Concerns over Auditing Quality Complicate the Future of Accounting

The accounting profession has come to a strategic fork the road. One path leads to a future in which the profession accelerates its diversification into new services that complement and build on essential, traditional ones; the other path, an unchanging continuation of the profession's prior portfolio, is narrower. While the better course may seem obvious, it involves complex issues, many of which were debated during an October public hearing held in New York by the Panel on Audit Effectiveness, a group established by the Public Oversight Board at the request of SEC Chairman Arthur Levitt to address persistent concerns about the quality of audits conducted on the financial statements of SEC-registered companies. Attending the panel's two-day hearing were officials from approximately 20 organizations that represent practitioners, corporate executives, preparers, plaintiff and defense attorneys, academicians, financial analysts and investment bankers. Because precision and trustworthiness have long been articles of faith for CPAs, self-regulatory bodies such as the AICPA SEC Practice Section (SECPS) have taken practical measures to address SEC complaints about the inadequacy of the audit process as it's applied today. A handful of negative news stories about audits whose shortcomings had dire consequences fuels the SEC's ongoing discomfort about them. Two examples are the situations in which auditors failed to detect misstatements in financial reports, which later seriously weakened the effectiveness of large-scale mergers involving Cendant and McKessonHBOC. According to statistics from the SECPS, which monitors the activity of all CPA firms auditing SEC registrants, virtually all (99.7%) financial reports are problem-free (each year, on average, suits are filed on, or complaints raised regarding, the financial statements of only 50 of 15,000 SEC registrants.) But because the accounting profession's credibility and the financial markets' well-being are at stake, the AICPA and related self-regulatory bodies are redoubling their audit oversight efforts. Getting to yes The task involves not only identifying the problems but also maintaining a good working relationship among those who can do something about them. Former SEC Commissioner Aulana L. Peters, a member of the panel, is familiar with the ongoing controversy between the profession and the SEC. "I think both sides have problems with the other," she said in an interview. Referring to views expressed before the hearing, she added, "That's clear from the speeches being made by SEC officials and the reactions to those speeches from the profession. " At the hearing, further comments by SEC officials may have widened the once publicly denied, but now openly admitted, rift between the SEC and the accounting profession. Contributing to the gulf between the two parties, observers said, is the fact that the profession feels it gets mixed messages about its performance from the SEC. In its last annual report (1998) to Congress, the SEC said its accounting staff's review showed that the AICPA's audit oversight activities continued to result in improved quality control systems at SECPS member firms' auditing divisions, which review public companies' financial statements. Nevertheless, at the hearing Levitt voiced his "grave concerns that the audit process, long rooted in independence and forged through professionalism, may be diminished--perhaps even sacrificed in the name of more financial and commercial opportunities. " He added that the share of revenue that accounting firms derive from traditional auditing has been decreasing. "Some firms, perhaps preferring to distance themselves from the roots that have given them such opportunities, prefer to think of themselves as `multidisciplinary organizations. '" "Has the accounting profession become so big and complex that we need a full-time SRO? …