Big Auditors Are Figuring Wrong
The Securities and Exchange Commission’s proposed rule to assure the independence of financial auditors is exactly what’s needed to reassure investors. The SEC rightly sees unbiased, independent scrutiny of corporate books as essential to maintaining trust between companies and their stockholders. A few big audit firms oppose the SEC rule and are said to be pushing for congressional action to at least delay it. A delay would be against the interests of millions of small investors.
The cardinal rule of outside auditing is that it must be independent of the management of the companies it addresses. That was easy 25 years ago when accounting firms did little aside from auditing. Today, however, the five biggest accounting firms derive most of their revenues from business consulting, such as strategic planning and marketing programs. The “super accountants” of the future, as the profession itself envisions it, would practically run companies.
The SEC rightfully concluded that any auditing firm so intimately involved in a corporation’s management could hardly provide an independent, critical analysis of the financial statements. Accordingly, its proposed rule would impose strict limits on the types of consulting services an accounting firm could do for audit clients. This would prevent audit failures such as one involving Connecticut’s Colonial Realty, in which thousands of investors lost their life savings.
SEC Chairman Arthur Levitt is waging a crusade against accounting fraud, declaring a war on “managed earnings”--figures manipulated to meet Wall Street expectations--and cracking down on accounting that hides the true value of a business. He set up a special enforcement division to investigate financial fraud. Half a dozen cases of massive audit failures are expected to emerge from the probe.
The opposition is led by three of the five biggest auditing firms--KPMG, Deloitte Touche Tohmatsu and Arthur Andersen. Any congressional delay would probably come in the form of a rider on an unrelated bill. No such measure should become law.
