Accountants need to be wary of promoting their services as advisors who can help their clients achieve success at the same time the firms are auditing their books.
That fact should be abundantly clear in the aftermath of the scandals of over a decade ago at companies whose names are now associated with accounting fraud, like Enron and WorldCom. The passage of the Sarbanes-Oxley Act of 2002, and the more recent financial crisis, should have made it even more apparent. But it’s easy to forget even recent history, and regulators are becoming increasingly worried about the slippery slope upon which some accounting firms could be starting to tread. Now with fresh accounting scandals popping up in recent weeks at companies ranging from Olympus to MF Global to Diamond Foods, which were regularly audited by some of the largest firms, regulators are starting to take notice.
Earlier this month at Financial Executives International’s annual conference on current financial reporting issues in New York, SEC Chief Accountant Jim Kroeker discussed some of the recent proposals from the Public Company Accounting Oversight Board calling for mandatory auditor rotation and auditor transparency. He encouraged audience members to share their comments and advice with the PCAOB on its concept releases.
“I think that’s particularly relevant when you think about something like mandatory auditor rotation,” he said. “What constructive advice do you have for the PCAOB in terms of how to improve auditor objectivity and skepticism, particularly when you hear stories like auditors in today’s world continuing to issue proposals that have words like ‘we want to be your trusted business advisor,’ or ‘we want to be your partner,’ or ‘our number one objective is client success’? What does that mean in the context of an audit? I guess if the number one objective is accurate financial statements for success, that’s one thing, but that’s not the connotation. Notwithstanding the fact that financial reporting has made very important strides since the early 2000 timeframe, I think there is some lingering question about the level of objectivity and how do we increase it.”
Kroeker made a good point. Accounting firms are again emphasizing how they can help their business clients achieve successful results, which is fine for the client advisory side of the firm. But if the audit side of the firm is promoting such services to the same clients, then that is clearly a conflict.
After Sarbanes-Oxley, many accounting firms shed their advisory businesses, spinning them off as separate businesses or selling them to technology companies, as PricewaterhouseCoopers did when it sold PwC Consulting to IBM in 2002. But not all of them did, such as Deloitte. Some, like PwC, turned around and rebuilt their advisory businesses after selling them.
In Europe, the pressure to split audit activities from non-audit services is growing. On Wednesday, Michel Barnier, the internal market commissioner at the European Union, released a draft law that would actually require the Big Four to split up in the EU and rename their non-audit units. The audit firms are sure to contest such requirements.
Accounting firms have good reason to hold themselves out as trusted advisors to their clients. But the same strategy can also lead to unforeseen consequences and firms need to be careful to avoid those pitfalls. The regulators are certainly watching for any missteps.
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