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the economic damage caps proposed for auditor liability would be even less likely to pass constitutional muster. If there were some way to trade existing accountants' privily-barrier protections for damage-limitations, that might make practical sense, but it is not how the law is likely to develop.

Structural Reform

Although one can rarely state authoritatively in many individual cases that auditors were influenced to overlook their clients' errors or irregularities for fear they might be replaced by less scrupulous competitors, it is clear that the temptation exists.(n395) If it is assumed that competition for audit fees and management advisory services contributes to the frequency of litigation involving auditors, then implementing reforms that would reduce this competitive environment presumably would reduce the urgency of finding legal principles to limit liability.

In the ideal case, auditors would be appointed and rotated by someone other than the insiders of the company (i.e., management, board of directors, stockholders, etc.).(n396) This would probably be a task for the SEC or an analogous body at the state level. We would recommend additionally the prophylactic rule that appointment be by lottery from a long list of statutory auditors.(n397) Clearly, the list would have to be broken down into subgroups of accounting firms that have the resources to audit companies of various sizes and types. Again, ideally, statutory auditors would be permitted to do nothing else professionally but conduct audits.

Companies would be free to hire accountants as advisors, advocates, tax planners, and management consultants, but these would be different accountants than the statutory auditors. This proposal tracks with the French system.(n398) Audit fees would be regulated, either on a per hour basis or some other indicator such as client size. If there are special problems that could justify larger fees, pre- or post-engagement arbitration would be one way to handle the problem.

In the actual, less-than-ideal-world, a major step would be to preclude accountants from offering non-audit services to their audit clients. This proposal parallels the Japanese and British systems.(n399) It would also be helpful if the highest possible "chinese walls" would be erected in the large firms that would keep auditing and advisory divisions as separate as possible. Aside from reducing conflict-of interest problems, such an organizational structure might prove to be good business.(n400) (Consulting and auditing divisions of accounting firms might then be successful in signing up competitors of the other division's clients.)(n401)

So that auditor turnover could be tolerated with minimal learning curve problems, greater efforts (through legislation or FASB rules) should be made over time to standardize accounting methods, forms, statements, and procedures as was accomplished in France.(n402) Such an initiative would also make it easier for unsophisticated users of financial information to understand and compare the data they receive.

Although the above proposals seem reasonable and probably would be in the accounting profession's best long term interests, they are unlikely to be seriously considered in the foreseeable future; the synergy of providing a multitude of loosely related services including auditing --the service that gets the firm in the door -- is simply too attractive to be abandoned.


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