Audit Reform Starts Here

Accounting scandals are a national problem, and Washington should be leading reform efforts. But, if Washington won’t do it? California, to its credit, is considering effective and focused accounting reform bills in both the state Senate and the Assembly.

Paralysis in Washington has been driven by intense lobbying by the Big Five accounting firms--or the Remaining Four, as pundits are calling them in the wake of Andersen’s implosion. The nonpartisan Center for Responsive Politics reports that the industry in 2000 spent $14.7 million on campaign contributions and $12.3 million on lobbying.

A reform bill in the House would force publicly traded companies to disclose certain financial transactions that can now be concealed. It would not, however, directly cure abuses.

The Democratic-led U.S. Senate hasn’t developed a better solution and seems content to use the flawed Republican proposal in the House as an election-year weapon.

Securities and Exchange Commission Chairman Harvey Pitt has failed to propose effective reforms and is seen by his critics as far too cozy with the industry he regulates.

That leaves a void that the states, at least for now, must fill. The California Board of Accountancy, the state’s licensing body, has identified several “critical issues.” Legislation moving out of Senate and Assembly committees reflects the board’s recommendations.

The issues include:

* Prohibiting auditors from shredding pertinent documents generated during audits. Firms now are free to toss documents that investigators would need during subsequent disciplinary actions. AB 2873, sponsored by Dario Frommer (D-Los Feliz) and Lou Correa (D-Anaheim), would require that important paperwork be kept for seven years.

* Slowing the revolving door that is feeding a stream of accountants into high-paying jobs with recent clients. AB 2970, by Assemblyman Howard Wayne (D-San Diego), would create a two-year waiting period before auditors could accept employment with customers.

The Accountancy Board stopped short of recommending that audit firms be prohibited from handling lucrative consulting work. The board did, however, underline the need to protect auditor independence by restricting nonaudit services. AB 1995, also by Correa, would limit the consulting that audit firms could handle for customers, and SB 1527, by John Burton (D-San Francisco), would define allowable consulting services.

The state legislation would technically affect only accountants licensed by California. But this would cover so many auditors that it could not be ignored by the rest of the nation, especially if other large states followed suit.