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Friday, 19 April, 2002, 08:05 GMT 09:05 UK
Accountants fight for reputations
In 1898, a judge presiding over an audit law suit famously described accountants as watchdogs rather than bloodhounds.
In recent months, this distinction seems to have become blurred amid an angry debate over the responsibilities of accountants.
Andersen's role in the spectacular demise of Enron and subsequent indictment for destroying "tons" of paperwork has fuelled much of the criticism.
In the new climate of post-Enron paranoia, reports of other investigations by the US Securities and Exchange Commission (SEC) have also surfaced.
Most recently, the US practice of KPMG was reported to be facing civil charges from the SEC over alleged accountancy fraud at the photocopying giant Xerox.
The SEC itself will not confirm any investigations other than Enron, but its chairman Harvey L. Pitt has spoken of the "pressing need" to reform the regulation of US accountants.
The world's media has also picked over numerous law suits currently faced by accountancy firms for audits that have failed to uncover irregularities.
Equitable's new management alleges that E&Y should not have signed off on the company's books, given the huge liabilities that the insurer faced.
So is the accountancy profession facing its biggest challenge yet, or is the fuss no more than a storm in a teacup?
Too much flak?
Dr David Citron, a senior lecturer in accountancy at the City University Business School, believes accountants are taking more than their fair share of the blame.
"When stock markets are nervous or companies are doing badly, there are law suits," says Dr Citron, who studied many cases in the early 1990s.
He also points out that the ultimate responsibility for a company's accounts falls to the managing director, not the auditor.
The small print
On top of each set of company accounts, the auditor will always state that its work "includes examination, on a test basis, of evidence".
This means that auditors test a company's accounting systems by sampling parts of it, rather than checking every single record.
Sometimes things might slip through - and it would be impossible to look at every record, according to Dan Gidwaney, an accountant and director at the Financial Training Company.
Auditors are also forced to weigh up the cost - and time - of doing an audit against the risk of something happening, says Dr Citron.
Conflicts of interest
Inevitably, the issue of cost is controversial.
"In the last 15 years, audit fees have not been the real earners; consultancy fees have," says Mr Gidwaney.
The value of this consultancy work has caused frustration for some auditors.
"The common complaint among junior auditors is that in the course of their work they find all these adjustments to make to the accounts, propose them to the partner, and then the partner doesn't make the client change the accounts," says one former auditor.
"Inevitably, accountants have to take a commercial view and will look to protect their greater commercial interests," adds Mr Gidwaney.
In the real world...
This has led to calls for new regulation to split off the consultancy arms from the audit division.
Dr Citron says that the payment of fees for audit work is the real crux of the argument, rather than conflict of interest.
"Auditors are dependent on the management for fees, and consultancy work only exacerbates this," he says.
"Society has to decide whether it is prepared to pay the audit fees instead... if not it has to live with the scandals."
Study of ethics
Nevertheless, the increasing complexity of company accounting has been recognised by the professional bodies that help the industry self-regulate itself.
During the last two years, the Institute of Chartered Accountants in England and Wales has been totally revising the main accountancy qualification, ACA, with an increased focus on ethics.
"We want auditors to be more reflective, to interpret all of the information and to ask chief executives the right questions," says Professor Brian Chiplin, executive director of education and training at the Institute.
Although this pre-dates Enron, he points out that other audit failures have triggered the improvement in training.
A dog's life
Certainly, the recent accounting scandals, surrounding Enron and other companies, have marked a sea change for auditors.
Mr Gidwaney believes that in the future auditors will make greater use of their ultimate weapon - the threat of "qualifying the accounts".
Qualification means that the auditors do not believe the accounts show a "true and fair view" of the company.
Currently, less than 1% of company accounts are qualified.
Dr Citron adds that accountants will also become more conscious of protecting their reputation.
"It is the only asset they have. It takes ages to build up a reputation - and they will seen how rapidly and totally it can be destroyed."
Andersen, which once considered itself a cut above its big four rivals, now faces an ignoble demise after being caught shredding the evidence.
Perhaps pedigree counts for very little, if the watchdog eats its homework.
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