Restoring Trust
A Plan For Financial Reform

By now, everyone is familiar with the Enron/Andersen debacle and the shadow that it has cast across the issue of confidence in financial information for publicly traded companies. For business owners who are publicly traded, you experience the same concerns. And even if you’re not publicly traded, the issue impacts you and your employees’ 401 (k) investments and general financial well-being.

While we applaud recent SEC and AICPA actions and the announcement by the Big Five to eliminate providing internal audit and certain technology consulting services to their publicly held clients, these measures alone are not enough to restore public trust in our profession and do not address all the issues.

We offer the following five recommendations to send a strong message to the global financial community that the accounting profession is serious about the integrity of the audit process and restoring public trust.

• The actions of the management of the major firms must make it clear that nothing is more important than their professional responsibility. The policies of those firms, including reward systems, must reflect an uncompromising commitment to professional excellence. In addition, all the major firms must collectively agree to limit the nature and extent of services provided to publicly held clients. Assurance and advisory and tax services must once again be the business drivers and focus for the auditors of SEC registrants.

• Audit committees must do a better job of protecting shareholder interests. They must challenge management and the auditors on the treatment of significant accounting issues. They must be diligent in determining that their auditing firms are free of conflicts of interest. Audit committees must ensure that the auditor’s primary responsibility is to the shareholders and that the auditor’s relationship with management is clearly subordinate to such responsibility.

• The SEC must amend its rules for proxy disclosures of auditor’s fees to require separate disclosure of fees for (1) assurance and advisory services, i.e., those services that meet the definition for assurance services, (2) tax services and (3) all other services. The current proxy rules for disclosure of the fees paid to the auditors, which resulted from a compromise, are misleading because services that do not give rise to a conflict of interest are inappropriately combined with services that can and, in some instances, have created conflicts of interest.

• We urge the use of a principles-based approach for all standards-setting areas: accounting, auditing and independence. In addition, the auditing standards should be expanded to incorporate a forensic approach. A principles-based framework for setting standards provides greater assurance to the public that management, auditors and those responsible for corporate governance will do the right thing.

• We assume that the major accounting firms believe they have superior auditing methodologies and are willing to share their best practices with others. Accordingly, we urge the AICPA to coordinate a review of the audit methodologies of these firms. The best practices of all should be shared with the entire accounting profession.

The global accounting profession is at a crossroads.

In order to regain public confidence of business owners, strong leadership is required. Support of this five-point plan by the major U.S. accounting firms can be the first step to restore the public trust and confidence in the accounting profession, which historically has served so ably to make the U.S. capital markets the strongest in the world.

Kent J. Gedman is managing partner for the Kansas City office of Grant Thornton LLP, a global accounting and management consulting firm. He may be reached at 816.471.1520 or by e-mail at kgedman@gt.com.