When Financial Cops Turn Bad
Traditionally, accountants held the public role of financial cops, making sure companies didn’t cheat on their quarterly statements, swindle their stockholders or lie on their tax returns. That’s changing. Now many corporate accounting firms themselves are being reproached for breaking the basic rules of the profession. It’s time to put accountancy under closer scrutiny.
The Securities and Exchange Commission has been raising alarms for more than a year. But nowhere has the scale of wrongdoing been more shocking than in a Jan. 6 report commissioned by the SEC on ethics at PricewaterhouseCoopers, the world’s biggest accounting firm.
The study found that more than 86% of PwC partners violated the most elementary rule of accounting--independence from companies that their firm audited. Worse yet, six of the 11 top managers, or family members, were found to own shares in companies under their scrutiny. That conflict of interest undercuts the very foundation of the profession’s integrity. It also reveals what the independent investigator called “serious structural and cultural problems in the firm.” A year ago, PwC was cited by the government for the same misconduct and promised to set up a $2.5-million education fund for accountants.
Some corporate accountants are guilty of more than just violating the conflict-of-interest rules. Outright manipulation of earnings data to boost stock prices is up as well, according to the SEC. Cutting corners, bending rules and massaging numbers can distort companies’ performance and inflate share prices. This undermines the trust on which market economy is based.
Back in the 1970s, accounting firms like Price Waterhouse functioned largely as independent auditors. Today, the big accounting firms provide a variety of financial services, operating more like consulting firms than accountants. Audits bring in less than a third of their revenue. That has changed the culture.
Clearly, when leading accountants violate the cardinal rule of independence, self-regulation has failed. It should be replaced, not by cumbersome government rules but by an independent panel with enforcement powers.
Such a panel, the Public Oversight Board, already exists, but it has no teeth. Set up in the mid-1970s, it is composed of accountants and outside financial and legal experts. The board now should be given authority to set rules for audits and the professional conduct of accountants and to punish rogues, as is done with stockbrokers. Public trust in America’s businesses is at stake.
