In a stunning about-face on January 31, 2002, the president of the American Institute of CPAs (AICPA) announced his organization’s support for reforms of auditor independence that would bar accounting firms from doing certain kinds of consulting for their audit clients. Separately, the leaders of all but one of the Big Five firms have reportedly either made or are expected to make similarly supportive announcements.
Legislative and Regulatory Initiatives
The issue of auditor independence has had a divisive effect on the accounting profession, as some firms voluntarily separated their audit and consulting groups while others did not. The AICPA had fought tooth and nail against prior SEC efforts to split auditing and consulting. It won, only to see the collapse of Enron turn into the subject into a front-page issue that has already inspired legislative initiatives on Capitol Hill and the threat of regulatory actions by stock exchanges.
In recent developments, Democratic Senators Christopher Dodd of Connecticut and Jon Corzine of New Jersey have said they will propose legislation to impose term limits on auditors and limit the types of non-audit services that auditors can provide. Recent remarks indicate Republican lawmakers may oppose the proposed legislation. In the interim, the New York State Comptroller has called on the New York Stock Exchange to impose limits on non-audit services.
AICPA and Big Five Policy Statements
Policy statements already made or expected to be made by the AICPA and Big Five firms include the following:
AICPA. Barry Melancon, president of AICPA, announced his organization's change of stance to BusinessWeekOnline, saying the membership association wants to, “put this issue behind us” so that accountants, Congress and the Securities and Exchange Commission (SEC) can “get to the broader debate… on what’s needed to prevent future Enrons.” Although Mr. Melancon did not go so far as to endorse the Dodd-Corzine approach, he did say the AICPA is dropping its opposition to the bans on internal audit outsourcing and systems integration consulting. KPMG. KPMG issued a press release to announce its support for barring auditors from performing systems integration consulting and internal audit outsourcing services for public audit clients. Stephen G. Butler, chairman of KPMG, said the issue of non-audit services has become a “red herring,” making it difficult to move on the larger issues of modernizing the financial reporting system. Like AICPA, KPMG had fought restrictions on non-audit services in prior years. But Mr. Butler said in the press release, “I believe we should accept previously proposed limits on non-audit services and move forward.” PwC. In announcing its plans for an initial public offering to separate its consulting services from its audit practice, PricewaterhouseCoopers (PwC) told the Wall Street Journal it too would endorse the previously proposed restrictions. PwC has supported the proposals in the past. “We recognize like so many people,” PwC’s Chief Executive Samuel DiPiazza told the Journal, “that the Enron failure has created a huge crisis in confidence. This is a response to the crisis around the Enron failure and the confidence crisis in our own profession.” Mr. DiPiazza said the firm will be announcing its initiatives and policy positions in a letter to clients this week. Without waiting for a letter, entertainment giant Walt Disney Company announced it would not use its independent auditor, PriceWaterhouseCoopers, for any new consulting work and would evaluate the consulting work the accounting firm is currently doing. Ernst & Young. A spokesperson for Ernst & Young told AccountingWEB on February 1, 2002 the firm expects to make an announcement in the very near future about these specific issues. In the past, EY has supported reforms of auditor independence. EY says it first announced its support of a ban prohibiting an accounting firm from providing management consulting and information technology systems integration to an audit client two years ago. Andersen. Industry sources suggest that Andersen, Enron’s auditor, will also adopt this position by February 4th, when Andersen CEO Joseph Berardino next appears before a House committee.