December 2002

Reviving the Profession

Editor-in-Chief Robert Colson’s column in August prompted some thoughtful responses from readers. We’re pleased to publish one interesting perspective.

According to the Business Briefing Column of the August 31, 2002, edition of the [Ft. Lauderdale] Sun Sentinel, “A judge has given final approval to a $17.1 million settlement in a securities fraud lawsuit against Aviation Sales Co., and against its auditors, Arthur Andersen. Arthur Andersen denied any wrongdoing as it agreed to pay its share in the lawsuit settlement.”

One of the world’s foremost auditing firms, certified to express an opinion as to the “fairness of the representations” in its client’s financial statements, cannot recognize its wrongdoing in the fulfillment of its professional obligation. Yet the judge and the class action lawyers recognized and proved wrongdoing to the extent of $17.1 million in damages.

From the point of view of young people seeking entry into a career, what can be more attractive than being an attorney in a law firm that specializes in class-action lawsuits involving auditors? Just scoop up the booty from the inept and ignorant auditors, pray that they continue in their ignorance of what constitutes wrongdoing, and keep banking money. Accordingly, it seems to me that clever young people will realize the benefits of acquiring the knowledge that the Andersen auditors either never acquired or may have forgotten. Acquiring knowledge in the art and science of accounting and auditing is a first step into the legal profession, possibly with the expectation that Andersen-type auditors will provide them with a gold mine until eternity.

Some young people will still seek an education in accounting as a preparation for entry into private accounting and advancement to positions such as CFO; some business majors, in preparation for positions in other fields such as banking and insurance. Others will opt for positions in government that require accounting expertise, such as tax departments, contract auditors, budgeting, and appraisal. The market will pay sufficiently well to attract enough young people into any field that requires such an educational background.

Referring to Colson’s invitation for comments based on perceptions and experiences, let me bring up one of the basic concepts in the principles of internal control and how its adaptation and implementation for the representations of audited financial statements may prove beneficial in restoring the investing public’s confidence in such statements. Division of responsibilities among employees within a single department creates a dependence on and a check by each division of the department on each other.

Let’s consider its implementation in the matter of certified audits of large public companies. Companies that are international in scope may, as a matter of client–auditor relationship, provide services other than auditing. If we were to consider a firm as a single individual, not as a firm of many individuals for purposes of the certified audit, we must assume that one individual is not going to disagree with himself as to his opinion of his own work. This leads to the opinion that such multiple relationships—audit and other services to the client—may be responsible for looking away from or otherwise ignoring what may ultimately turn out to be ignorance of wrongdoing.

For the purposes of public disclosure, why not consider a joint audit by both the firm and another audit firm or with a combination of smaller firms as to one or more or even all of the items represented in the final report? Each of the firms that participate in the audit would jointly and severally be accountable for the audit and its representations, but the client remains the primary firm’s. The auxiliary-auditing firms need not be the same each successive audit period, but might participate in alternating audit periods.

The individual audit cost here may be higher, but I am sure the total cost will be lower than the cost of the single-firm audit cost combined with the cost of common legal settlements and rising liability insurance premiums. I would suggest that surety companies mandate this procedure before providing liability insurance coverage to any single CPA firm. This audit requirement should also be a prerequisite to providing fidelity or performance bonds covering any of the principals and directors of a publicly owned company.

However, until the public capital market comes to terms with its greed, and until the government decides to intervene with standards, we can look forward to the ultimate development of a pawnshop type of capital market, collateral-backed loans, personal guaranties and pledges from persons of proven integrity and with sufficient private worth, and private pools of funds for entrepreneurial undertakings.

As a retired CPA who in the 1950s was a reviewer on the staff of the New York City office of Seidman & Seidman CPAs, and with some 40 more years of varied business experience, I believe—and history has proved—that our collective common sense and respect for honest behavior will prevail, and that with sensible governmental oversight, ultimately the CPA (Certified Public Auditor) will prove its societal worth and earn its proper status in our society.

Louis Kaplan, CPA (Retired)
Deerfield Beach, Fl.

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