Levitt offers crumb of comfort to auditors

As the efforts to save the world economy reached fever pitch last week, among
the statements issued by the US Treasury was the report of a panel asked to make
recommendations on the audit profession.

For some it would have been a disappointing report. Jointly chaired by former
Securities and Exchange Commission chairman Arthur Levitt and Donald T
Nicolaisen, there were hopes the recommendations would include measures to
protect auditors from the kind of catastrophe suffered by Andersen. Something
along the lines of limiting auditors’ liability.

But there was nothing like that included in the report. Observers in the end
were merely grateful that protection was recognised as an issue even though no
steps were advised.

Lobbyists pointed to the co- chairmen, who is well known as being
unsympathetic to the audit profession. As one told Accountancy Age: ‘What was
needed were people with totally open minds. The battle in the end was would they
even recognise that there was an issue.’

Levitt has been aggressive in his approach to audit firms. In June this year
an interview appeared in the Dutch magazine De Accountant in which he expressed
his liking for ‘audit only’ firms, a replay of his views that firms were
conflicted by running audit along side other advisory services.

‘The profession is better managed today than ever before. But once again,
this is a moving target. The firms are aggressively getting back into consulting
services. I think there is a role for an audit only firm. We also need greater
transparency to understand what condition a firm is in. We need their firms to
provide fully documented audits of their own operations. They don’t do it at the
present time, but I think that clearly is coming.’

At the beginning of September the US Center for Audit Quality issued a
warning to the Treasury in Washington saying that it was failing to do enough to
avert the risk of litigation destroying a large firm. The center was furious
that the panel’s recommendations would not address auditor protection even
though the issue had been discussed.

Cynthia Fornelli, director of the center, insisted that liability capping
should be among the proposals the panel would make.

‘If this liability concern is not addressed, many of the committee’s other
recommendations will prove unworkable due to the current litigation context.

‘And as we pointed out in our first letter, we believe that fulfilling the
committee’s mandate to address “the sustainability of the public company
auditing profession” includes meaningfully tackling this issue,’ she warned.

The report included up to 30 recommendations for dealing with the audit
profession.

On the concentration of the audit market and the competition issue there was
advice that regulators should monitor the ‘potential sources of catastrophic
risk and the creation of a mechanism to ‘rehabilitate’ large audit firms in
crisis.

The report followed through on Levitt’s belief that audit firms should
publish annual reports (something already underway for a number of years in the
UK) and said engagement partners should put their personal signature on an audit
to improve accountability.

The panel also recommended that independent members should be appointed to
audit firm boards with full voting rights.

In terms of recommendations there was nothing to tackle the belief that
giving audit firms more protection was a route to encouraging other players into
the market for large public company audits.

Observers believe the key members of the Treasury panel were reluctant to
even acknowledge this as an issue let alone recommend a course of action.
Because the final report does, it is being viewed as a step forward, however
tentative that step may be.

Despite the concern over the report, lawmakers in the US are unlikely to do
anything with it. Elections are a month away so it will be left to a new regime,
once there is some calm around the credit crisis, to consider whether to take
the recommendations in the report and turn them into action.

That may be some time away which might, in turn, create the breathing space
necessary to force auditor protection and liability capping back on to the
agenda.

A Democrat regime in the Whitehouse and at the Treasury could be persuaded to
ignore the recommendations produced for a Republican government and find their
own route forward on the audit profession.