Global Business

In Whose Best Interest?

The largest accounting firms are floating a half-dozen reforms for financial reporting and auditing, but finance officers and other experts have al...
Karen M. KrollJanuary 12, 2007

Later this year, the six largest accounting firms plan to hold open forums on their reform proposals for the industry. Those proposals, as outlined in a report called “Global Capital Markets and the Global Economy,” offer half a dozen changes that the firms say will better align the financial reporting and auditing process with today’s business environment. But finance officers and other experts may beg to differ.

“In my opinion, the report is nothing more than a glossy spin job, and not a very effective one at that,” says Bruce Pounder, president of Leveraged Logic and host of a Web-based series, “This Week in Accounting.”

Among the proposals is the idea that companies should issue financial reports more frequently than once per quarter, and disclose a wider range of information. “It’s not realistic,” says Pounder. He and others are concerned about the cost of greater frequency, and point out that competitors, not just investors, would have access to any additional information.

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Another idea is to introduce more forensic audits, in which absolutely every transaction, rather than a sample, is reviewed. That’s a nonstarter, says Dana R. Hermanson, professor of accounting at Kennesaw State University. He says sophisticated users of financial reports expect auditors to catch “material financial statement fraud — not all fraud” — which can be done with rigorous audits that focus on high-risk entries, such as end-of-period adjustments. The suggestion that catching fraud requires a review of every single transaction doesn’t hold up, says Hermanson, adding that such audits can be very expensive.

Others maintain that the suggestion that firms undergo forensic audits on a regular basis is, at least in part, an effort to boost auditors’ top lines. “Auditors delight in charging outrageous rates,” such as $1,000-plus an hour for a national Securities and Exchange Commission reviewer from one of the Big Four firms, charges James Wall, retired CFO of Core-Mark. “They’d like the gravy train to keep on rolling.”

Similarly, many observers dispute the report’s suggestion that audit firms should be able to engage in nonaudit services. “Segregation between audit and nonaudit services has been beneficial to the capital markets,” says Pounder.

The report maintains that forensic audits and the other suggestions would go a long way toward redefining the expectations gap, or the difference between what the authors say investors and other users of financial information expect an audit to uncover, and what an audit, as currently completed, actually can determine. In addition, the authors note that several forces are reshaping the world economies — namely easier access to information, growing cross-border trade, and the increasing importance of intangible assets in most companies’ operations — and are changing the type of information that investors and regulators need.

No timetable has yet been set for the forums. Obviously, the accounting firms hope their proposals will be embraced. But they may get a sympathetic audience, at best. Dennis M. Stevens, director of internal audit at Alamo Group, for example, says that “the point of the paper is well founded.” He believes the profession fundamentally needs to reinvent itself and move to a greater understanding of the processes used to determine the numbers being audited.

What Auditors Want…

(A) An Internet-based system delivering customized real-time corporate information

(B) Special forensic audits conducted randomly to detect fraud

(C) A single set of globally accepted accounting/auditing standards

Source: “Global Capital Markets and the Global Economy”