Global Companies Tackle Auditor Independence and Oversight

In the U.S., the Enron collapse continues to be the subject of investigations by at least ten congressional committees. But the fallout has grown increasingly global in scope, and global companies are taking action to achieve the needed reforms without waiting for U.S. lawmakers.

Recent Actions by Companies

Global companies and accounting firms have already taken the initiative on the two issues that have most captured the world’s attention -- the perception that non-audit services can impair auditor independence and the debate over how best to achieve quality control and disciplinary oversight of the accounting profession.

  • Auditor independence. On February 1, consumer foods giant Unilever and CGNU, the UK’s largest life assurance company, announced plans to bar their auditors from providing consulting services. Entertainment giant Walt Disney Company made a similar announcement last week. These actions came at the same time as, or shortly after, four of the Big Five firms announced they now support bans on certain consulting services, (i.e., services related to computer systems and internal auditing). It all happened before U.S. lawmakers had a chance to debate the issue of non-audit services.
  • Oversight. Despite urging by the Securities and Exchange Commission (SEC) to reconsider, the Public Oversight Board has reaffirmed its intention to close its doors by March 31, 2002. Arthur Andersen, Enron’s auditor, has decided to forge ahead with its own independent oversight board chaired by former Federal Reserve Board Chairman Paul Volcker. “I think you’re going to see a fundamental restructuring of the accounting industry in the United States,” said Joseph Berardino, Andersen’s CEO. “We expect to be ahead of the curve.” Andersen also announced it is joining PricewaterhouseCoopers, KPMG, and Ernst & Young in voluntarily limiting the consulting services provided to audit clients.

Reactions from Lawmakers and Regulators

U.S. lawmakers are expected to propose a variety of bills to address the issues of auditor independence and oversight. Some go beyond the actions taken to date and the initial oversight proposal put forth by SEC Chairman Harvey Pitt. Chairman Pitt said the proposal was simply a way to open a dialogue on the subject. Congressman John LaFalce responded to the proposal by calling instead for a major increase in government resources for oversight and enforcement.

In addition to audit reforms, the Enron fallout has included calls for faster action by accounting standard-setters, a call with the Financial Accounting Standards Board (FASB) appears to be heeding. FASB said it plans to propose new rules on off-balance sheet financing by June. But even that may not be fast enough for SEC Chairman Pitt, who has said, “I want the SEC to be able to say we need guidance on these issues and we want it within 60 to 90 days.”

The Roadmap to Reform

This past week's developments culminate an intense period of mounting pressures and progress in the accounting profession.

Accounting reforms: The story so far

  • Feb 1 - AICPA Reverses Stance, Won't Oppose Independence Reforms
  • Four of the Big Five firms announce their support for proposed reforms that would limit non-audit services provided to large publicly-owned audit clients. AICPA agrees to drop its opposition.

  • Jan 29 - Survey shows ‘Immense Support for Audit Reforms’
  • A survey of business executives shows they support limits on non-audit services provided by audit firms.

  • Jan 31 - SEC's 'What-if' Numbers Offer Hope To Battle-Weary Companies
  • The Chief Accountant of the U.S. Securities and Exchange Commission explains how and why companies should report their critical accounting policies.

  • Jan 30 - Accountants Unite To Better Measure Business Risks
  • The accounting profession unites under the aegis of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to develop comprehensive guidance on risks.

  • Jan 28 - GAO Announces New Rules on Auditor Independence
  • The U.S. Government Accounting Office issues independence standards for government agencies and all entities that receive federal assistance or participate in federal programs.

  • Jan 23 - Public Oversight Board Agrees to Close Its Doors
    The Public Oversight Board (POB) passes a resolution stating its intent to close its doors by March 31, 2002. POB's closing leaves a big void and a lot of unanswered questions.
  • Jan 23 - SEC Releases MD&A Guidance for 2001 Reports
  • The Securities and Exchange Commission issues guidance to help companies report off-balance sheet arrangements, certain kinds of trading activities and transactions with related parties.

  • Jan 22 - IFAC Adds International Ethics Rules to Post-Enron Equation
  • The International Federation of Accountants issues a code of ethics for all accountants, public and private.

  • Jan 18 - SEC's Pitt Calls For End to Accounting Self-Regulation
  • The Chairman of Securities and Exchange Commission announces his plans for a new regulatory body to oversee quality control of audits and discipline of auditors on large publicly-owned audit clients.

  • Jan 16 - First Pro Forma Case: SEC Faults ‘Positive Spin’
  • The Securities and Exchange Commission cracks down on misleading disclosures in press releases that feature pro forma reporting.

  • Jan 11 - AICPA Releases Free Toolkit For Related Party Transactions
  • The American Institute of CPAs urges caution in reporting and auditing related-party transactions, and it releases a free toolkit to help companies and auditors.

  • Jan 10 - FASB Forges Ahead on Three New Frontiers
  • The Financial Accounting Standards Board tentatively agrees to undertake new projects on intangibles, revenue recognition and standards overload.

  • Jan 10 - New Considerations For Financial Statement Prep This Year
  • The Big Five accounting firms together with the AICPA issue their assessment of the key risk factors for financial statement preparers, audit committees and auditors to consider for 2001 reporting cycle.

  • Dec 26 - SEC to Examine Fortune 500 Annual Reports
  • The Securities and Exchange Commission announces it will review filings of largest U.S. public companies for disclosures that are unclear or conflict with generally accepted accounting principles.

  • Dec 5 - Big Five Vow To Improve Standards
  • The CEOs of the Big Five accounting firms commit to take steps to enhance financial reporting and audit effectiveness. See AICPA’s web site for full statement.

    -Rosemary Schlank

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