Self-Policing of Auditing Industry Hit : SEC Criticized for Reluctance to Govern Accounting Firms

Launching an extensive congressional investigation of the accounting profession, a key House committee chairman Wednesday sharply questioned the integrity of the industry’s self-policing procedures and criticized the Securities and Exchange Commission’s reluctance to step in to do the job.

Audits of publicly held corporations by accounting firms run the risk of being tainted because the same firms also bid for lucrative contracts to perform other accounting services for the corporations, Rep. John D. Dingell (D-Mich.) said.

“How can the independent auditor on the job be expected to maintain independence when his or her personal success is linked to attracting clients and enhancing revenues?” demanded Dingell, who is chairman of the House Energy and Commerce Committee.

He noted that the SEC “has ample authority at this moment to address problems in standard-setting and audit enforcement.” Yet, he declared, “the commission seems to take great pride in its reluctance to use the powers granted to it by Congress.”

Two private witnesses, both well known as harsh and persistent critics of the accounting industry’s practices, opened the series of hearings before the committee’s oversight and investigations panel, which are expected to last into the summer and perhaps until autumn.

‘Private Priesthood’

In particularly harsh testimony, Abraham J. Briloff of the City University of New York characterized accounting as a “private priesthood” that often does not apply the rigorous independent standards implied by the term “audit.”

An audit, he observed witheringly, “has become a commodity” for sale and accountants should adopt a skull-and-crossbones logo as a warning to the public.

Briloff also derided the auditing standards often cited in accountants’ certifications of corporate earnings statements, “generally accepted accounting principles” and “generally accepted auditing standards.”

The second witness, Robert Chatov of the State University of New York at Buffalo, urged that regulation of accountants’ audit procedures be taken over by the SEC. He advised that “auditors ought to be assigned and rotated by the SEC, fees should be standardized and no other business contacts ought to be permitted between the auditor and the audited.”

Chatov criticized the SEC’s preference over the half century of its existence for leaving regulation of accounting to various “peer review” groups within the profession.

Malpractice Lawsuits

“The challenge here is to see they do the job they’re supposed to,” he said. “I think that it would be judged madness to invent a system where the one to be audited hired the auditor, bargained with the auditor as to the size of the fee, was permitted to purchase other management services from the auditor and . . . the auditor, in turn, had the prime responsibility for setting the rules and for enforcing them and applying sanctions against themselves.”

The fusillade of criticism over the accounting industry comes at a time when shareholders of bankrupt companies are filing malpractice lawsuits against the accountants responsible for auditing the financial health of those firms. In particular, federal regulators are looking at the role of auditors in some of the more publicized bank failures or near-failures of recent years, including those of Continental Illinois, Penn Square and United American banks.

At the same time, the dominance by the so-called Big Eight accounting firms, especially in the area of auditing major public corporations, is itself coming under scrutiny for possible antitrust action.

Dingell’s hearings are considered a likely arena for the airing of these and other grievances, but they do not represent the first time that Congress has looked at the profession. Indeed, the Senate Governmental Affairs Committee covered similar ground during a 1977 series of hearings, and both Chatov and Briloff also testified then--saying much the same thing, both noted Wednesday, as they said to Dingell’s subcommittee.

Chatov noted that Dingell’s renewed hearings are “sufficient indication that the hoped-for changes have not occurred, which is not surprising and which, unfortunately, fulfills the prediction I made when testifying before the (Senate committee in 1977)--namely, that unless structural changes were made, things would go on as usual.”