Auditor Independence: Is this really the answer that will make it all work?

Is Auditor Independence really the answer that will make it all work?

This is an age-old question of the accounting world, and there are no easy answers. In simpler times, the fear of being publicly humiliated by losing your CPA license and having to sit for the 3-day exam again was enough to keep most CPAs clean.

Well, times have certainly changed!

With auditor independence and the Enron-Andersen issue dominating industry discussions, that no longer seems to be the case. Auditor independence has been held up by many as the answer to the ethics issues that currently plague the industry.

The fact that we are addressing this question in the most public of ways-in the headlines of newspapers and on the nightly news-is actually a testament to the success of CPAs. Let's face it-accountants are not known for being especially savvy when it comes to marketing. The incredible growth in their consulting work is due in large part to their clients coming to them, asking for help! Think about it: most professionals go out looking for more work. But in the accounting industry, companies are seeking the CPAs who audited them-their trusted advisors-for help on other business matters, everything from M&A work to installation of computer systems to internal auditing.

This type of work has grown so popular over the last ten years that CPAs' consulting fees and revenue have far outpaced those of auditing and tax work. What good business is going to turn away lucrative consulting work? So we now have a CPA firm conducting an audit that also gets more than 50% of its fees from the same client for work unrelated to the audit. Therein lies the problem.

Granted, the majority of firms have been able to maintain the integrity of independence in their audit work regardless of substantial consulting fees. But all it takes is a few bad apples to destroy the most important element of this system: trust. There needs to be trust in the financial statements of companies and trust in the audits for our system to work. Public trust, investor trust and government trust are all crucial. Once this is lost, the confidence in our financial system could collapse, which would be a catastrophe for our economy. This necessary trust can be gained through strengthening of auditor independence.

Companies will eventually force the issue of separation between audit and consulting work, so the accounting industry might as well take the lead and do it right.

If I had all the answers to this complex issue, I would be living on some island named after me in the Caribbean. Since that is not the case just yet, I'll simply add a few ideas to the public debate.

Changes
· Break up audit and consulting divisions. Consulting includes tasks that are unrelated to the financials. This means M&A work is okay, but computer systems integration is not.
· Don't allow external auditors (CPA firms) to act as internal auditors for the same company.
· Develop and require more CPE classes on ethics, wisdom and protection of the public good.
· Strengthen the peer review process.

Continuations
· Do not prohibit CPA firms from performing both audit and tax work for the same company.
· Continue to allow free flow of workers; auditors should still be able to go work for clients.
· Don't overreact by over regulating. The government will find this area is much more complex than meets the eye, and it will not have enough people power to police a system that works in 95% of all cases.

Our system, as it stands, works well to protect investors and the general public in most cases. There will always be a few bad apples in any industry. If someone is given a choice between losing $50 million in revenue or tweaking the numbers and turning their head, some humans will just do that. In business, this sometimes happens. That is a human frailty.

My thought is, don't put someone in the position to make that choice. Here is the question we need to ask ourselves: Are there policies that would actually change this? Even if an auditor is “independent,” and not doing any other type of consulting for a client, they are still being paid for their services. Theoretically, this means they're not completely independent. Some in the industry-in the academic arena, especially-suggest that auditors can only maintain true independence by not charging a client. Instead, the government would pay for all audits. This clearly would not work, and so we find ourselves back at the beginning again.

It's hard to ask accounting firms to give up part of their revenue to concentrate on audit, tax and other finance-related consulting work alone, but I think the public trust for the moment is lost, so this seems to be the most reasonable course of action to gain that trust back. By limiting consulting work to strictly financial-related issues, accountants will still have a good understanding of a client's books, which is crucial to a successful audit. Using these ideas, firms might.

About the Author – Robert Epstein is the President and CEO of CareerBank.com. His unique combination of accounting and recruiting experience has been invaluable in the founding, development and success of the site. Robert has more than 15 years of experience in the accounting and recruiting industries, including positions as both an auditor and tax accountant at Arthur Andersen, and later as a senior director for the largest accounting and finance recruiting firm in the Washington, D.C. area. He is an established expert on accounting career and staff development, publishing articles and speaking on a number of related topics. Robert holds a BS in Accounting from the University of Maryland where he served as an officer in Beta Alpha Psi, and is a member of the AICPA, GWSCPA, MACPA and VSCPA.