Like most mature industries, the accountancy profession is dominated by a handful of players. Accountancy Age’s 2001 survey of the top 50 firms shows the Big Five commanded 78% of total recorded fees, with the next 46 scrapping up the remainder.
But size brings responsibility. The ongoing litany of questionable activities between firms and their clients is eroding the reputation of a profession that stakeholders see as the final safety net in protecting them from dubious dealings.
The revelations from Andersen’s CEO Joe Berardino, that it ‘made an error of judgment’ followed by KPMG’s latest slapping by regulators for auditing where it had a sizeable financial interest indicates a profession that is incapable of regulating itself – at least in the US. Comments suggesting that Berardino should have kept quiet will hardly be met with enthusiasm from a profession the public assumes acts in good faith and with the utmost integrity.
But the accountancy profession is both under pressure and showing signs of schizophrenia. As the news of KPMG’s public lashing broke, Mark Orton, KPMG’s receiver for UPF, sole supplier of chassis to Land Rover came under the media spotlight for attempting to maximise assets for creditors of the failed manufacturer.
Ford Motor Company, Land Rover’s parent is attempting to mount an industry boycott of the Big Five, a move it has tried before and which failed. KPMG must think it can’t do anything right.
But the profession is beset with many problems, not least of which is the fact that auditing is widely regarded as an unprofitable but necessary loss leader for firms that sell a wide range of finance related services. The profession has not found a way of making partners from any related discipline – especially those in related services like taxation – feel anything other than supporters of a lame duck activity.
In the US, the SEC, while publicly castigating auditors seems incapable of laying down a set of rules through which inventive accountants are able to drive a coach and horses.
Enron is but the latest in a stream of examples where ‘partnerships’ have been used to disguise costs as income or hide highly geared realities. In recent years, Lernout & Hauspie and the Baan Corporation spring to mind as cases where auditors must have had some idea what was going on yet appeared to turn a blind eye and where shareholder interest was sacrificed on the altar of fee income.
Today, the common practice of stating profits that ignore costs like amortization of goodwill, stock compensation, restructuring costs and interest as a way of glossing over patently poor results, is endemic.
It has been suggested financial analysts largely ignore these figures when assessing performance so it doesn’t matter. This is nonsense. When one trawls through the figures of high profile companies, especially those in high technology, stock compensation has an impact on cash flow, especially when it is tied to stock buy back schemes – which again are largely ignored when counting the numbers.
Can auditors – who review figures quarterly – ignore these endemic practices? Should the SEC and other regulatory bodies allow these practices to continue? More to the point, does the SEC have the guts to resist pressure from special interest groups that have scuppered past attempts to correct excesses.
Berardino’s revelation that his firm destroyed documents may represent a turning point but then maybe not. The Deloitte’s peer review of Andersen’s Enron audit gave the now disgraced firm a guarded clean bill of health. Did they too miss document destruction? Or is the profession retreating into its well-worn position of passing the buck by claiming that when different accountants review figures, the final result ‘all depends’ on individual interpretation.
Regulation is anathema in free economies but there are circumstances where it is essential. Financial service scandals in the UK during the late 1980s and early 1990s led to the creation of the FSA – a body with teeth it is currently combing through Barclays Bank. Is it not about time that stakeholder interests as a whole were taken seriously on both sides of the Atlantic?
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