Subject: S7-13-00
After thirty years as a commercial banker, I've developed an
appreciation for the sorts of "errors", both of commission and of
omission that can evolve when money and conflict of interest come
together. Additionally, as one who is heavily invested in the stock
market, I am compelled to rely entirely on the quality and
forthrightness of the financial reporting as filed with the SEC. For
both of these reasons, I am much interested in this issue.
In instances when an accounting firm producing "audited" financials also
maintains a lucrative non audit relationship with any business entity,
there is a genuine, not merely apparent or potential, conflict of
interest. The only result can be pressure (perhaps only perceived
and/or self-imposed) to generate financial statements which, while
represented as gospel, may be subtly evasive of issues thought
potentially disturbing to investors.
That is wrong. Even more wrong, is for the investing public to be
denied any real opportunity to readily discern when this may be
happening.
Having said that however, the task of the audit firm extends beyond the
generation of audited statements to the creation of a Management Letter
detailing findings and making recommendations for any recommended
changes.
Follow up discussions based on that Management Letter between the
auditing firm and the subject firm, and the providing of assistance in
the implementation of recommendations, are matters that can blur the
line between audit, and non audit related support.
In any case, my bet is that the best way to attack this problem is by
defining where the aforementioned line exists, and then by requiring
that publicly held companies report, as a standard element of the
required financial disclosures to the SEC and to stockholders, either
affirming that they engage in no such conflicting relationships, or,
alternatively, the financial details of any additional dealings of a
non audit nature with the auditing firm.
Having to offer such a negative disclosure, I would think, should have
the same effect on investors as does the warning label on cigarette
packs have to rational people who might otherwise contemplate smoking.
Perhaps, in view of that, publicly traded companies would do what they
must to avoid having to make such disclosures. That is, they would do
what they should do. They would split the audit function, and the non
audit related functions between two different and unrelated accounting
firms.
In the final analysis, however, there will always be conflict of interest in
the
audit function. Firms that do audits are businesses too. Businesses that
very
much want
to be invited back again next year to do the next audit. You can't be a
commercial banker for very many years and not discern that fact.
Perhaps all that can be done is to make the conflict of interest issue
substantially less blatant. There is great value in that, however, and I want
to
thank you for pursuing that objective.
Sincerely,
James F. Donald
Author: Jim & Joyce Donald
Date: 09/13/2000 2:14 PM