January 2003

Through the Eyes of an Auditor: Trust and Verify

A Gallup poll update released last month on the public’s rating of the honesty and ethics of professions was interesting because—in addition to the unsurprising news that nurses haven’t lost their most-respected-profession status—accountants have been in the top 10 since Gallup first started including them in the survey in 2000. Although recently accountants’ ratings have fallen slightly, they and bankers remain the most positively rated of all the business professions.

Nonetheless, many members of the accounting profession believe the events of the last year irreparably damaged the image of the CPA. Gallup’s poll showed lower ratings for accountants as of last February, when accounting scandals dominated the headlines. The new report shows that the ratings have rebounded slightly, which I attribute to the public, at some level, knowing that the accounting profession’s problems were isolated rather than widespread, the exception rather than the rule. I also think the public understands what accountants do better than they did a year ago.

As the bad press accountants re-ceived during the various financial meltdowns fades, investors continue to suffer losses due to corporate fraud and mismanagement and loss of trust in the integrity of our investment markets.

Balancing Two Duties

CPAs serve the dual roles of watchdog and business advisor. In its purest form, the watchdog role entails in-forming the public about a company’s financial condition, good or bad, and requires a challenging, even adversarial, stance toward a client. The advisor role applies technical mastery to a client’s business. Although these roles sound dissimilar, if not incompatible, between the two extremes is the independent advisor. This person acts and speaks from an arm’s-length perspective and follows principles laid down by professional ethics and government regulations, including those that say auditors can’t verify their own work and then claim to be independent.

I’m reminded of the “trust and verify” policy that President Reagan adopted during the 1980s when negotiating nuclear arms treaties with the Soviet Union: Practice mutual openness and be confident that the information others provide is truthful and reliable, but verify it rather than accepting it at face value. Both sides understand that the system and the relationship absolutely require that verification take place. There can be no shortcuts or covert winks.

When the spirit of this policy is applied appropriately, the result is an authentic relationship that both parties—as well as outsiders—know is in everyone’s best interest. Applying “trust and verify” to accounting isn’t unrealistic. In practice, we see it predating Enron, as evidenced by the SEC’s independence rules and the recommendations of the Public Oversight Board Panel on Audit Effectiveness in 2000.

There’s nothing inherently wrong with an advisor being a friend to a particular business, it’s just that an advisor can’t put more value on the profitability of the relationship than on the integrity of the advice. The best advisor is someone who knows you well, warts and all, and who can tell you the unvarnished truth: what you need to hear rather than what you want to hear.

The moral of Hans Christian Anderson’s story of “The Emperor’s New Clothes” hinges on the emperor’s court being so loyal that they wouldn’t state the obvious. To draw a direct analogy to auditors’ recent missteps, however, would be oversimplifying the case; financial reporting is complex by its nature, largely because of reporting requirements. When the circumstances call for skepticism, however, the auditor must have the integrity to say, “My job is to ask for more evidence, and to not sign off until I see it.” Applying the “trust and verify” policy whenever the auditor sees a line about to be crossed allows the auditor to do the best job for any client worth having.

Louis Grumet
Publisher, The CPA Journal
Executive Director, NYSSCPA

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