Top CPA Firms Urge Action to Salvage Image of Accounting : Audits: Industry plan envisions new laws and internal controls. Aim is to restore the public’s confidence.

The nation’s accounting industry Tuesday called for broad reforms it said would improve public confidence in corporate financial statements.

Proposals for cleaning up the profession and the reports they produce were unveiled by the American Institute of Certified Public Accountants, with the support of the so-called Big Six accounting firms.

The initiatives would create a nationwide disciplinary system that could crack down on accountants and firms guilty of substandard work or professional misconduct.

The system would be administered by the profession, with government oversight, and would be designed to “remove the bad apples,” Jake Netterville, the institutes’s chairman, told news a conference.

Much of the package would require significant action by regulators and lawmakers, but the group billed it as a much-needed first step toward stemming a loss of public trust in the industry.

Although the government to a large extent sets the rules, the impetus for them comes from the accounting industry.

“We couldn’t afford, in our view, to wait,” Netterville said.

The accounting profession has suffered in recent years in the wake of some highly publicized business failures.

Accountants for some of the savings and loan institutions that eventually failed, for example, have been criticized for failing to act on suspicions of financial fraud.

The accounting industry reiterated its support for pending federal legislation to require accounting firms to notify regulators of any appearance of corporate fraud. A key provision of that bill would shield whistle-blowing auditors from potential lawsuits.

The accounting group said that even with such protection, there is need for legislation to change the liability system to reduce the risk of unwarranted litigation.

The group proposed that public companies be required to have audit committees made up entirely of outside directors. It also called for management to report on its own internal controls over financial reporting.

Other proposals would:

* Close the “revolving door” between auditing firms and clients by barring publicly held companies from hiring the partners responsible for their audits for one year.

* Develop reporting rules to force regulatory agencies, underwriters, legal counsels and other participants in the financial reporting process to notify auditors of any suspicion of fraud.

* Require corporate management to disclose more information about risks and uncertainties that could affect their companies’ operations or financial conditions.

* Establish a system for reviewing alleged audit failures.

* Develop guidelines to help auditors assess any appearance of management fraud.