09/05/2000 6:13 PM
Like Caesar's wife, auditors must always be above and beyond reproach. Auditors have the obligation and responsibility to ensure that investors, large and small, are able to rely on the integrity of audited financial statements, so that investment decisions can be made with confidence. Like the SEC, auditors are public watchdogs and investors' allies, charged with the task of making and keeping our capital market system open and transparent. That's why investors from within the U.S. and from all over the world are attracted to the U.S. capital markets and that's how it should remain.
And that's what small investors like myself would urge the SEC to enforce: order accounting firms to separate their consulting services from the audit function because auditors and consultants offer different types of services. Consultants can afford to be (even expected to be) partisans for their clients, auditors can't afford to be anything but protectors of investors. The SEC is absolutely right to call for keeping the audit and consulting functions separate.
When auditors also provide consulting and other services to corporate clients, the potential for abuse is significantly increased. The accounting industry would like to keep the consulting gravy train rolling, while proclaiming they are the protector of the investing public. Accountants can't have it both ways -- have their cake and eat it too. The argument that one is a better auditor because one also has a finger in the consulting pie -- auditors supposedly do a better job if they understand the complexities and modus operandi of the 21st corporation in the Internet age, and consulting services are the tools for in-depth understanding of clients' business -- is self-serving at best and specious at worst.
Why? The real reason has to do with dollars and cents: accounting firms make more money from consulting services than performing audits, but they can't and won't publicly say so. Such admission is tantamount to conceding there is at least the likelihood of a conflict of interest. Hence the frenetic attempts to "spin" the facts by the Big Five and the AICPA, the so-called self-regulatory body of the industry, engage in intense lobbying of lawmakers in Washington to rein in the SEC and set up roadblocks to prevent Chairman Levitt from fulfilling his commendable goal: protection of the investor.
The facts are these: Auditing is the "loss leader," the Trojan horse that accounting firms use to get a foot in the door for more lucrative business from clients. How else does one account for the very public, and unsavory, washing of dirty laundry over the past few years by Arthur Andersen and Andersen Consulting? For years, AA had fought tooth and nail to keep AC within the fold because AC consulting partners were bringing in more revenue than audit partners and so unwilling to keep subsidizing the six-figure incomes of AA audit partners -- until the recent break up ordered by the independent arbitrator brought an end to this sorry spectacle.
In my testimony, I'll draw upon my own experience as a former AICPA staff member on how the accounting industry has tried to keep the status quo intact. I'll refer to a few recent high-profile audit failures where the same accounting firm provided lucrative consulting services to the audit client: Waste Management, Microstrategy (the losses were quite "macro" for investors who based their investment decisions, in part, on audited financial statements!) and others.
I'll also cite recent newspaper articles and opinions expressed by the likes of Warren Buffett, the chairman of TIAA-CREF, John Bogle of the Vanguard Group, and even the head of consulting practice at PWCoopers. All these well-regarded market mavens have called for accounting firms to split or spin-off their consulting arms from the audit practice.
I am gratified that my thoughts and views on this crucial issue accord with the opinions of such illustrious individuals.
Thank you very much.
(former Manager of Media Relations, AICPA)