A House Energy and Commerce subcommittee is expected to begin a year-long series of hearings next month into auditing firms and their relationship to some of the biggest business failures of 1984.
The Energy and Commerce subcommittee on oversight and investigations, chaired by Rep. John D. Dingell (D-Mich.), has outlined nine areas of concern, including auditors' independence, compliance with standards, adequacy of disclosure, and the effectiveness of industry oversight of accounting firms that audit publicly held companies, a subcommittee aide said.
The investigation will examine the role of the so-called Big Eight firms as well as smaller accountants in the crises at such institutions as Penn Square National Bank, Continental Illinois National Bank & Trust Co., and the Financial Corporation of America, to determine whether the auditors did their job properly, the aide said.
The hearings, the first substantial inquiry into the accounting profession in seven years, were prompted by a rise in the number of business failures as well as by the increasing number of disciplinary actions brought against accountants by the Securities and Exchange Commission in the past year or so.
Aetna Life Insurance Co. and Financial Corporation of America, for example, were obliged by the agency to change their accounting methods and restate their earnings, resulting in considerably lower figures.
In the late 1970s both the House and Senate held oversight hearings into the accounting industry. Out of those came the Public Oversight Board, a group of citizens that reviews and publicly reports its findings on the peer reviews that accounting firms perform of one another. The board, whose $800,000 budget is paid by the accounting profession, is headed by former Sears, Roebuck chairman Arthur M. Wood. Its other members are Melvin Laird, former secretary of Defense; A. A. Sommer Jr., a former SEC commissioner; John D. Harper, ex-chairman of Alcoa; and Robert K. Mautz, an accounting professor.
The board has no censure or enforcement authority. In the seven years of its existence, it has never made a public announcement of any wrongdoing, always concluding that peer review was good, said Thomas P. Kelley, group vice president/professional of the American Institute of Certified Public Accountants.
In its look at peer review, the subcommittee wants to know whether the practice of taking an inside look at each other's books has unfairly aided some firms in their attempts to take over their rivals, the aide said. Another issue is the independence of auditors when the contracting accounting firm also sells to the corporate client management, consulting and other services, according to the aide, who said that may represent an unfair tie-in.
However, Kelley said a recent survey showed that less than 10 percent of the fees accounting firms receive from public companies come from management advisory services. He deplored the oft-expressed attitude that if a company suddenly goes bankrupt, it must somehow be the fault of its auditors. He said his organization is prepared to testify that a business failure is not necessarily an audit failure.
A high SEC official, who did not want to be named, said few false or misleading audits were involved in recent spectacular business disasters.