Is the Audit Industry Beyond Repair?

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Last month, I pointed to a Financial News Online piece on a conference in Paris at which many investment advisers praised Sarbanes-Oxley as giving investment advisers "powerful tools" against fraud. Former Arthur Andersen counsel Jim Peterson, however, provided a bit of a reality check with his comments in the piece regarding the unsteady state of the audit industry.


Reader response so far has been interesting. Most didn't agree with the article's premise, and seem to bolster Peterson's opinion. For instance, Chris Billington says, in part:

Sarbox is a CYA audit (Cover Your - well, you know). It is driven by checklists and is done to a formula...The system now means that if a fraud occurs, no one can get sued. The paperwork will prove that no one was responsible....Audit Managers are still under the cosh not to upset clients, so provided all the bits of paper are signed, everyone is happy -- oh, except the shareholders when it goes down the tubes.

A University of Essex accounting professor, Prem Sikka, agrees. In commentary posted at Guardian Unlimited, he says auditing firms are "far too cozy" to keep shareholders' interests first:

As a society, we continue to give auditing firms state-guaranteed markets, monopolies, lucrative fees and liability concessions. None of it has given us, or is likely to give us better audits, company accounts, corporate governance or freedom from frauds and fiddles. Without effective independent regulation, public accountability and demanding liability laws, the industry cannot provide value for money.

The problem, it seems, is that legislators and regulators haven't come up with solutions that would, essentially, hold accounting firms' feet to the fire, so to speak. And according to Jim Peterson, it's because they're missing the big picture. He says:

Threats to the viability of the large accounting firms are receiving increased attention from politicians, regulators and academic and media commentators. But the search for evolution onward from the model put in place with the passage of the American securities laws in the 1930's has so far yielded neither a coherent debate nor achievable solutions.

So what will it take to effect change -- a full-scale collapse of the industry? Maybe not, but we may be headed there anyway.