Responses to this month's column lead one to conclude that we can expect that more major accounting scandals are in our future. Causes, according to these thoughtful comments, range from the consolidation of the major global accounting firms, the very nature of the shared interests of auditors and audit committees whose mutual survival depends on each other, overly complicated accounting and tax systems, and the nature of the reporting relationships between internal auditors and those responsible for the integrity of their work.
Bill Korn comments, "With the trend of separating audit from consulting, you may have two of the Big Four serving your business, and the other two ... serving your competitor." Edward Hare laments that "conditions have not materially changed ... further scandals are likely."
A range of responses to the dilemma was proposed. They include Hare's call for "a wholesale simplification of our government, accounting, and tax systems," Maria Dell'Oro's suggestion that "the audit committee should have its own staff that follows its own instructions and has no reporting lines to the CEO," and Shann Turnbull's proposal that "a non-Big Four auditor should be retained to [perform tasks such as] ... due diligence."
Until these kinds of things happen, C.J. Cullinane believes that the "deterrent of getting caught is the biggest threat to the present survivors." Mark Alarik, in arguing for the increased use of more narrowly focused professional accounting "boutiques," suggests that "what the industry really needs is more objectivity and innovation—not a larger tribe of 800-pound gorillas." In retrospect, William Rahm wonders "whether the Justice Department should have been more active in reviewing the mergers of the major firms as the industry consolidated over the last fifteen years."
Several responses hinted at the need for audit committees to be more adventurous in their selection of non-Big Four firms to carry out various tasks for the respective organizations. Without incentives to do so, the natural tendency is to opt for the "safe" alternative, particularly in a litigious investing community. What form could these incentives take? Whose responsibility would it be to implement them? How else can what is perceived as a self-reinforcing set of relationships between audit committees and a very small group of firms who serve them be disrupted in useful ways?
What do you think?
Consider this scenario: Acme Corp., the large, long-term client of a Big Four accounting firm, asks its accountants to perform due diligence on the books of a company, Zulu Inc., being considered for acquisition. It comes to the attention of the acquirer that for some years Zulu has employed the same accounting firm. Directors at Acme, concerned about having their accountant review the working papers prepared by other employees of the same accounting firm, suggest hiring someone else, even though accountants for both clients insist that proper barriers are maintained within their firm. A search for another Big Four accounting firm is launched by Acme. But upon closer examination, it is found that, for one reason or another, all of the other three Big Four firms have greater conflicts of interest (i.e., representing Acme's arch competitors, etc.) than the one hired to perform due diligence on its own work. The audit committee at Acme, unwilling to entrust the due diligence to a second-tier accounting firm, reluctantly elects not to recommend to management that it switch accountants.
Why has the likelihood of this situation arisen? Consolidation within the "industry" has been underway for the past decade or more. But clearly, the demise of Arthur Andersen didn't help. And at least for those who would claim that the Justice Department played a role in Andersen's demise, the irony is that the Justice Department itself may have contributed to the tightening of an accounting oligopoly that could set the stage for future accounting-related controversies.
Is the hypothetical situation described above more likely to arise periodically in the future than it did in the past? Does it suggest an opportunity for a would-be fifth or sixth entrant to the global elite of accounting firms? Will such an organization, probably already in existence, be able to take advantage of the opportunity? Or will the natural tendency of risk-averse corporate audit committees to engage the biggest accounting firms insure that the oligopoly will become even stronger? Will it require the relaxation of guidelines regarding potential conflicts of interest among accountants? Or will the final answer lie in some other action designed to restore choice among accounting clients facing the prospect of utilizing the services of firms continually "meeting themselves" in one situation after another? What do you think?