D&T's CEO Argues Against Three 'Quick Fix' Reforms
Speaking at the Senate Oversight hearings, James E. Copeland, chief executive officer of Deloitte & Touche, spoke out against three types of audit reform proposals that some lawmakers see as "quick fixes" to perceived problems with the accounting profession.
- Mandatory rotation of audit firms.
Some lawmakers have proposed that publicly-traded companies be required to change audit firms on a regular basis, e.g., every five years. Mr. Copeland said the risks and costs of these proposals would exceed the benefits. In addition to the added "start-up" costs associated with the incoming auditor's learning curve, there would be added risks of audit failures and fraud. Studies have shown the risk of audit failures increases during the initial years a firm is auditing a new client. This would be particularly true of a client as complex as Enron. Additionally, at least one study has identified a link between financial fraud and a change in auditors. Some speculate a key reason is the increased reliance an auditor must place on the client's guidance and representations in the initial years.
- "Revolving door" provisions.
Other lawmakers have proposed ways to stop companies from hiring accounting firm personnel who are involved in the company's audit. Mr. Copeland said these proposals impose unnecessary costs and make it harder for accounting firms to hire qualified people. The Securities and Exchange Commission (SEC) and the Independence Standards Board considered imposing a "cooling off" period before an auditor could accept employment with a former client. Both concluded that such a rule would impose unwarranted costs on the public interest, on public companies, and on the profession. Studies have shown that existing safeguards are effective in addressing so-called "revolving door" situations. These safeguards include the mandatory rotation of audit partners and the additional procedures that are put in place when a member of an audit team joins a client.
- Limits on non-audit services.
The Enron fallout has raised concerns about the apparent conflicts of interest that arise when an audit firm also provides non-audit services. Mr. Copeland said these concerns are based on unfounded perceptions. There is no evidence to suggest that non-audit services caused the problems at Enron or that restrictions on non-audit services could prevent another Enron. D&T has taken steps to voluntarily separate its audit practice from its consulting practice, but this model may not be right for other firms. Just as important are the effects on individual audit teams. The limitations on non-audit services can make a team less competent, if they also limit the types of technical expertise available in such areas as market trading controls and information technology. Both areas are important in auditing a company like Enron. But experts in these areas are not career auditors, and audit fees would not support their involvement in audits on a full-time basis.