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Friday, 19 April, 2002, 08:05 GMT 09:05 UK
Accountants fight for reputations
Different logos of Andersen and the top four accountancy firms
test hello test
By Emma Clark
BBC News Online business reporter

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.

Under fire

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.

What does an accountant do?
Accountants provide a range of services, including audit, tax advice, consulting and corporate finance
Only auditors actually work on checking company accounts
Auditing usually involves checking company accounts against underlying records, such as receipts
Auditors are not responsible for keeping the accounts, as is commonly believed
The Times newspaper reported "another black day for accountants" earlier this week, as details emerged that Equitable Life was planning to sue its accountants Ernst & Young.

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.

Dr David Citron, senior lecturer in accounting at the City University Business School
Dr Citron: Accountants always faced law suits
For a start, law suits are nothing new for the profession - and go with the territory.

"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.

Society has to decide whether it is prepared to pay the audit fees instead... if not it has to live with the scandals

Dr David Citron
City University Business School
A lot of accountancy profits come from lucrative consultancy work, such as advising on management structure, marketing strategies and tax liabilities.

"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.

Recruitment pictures from the Ernst & Young website
New accountants are learning more about ethics
To date, the SEC had resisted such a separation, arguing that an "audit-only" firm does not guarantee an "audit failure free future".

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.

See also:

11 Apr 02 | Business
SEC steps up Xerox probe
22 Mar 02 | Business
US accounting watchdog proposed
19 Mar 02 | Business
Questions over Andersen break-up
15 Mar 02 | Business
US bans Andersen from official work
15 Mar 02 | Business
Enron auditor faces criminal charges
13 Mar 02 | Business
Global Crossing accounts under fire
22 Feb 02 | Business
Software giant admits SEC probe
05 Feb 02 | Business
Audit giants called to account
25 Jan 02 | Business
Kmart starts internal investigation
25 Jan 02 | Business
Audit giants face reform calls
10 Jan 02 | Business
Enron documents 'disposed of'
19 Jun 01 | Business
Top accountant fined $7m
02 Feb 99 | The Company File
Record fine for Maxwell accountants
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