Members of a House subcommittee, citing a series of alleged abuses and improper practices by major accounting firms, warned yesterday that Congress may be forced to act if the Securities and Exchange Commission doesn't do a better job of regulating the industry.
In a hearing marked by frequent clashes with SEC Chairman John S. R. Shad, members of the House oversight and investigations subcommittee charged that lax regulation and conflicts of interest within the industry contributed to the failure of accountants to warn of such spectacular business crises as the 1982 collapse of Drysdale Government Securities Inc. and the near failure of Continental Illinois National Bank last year.
"I would like to see the accounting profession stay independent," said Rep. Richard C. Shelby (D-Ala.). "But if you don't clean it up more, if you don't tighten up some, there's going to be more pressure from Congress."
Shad said the SEC has been cracking down on an increasing number of accounting frauds, citing a record number of financial fraud cases -- 33 -- that the agency brought during fiscal 1984.
"We're coming down with hobnail boots on audit failures," said Shad.
The debate came during the second in a yearlong series of hearings the House panel has planned for this year to review the performance of auditing firms and the adequacy of government regulation. The hearings, the first substantial inquiry into the accounting profession in seven years, were prompted by the role of accountants in major business failures and a number of well-publicized disciplinary actions against major firms.
In the late 1970s, hearings by both House and Senate committees led to the creation of the Public Oversight Board, a group of prominent citizens that reviews and publicly reports its findings on the peer reviews that accounting firms perform on one another. Yet the board has never made a public announcement of any wrongdoing, always concluding that peer reviews among accountants were satisfactory, according to industry officials.
Rep. Ron Wyden (D-Ore.) charged that this system smacked of conflict of interest among accountants. He also charged that there was a "double standard" in SEC law enforcement because most of the agency's financial fraud cases were against small firms rather than the so-called Big Eight accounting firms that have been linked to major business failures.
Shad responded that this was understandable because "when you run into the most egregious situations, it's usually a small firm with very few SEC registrants. . . . There's an enormous degree of difference in the professional qualifications between the small accounting firms and the large ones."
Another issue raised by subcommittee Chairman John Dingell (D-Mich.) was the practice among large accounting firms, such as Arthur Andersen, to serve as management advisers to the same companies they are auditing. Dingell called this a "clear and apparent conflict of interest. They're auditing their own work, and that worries me."
But Shad denied that this was a growing problem, noting that only 15 percent of the total fees of the Big Eight firms came from management advisory services and that this figure had only increased 1.6 percent in the last three years.