VideoConcerned that these kinds of close ties between accountants and corporates can lead to mistakes in judgement — or worse — one attorney has started counseling clients to show restraint in hiring audit team members. Martin Lipton, a partner at the law firm of Wachtell, Lipton, Rosen & Katz, recently advised the firm's corporate clients to refrain from hiring key members of the accountant's team "for at least three years after the individual last worked on the company's account." He adds, "At no time should a significant number of the company's finance and accounting staff be former employees of the account."
Shareholder activists are also encouraging the accounting industry to rethink the auditor/client relationship. Some activists believe corporations should be required to rotate their independent auditors. And in February, the Council of Institutional Investors asked the accounting industry to impose cooling-off periods before audit firm employees can go to work for audit clients.
So far, that hasn't happened. The Independence Standards Board's Standard No. 3 ("Employment with Audit Clients") offers safeguards to protect against the impairment of auditor independence, but does not recommend a cooling-off period. The American Institute of Certified Public Accountants has also issued guidelines for any company that does offer a job to a member of its existing audit team. And in November 2000, the SEC approved its revisions on auditor independence guidance — but did not endorse a cooling-off period.
It remains to be seen whether the commission will revisit auditor employment concepts like auditor rotation and cooling-off periods. Sue Coffey, AICPA vice president of self regulation and the SEC practice section, says that in the wake of the Enron collapse, the auditor employment issue is "on the periphery."
Managers at many audit firms would probably like to keep it there, too. The reality is, for a great many accountants, corporate audit work is their entree into the corporate world. For these future C-level executives, a cooling-off period would place a sizeable roadblock in their career paths. The SEC noted this problem when it issued its revised auditor independence guidance. "We have determined that a cooling-off period unnecessarily restricts the employment opportunities of former professionals," the commission stated, "and we have decided not to adopt a cooling-off provision."
Such a provision might have cost Jon Gacek a shot at becoming CFO. In the mid-'90s, Gacek worked as an auditor at PricewaterhouseCoopers. Then, in 1997, Gacek took at finance chief job at software vendor Advanced Digital Information Corp. (ADIC) — one of his clients at PwC. In fact, Gacek, was hired by the software maker right before the start of an audit.
By Gacek's lights, concerns about auditor independence should be focused squarely on auditors, not the audited. "The rules need to impact the firms, not the companies, and not the partners therefore leaving the firms," he insists. "My view is we have a relationship with our auditor, but it's their job to manage their independence, not mine."
Under the Influence
It appears auditors think they're managing their independence just fine. A number of accounting firms have examined the issue of auditors who go to work for clients. "Most firms have policies that exceed requirements," claims Edward Coulson, national director of independence at Ernst & Young. "I personally don't think there should be — or would be — a need for change."
At least one other Big Five senior executive appears to agree with Coulson. In a SEC-sponsored panel examining auditor oversight, Deloitte & Touche CEO James Copeland noted: "I believe most of the proposals will take us backwards rather than forwards. We need to be careful with ideas like mandatory auditor rotation, and examine why it now makes sense when so many groups previously studied the issue and consistently concluded it was wrong."
Nevertheless, two legislators appear undeterred by industry resistance to auditor employment restrictions. Senator Christopher Dodd (D-Conn.) and Sen. Jon Corzine (D-N.J.) recently proposed a bill that would in part ban any accounting firm from providing a public audit for a company whose controller or chief financial officer had worked for the firm in the previous two years.
The SEC did not go nearly that far when it issued its guidance on auditor independence. According to the commission's guidelines, an auditor's independence is not compromised if the auditor does not influence a company's operations or financial policies, does not have a capital balance in the firm, or does not have a financial arrangement with the company, other than a fully funded, fixed-payment retirement account.
Under the SEC's framework, when a auditor is approached by a client — and is considering a job offer — the auditor should pull out of the engagement. If the auditor accepts the offer, the accounting firm is advised to review the auditor's work to ensure that there is an appropriate level of skepticism in the audit. Also, the firm should reassess whether its audit procedures need to be changed, or for that matter, whether members of the audit team need to be replaced.
But industry watchers assert that SEC guidance and industry self-regulation may not be enough. They argue that an auditor who goes to work for a client may be able to exercise undue influence over the remaining audit team. If several members of an audit team go to work for the same company, critics claim it tends to create an old-boy network between auditor and client.
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