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Friday, 25 January, 2002, 13:00 GMT
Audit giants face reform calls
David Duncan
Auditors face grilling as the momentum for change grows
Momentum for reform of the audit industry is growing as Congressional hearings into Enron's collapse continue.

Investors typically rely on auditors to verify a company's financial wellbeing, enabling them to trust the company in which they buy shares.

As two new hearings got under way on Thursday, accountancy firm Andersen battled to save its reputation, insisting its senior management did not know about the shredding of documents related to Enron.

It is not just Andersen's reputation that is taking a battering: the hearings have triggered calls for closer monitoring of the whole industry.

More concessions?

In 2000, the Securities and Exchange Commission (SEC) backed away from a proposal to restrict audit firms' expansion into other business services.

At the time, it was felt that the Big Five - Andersen, KPMG, Ernst & Young, Deloitte & Touche and PricewaterhouseCoopers - had made just enough concessions to avoid serious shackling.

Now that the good behaviour clause has been breached, and with or without proof of malpractice at Andersen, the SEC is reckoned almost certain to introduce new restrictions on the sector.

The most draconian could be an attempt to force the Big Five to split their auditing from their consultancy divisions, and possibly even spin off marginal interests such as legal and human resources services.

Former SEC chairman Arthur Levitt has called for an agency to oversee the accounting profession.

This should be made up of independent individuals funded outside of the profession. He also wants to see the consultancy and auditing sides of the business separated.

William Lerach, a lawyer representing Enron shareholders, carries shredded documents into a Houston court
Lawyers want to know who shredded what
"I think the major change that comes from an event of this kind is not necessarily addressed by legislation and regulation; it is by a change in behaviour.

"I think the brokerage firms and the analysts also recognise that they are enduring a strong perceptual damage," he said.

Aggressive accounting

Senator and former Goldman Sachs chairman John Corzine is among those who wants new laws to curb conflict of interest of auditors, who win fees as consultants.

Enron, Houston
The Enron debacle is increasing calls for reform
"The whole system tries to figure out ways to get the greatest earnings per share," he told the BBC's World Business Report.

"I think people say 'Let's use aggressive accounting so that we can report the best possible positioning of the company.'

"I think sometimes they lose track of the reputational risks that are associated with that," he said.

Widespread failure?

With the new hearings only one day old, it seems unlikely that the reform calls will stop there.

"Auditors have failed across the board and it is not just Andersen," Melvyn Weiss, a lawyer acting for Enron shareholders, told World Business Report.

"It doesn't bode well for investors in our society. We need a lot of reforms to stop this kind of conduct."

The BBC's Tim Fawcett
reports on the Congress hearings and the calls for reform
See also:

24 Jan 02 | Business
Enron scandal at a glance
14 Jan 02 | Business
Audit giants called to account
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