America tries to shore up investor confidence

Bush: signed a new bill into law to restore confidence

By Martin Webber BBC World Service business news editor

Hopes that new laws passed last week will quickly end America's crisis of confidence in its accountants seem to be misplaced.

In recent months Americans have become used to seeing the downward restatement of company earnings by billions of dollars.

So in the past week, amid much fanfare, President George W Bush signed into law a bill designed to restore confidence.

Mr Bush described it as the most far-reaching crackdown on corporate crime since the 1930s depression.

"This law says to workers we will not tolerate reckless practices that artificially drive up stock prices and eventually destroy the companies and the pensions and your jobs," he said.

"And this law says to every American there will not be a different ethical standard for corporate America than the standard that applies to everyone else."

Done and dusted?

From the way President Bush talked about the issue, it sounds like the job is done and dusted.

"I think these are significant reforms but I have to tell you that the devil is in the details, they have to be implemented"

Professor John Coffee, Colombia Law School in New York

Well unfortunately it's not as simple as that.

The politicians have now been seen to have done something, but is it enough?

Everyone accepts that there have been cases where accountants have got too close to the clients that they're meant to be checking up on.

The fees that accountants make from consulting have been so huge, that they dare not risk losing them by making a fuss over aggressive accounting methods that make profits look rosier than they really are.

One suggested reform had been for accountants to be limited to auditing a company's books for a limited time - say 5 years - to stop relationships becoming too cosy.

That idea didn't get into the bill.

"Devil in the details"

So I asked Professor John Coffee of Columbia University Law School in New York if the accountants had got off lightly.

"I think what you really do address in this legislation is the danger I think had developed - that audit firms would see the auditing function as merely a loss-leader that they would use to get inside the firm to cross-sell more lucrative consulting services, and that has been addressed," he said.

"It only prohibits nine specific types of activity but those were the most lucrative - computer consulting, software design kind of services - that had in fact recently expanded."

"I think these are significant reforms but I have to tell you that the devil is in the details, they have to be implemented."

The 'big four'

The puzzle to outside observers is why global corporations have just four big companies to choose from when they're looking for auditors.

Why is there so little competition?

For an answer to this I turned to an accounting firm that's big - but not big enough to be regarded as one of the elite.

Newman: wants extra exams for auditors

BDO Stoy Hayward does audit well known names like the Barnes and Noble bookseller and Britain's Body Shop.

Mr Newman, UK managing director of BDO Stoy Hayward, told World Business Review he doubts that the new bill passed in America will address the problems faced by the auditing industry.

Mr Hayward says the key issue is the lack of self-respect of auditors which has resulted from audit fees being cut to the bone in recent years.

"Unarguably the price for audits has been reduced in recent years," he said.

"We can take it back probably over ten plus years, where the 'big four' have price cut in order to buy audits, and the only logical commercial reason for them doing that is if they think they are going to sell added services to the client at a super profit that will compensate for the loss that they are making on the audit."

"For other firms such as myself, which don't have significant consulting businesses at all, it's meant that competitively getting audits is very difficult because we've not got the swing back on the other side."

Making the changes

Mr Newman wants extra exams for auditors, including papers that test their integrity.

And he wants more power for audit committees of companies, with more freedom to buy a better audit at a higher price.

Whether any of this happens is still uncertain.

It is possible that the anger will dissipate and the public will lose interest in accountancy reform before any big changes are set in stone.

The biggest change so far has ironically been - with the demise of Andersen - a further consolidation in what many view as a highly concentrated global accountancy industry.