCom." It sure looks like the "you-expect-too-much-from-us" defense. I am not sure many will buy it especially when you are talking about $3.8 billion discovered by a "routine audit" of the audit committee.
The problem is not an expectation gap, but rather a lack of confidence in the numbers being floated out by many of the Fortune 500 and 1000 companies. As more accounting irregularities are publicized, the lack of confidence seems even justified and is starting to spread to the auditors whose names appear on the financial statements. So far, Andersen, is the only firm that has been fatally hurt. But, what other accounting firms have to fear is that they are increasingly being identified as part of the problem, rather than the solution.
Ultimately, to be successful, that expectation gap will have to close, but accounting firms will probably have to do much more of the closing than the public by starting to deliver more of what the public expects and will soon demand.
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