August 2003

Memo To Accounting Profession: Accept Change as Inevitable

In their article “Of Fiddlers and Tunes” (June 2003), Robert J. Sack and Mark E. Haskins present essentially the same thesis as one I presented in December 2002 at the American Academy of Accounting and Finance conference in New Orleans

Upon further reflection, I have decided that simply having the exchanges or another third party hire the auditors is not enough. It seems the process of being an auditor can lead to impaired independence, whoever pays the fee. There can be a true lack of independence, such as where a financial arrangement exists. I contended that the current auditing situation falls into this category, as firms bid a lower first-year fee than they would require if they knew they were performing the audit for only that one year and recoup their monies by continuing on the audit for a number of years. This would be an actual lack of independence, and would be solved by someone else, such as an exchange, being responsible for hiring and paying the auditor.

There is a second type of independence, apparent independence, and this is impaired in any arrangement where an informed public can question whether independence has been impaired, whether rightfully or wrongly. I believe this problem exists no matter who pays the fee or does the hiring, because all the public sees is the same auditor performing the same audit for the same client every year. I believe the only way—or at least the best way—to restore public confidence in the short term is to require mandatory annual rotation of auditors. And no auditor can audit the same company in more than two of any five years.

I recognize the potential for upheaval with this solution, but I believe it to be necessary. Twenty years ago when I visited Atlantic City I would have bet (no pun intended) that it was too unwieldy for every slot machine to have its own bill acceptor; the magnitude and cost of the changeover seemed inconceivable. Yet today that is what you find. So, too, with auditing. Somehow the profession will get it done, and I hope the public will again respect auditors and the audit process. So much of what is being proposed is nothing more than window-dressing on a huge problem.

Arthur Andersen thought that it was merely embroiled in a situation that every major firm has faced. The firm failed to realize that the world is a terribly different place and different actions were required.

The profession needs to asses what is required and go about doing it, not worrying about whether it can be done.

Jeffry R. Haber, PhD, CPA
Hagan School of Business
Iona College
New Rochelle, N.Y.

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