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    Heskett Column - Are Conditions Right for the Next Accounting Scandal? - Summing Up

     
    3/31/2003

    by Jim Heskett

    Just How Do We Avoid the Next Accounting Scandal?

    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?

    Are Conditions Right for the Next Accounting Scandal? Read Jim Heskett's original column | Additional Resources | Readers Respond

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