Accounting for the Future
Friday, March 9, 2007
The future of the accounting industry may depend on the answer to a single question: With only four major firms left in the business, are there too few to let any fail?
Five years after the indictment and collapse of accounting giant Arthur Andersen, the government remains skittish about how much to punish audit firms for misdeeds. The firms and their Washington allies warn that the companies are vulnerable to big verdicts that could steer them out of business, leaving clients with few choices, driving up costs, and throwing investors and markets into disarray.
Even as the industry profits from a spike in accounting fees after the scandals at Enron and WorldCom, it is launching a bid to win relief from high-stakes court judgments that insiders say could spiral one or all of the firms into bankruptcy. To spread the word, the top firms recently launched a public policy center and are turning to the Securities and Exchange Commission for help.
SEC officials are meeting with outside experts to consider ways to create safe harbors that would shield auditors from legal liability. Regulators also continue to assess whether to give their blessing to a strategy that would compel companies to bring disputes with auditors to an arbitration panel rather than a jury, according to sources briefed on the issue.
But the issue of how much leeway to grant auditors remains something of a hot potato just a few years after a series of corporate blowups devastated investor confidence and tarnished the reputation of the accounting profession, which failed to detect widespread fraud.
Debate is raging even as PricewaterhouseCoopers is attempting to stave off possible charges by Russian authorities over its work for oil giant Yukos, as Deloitte & Touche last month settled a claim involving its failed audit of Parmalat for $149 million, and as KPMG and Ernst & Young continue to battle lawsuits from clients who bought improper tax shelters.
KPMG narrowly escaped indictment over its marketing of abusive tax shelters in 2005, agreeing to pay the government $456 million and avoid a possible "death sentence." Ernst remains the subject of a tax investigation by federal prosecutors in New York.
The effort to limit auditors' liability has gained traction within the European Commission, but sentiment remains strong in certain quarters . When Conrad Hewitt, the SEC's chief accountant, mused publicly about restricting liability for audit firms at a conference last month, consumer advocates howled.
Under their view, the threat of liability prompts auditors to do better work -- and it is the only real leverage that remains, given prosecutors' reluctance to bring criminal charges against another accounting firm.
Moreover, Bevis Longstreth, a former securities and exchange commissioner, said accounting firms -- insular partnerships that do not release detailed financial information and that govern and insure themselves -- have failed to make a case that they cannot afford big legal judgments.
"It's just unacceptable to cap liability and not even look at profit," said Longstreth, who served during the Reagan administration. "No one knows what the profits are because there is no transparency."
In an interview last week, Hewitt said that only Congress could pass monetary caps on liability for auditors and encouraged the industry to present a plan to lawmakers. But behind the scenes, aides to the SEC's general counsel and its chief accountant are mulling steps that regulators might take to ease the burden on audit firms, according to sources briefed on the issues who spoke on condition of anonymity because the process is in its early stages.