The Bottom Line

Profession Not Keeping Pace With Rapid Develpments In Market
By William E. Thomson, CA - April 2002

Accounting as a profession was established originally because the business community felt that it might be useful to have an outside, independent opinion on the financial statements of companies – representing to shareholders the venture’s financial position and/or operating results. Times have changed. Unquestionably, independent views on companies are still required but the vista upon which the opinion is necessary has considerably expanded, as has the audience, and a new approach must be developed to fulfill this overwhelming need.

There are several sacred cows that must be eliminated in the process.

The first casualty must be the view that our conventional accounting-based auditing firms can satisfy the requirement. Obviously the education and experience of those who staff these institutions does not provide them with the perspective to opine on the breadth of issues presented.

These firms are so thoroughly compromised already by their headlong stampede into other moneymaking ventures that they have lost all credibility due to conflict issues.

The second must be accounting by statute.

Development of accounting principles to fit laws of regulatory groups results in financial statements in accordance with accounting precision and nicety rather than language and numeric organization comprehensible to a broad cross-section of society.

We must remember and implement the most fundamental ideals of corporate governance in this process; auditors act for shareholders and not for management. To begin building a proper base, competent, experienced and independent directors must populate public boards of directors.

I have never met a member of a management team, including the chief executive, whose opinions changed simply by anointing him with a directorship.

Committee membership, particularly audit and compensation, should be carefully considered by boards in their choice of those appointed. Chairmen should most definitely be outsiders not financially dependent on the company. The European model may well bear closer study.

Segregation of board from management is a more established idea and on the face of it, seems to provide for more protection for stakeholders from a governance aspect.

Thus, if a company has a competent, independent board with a properly constituted series of board committees, how do they satisfy the realities of audit?

A possible approach would involve the audit committee identifying the critical issues most relevant to the subject company including historical financial performance, environmental, industry trends, regulatory, technological factors, etc.

Independent “auditors” representing each of the subject areas would be chosen by the committee.

A brief synopsis of their qualifications could be included in the annual report together with their individual statements on the condition of the company as they see it, based on their perspective.

Over time, convention in the form of more standard statements could be developed not dissimilar to current practise related to the accounting perspective.

The auditing profession may then regain the credibility which it has lost through the actions of our greedy brethren.

William E. Thomson, B.Comm, CA (1963), is the founder of Toronto-based Thomson Associates Inc., specialists in turnarounds and corporate crisis management.

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