Consulting Journal: Trends - Consulting and accountants (2)

Trends: Consulting and accountants (2)

by David Blakey

This second article in the series considers the proposed legislation.

[Monday 25 March 2002]

I wrote last week [see article] that the Enron situation has prompted responses from legislative, regulatory and professional organizations throughout the world. I added that there had also been considerable coverage and comment in the media.

Some of responses - especially by the US House of Representatives - have been misrepresented in the media. I read a letter to a newspaper from a university lecturer in accounting. It advocated accounting firms continuing with consulting, quoting the reforms of the AICPA and stating that accounting firms' revenues from consulting for their audit clients were considerably lower than their revenues from auditing.

Is revenue the point?

On this last point, I failed to see the relevance. You would expect the fees from audits to exceed the fees from consulting, because auditing is what these firms do. The fees from consulting can be excessive, whether or not they are lower than the fees for auditing.

What about reforms?

The legislation on accounting firms and consulting is being introduced into the House because accounting firms - and the AICPA - have failed to control their consulting practices. Far from introducing reforms that would justify accounting firms continuing to work as consultants, the accounting profession has notably failed to introduce any form of regulation in the key areas linked to the Enron - and other - scandals.

The legislation

The Corporate and Auditing Accountability, Responsibility and Transparency Bill introduced on 14 February aims to restrict accounting firms only from two areas of consulting. The first is design or implementation of financial informations systems. The second is internal audit, which, strictly speaking, is ‘contracting’ rather than ‘consulting’. The accounting firms can continue to offer consulting services in every other area of their clients' business. Consulting fees are likely to become only marginally smaller than they are now. The accounting firms will continue to earn fees from consulting that the letter for the accounting lecturer argues are relatively small already and that I argue will remain excessive.

The problem

The real problem highlighted by Enron stems from two causes.

Cause 1

First, an auditor may adopt a position that they do not wish anything disturbing to be brought to their attention. They may rely upon statements made to them by their clients. They do not have to look for problems, and so they do not. This position will enable them to give an ‘unqualified’ certification of their clients' financial statements. There is a difficulty with this position. Some clients may have problems. While it is not an auditor's responsibility to hunt out problems, some auditors take steps to avoid seeing problems that might otherwise be brought to their attention. This can mean that they may choose to ignore evidence that points to a potential problem. They shouldn't do this, but some of them do.

Cause 2

The second cause is that consultants from an accounting firm may know of such problems. In their day-to-day dealings with their clients, consultants may learn much about them. Some of this knowledge could include matters that would cause the auditors to qualify their report. If a consultant employed by the accounting firm that also audits the client learns of such matters, it can be argued that the firm has that knowledge and that the audit by the firm should use that knowledge. It is, however, sometimes convenient for an accounting firm to erect ‘Chinese walls’ between its audit and consulting practices. Consultants may be told that they too should ignore any signs pointing towards such matters.

This is why the legislation is being introduced and why it is focused on financial information systems and on internal audit services. Accounting firms and their representative bodies have failed to deal with the issue. Now, instead of them changing their practices so that their auditors will have to act upon information received by their consultants, they will be prevented from doing the kinds of consulting assignments that could reveal this information. It is a sad tale of irresponsibility.

As far as situations like Enron are concerned, I think that the bill is appropriate. It places control with the SEC and make rules about whether accountants are qualified to certify financial statements. Accountants providing financial information systems design or implementation or internal audit services will be prohibited from certifying statements for that client.

The bottom line

The charges against Andersen relate to its shredding of documents. Whether or not it did shred documents and whether or not there was obstruction of justice as a result is a matter for the courts. It is easy to imagine situations in which the consulting practice of an accounting firm would have documents that would affect the audit report if they were known to the auditors. If there were some real fundamental reason for documents held by one part of a firm to be withheld from another part of the same firm, then I have yet to hear it. Otherwise, why shred them?

[The final part of this series will try to predict the future for accounting firms and their consulting practices.]

[ List articles on Trends ] [ View printable version ]