Public Audits: Independent Audit Practices Called Long Overdue
By William Thomson - October 1997
ABOUT two years ago a company financed by the Ontario government was forced to seek protection under the Bankruptcy Act and called in as the trustee one of the Big 6 accounting firms. The company continued for several years under my direction and the watchful eye of the trustee. As part of the recovery strategy, several of the divisions were offered for sale and on* attracted the attention of a company whose auditor was employed by the same accounting firm as the trustee.
The president of the company, a former partner In the subject firm, requested my permission to use the accountant to perform required due diligence. The accounting firm did not see any conflict. I did, and denied the request.
Last autumn, a company that I chair was seeking income tax advice and approached another of the CA firms and was forced to sign a confidentiality agreement before the accountant would share what were considered to be proprietary ideas owned by the firm. As a condition precedent to access what were undoubtedly good ideas, the company was asked to appoint the accountant as auditor and to patronize a Barbados-located trust company and law firm, all of which bore the name of the accounting firm or some derivation thereof. We refused.
Last week, a company of which I am a director was forced to accept the imposition of another of the Big 6 by its banker to carry out an evaluation of bank security, commonly called a Vital Signs™ - Specialist Business Assessment Diagnostics -- a practice followed when the bank is uneasy, wants a risk assessment, and employs an accountant for the purpose, all paid for by the borrower.
When the assignment was completed, the accountant solicited the company to retain the CA firm as a broker to raise the required equity, We accepted their proposal because we are confident that we can convince the bank to pay their retainer and add it to the credit. After all, the bank recommended the firm and should have some accountability for its performance.
Accountants have been bewailing the lack of profitability of their audit practices in recent years as companies become more demanding in forcing the auditor to actually deliver value beyond the standard opinion letter. This has forced the partners of the firms to expand their offering so as to more fully exploit what they consider to be their abundant intellectual inventory. Accordingly they will now sell not only auditing but forensic accounting, placement, out-placement, income tax, other tax, foreign tax, insolvency, business planning, brokerage, consulting services of every stripe and, shortly, we are told, legal services. I apologize for any services which I may have forgotten in the above list, but the point is that there seem to be no limits of practice beyond the imagination of the partners. From what I have seen, experience, ability and attitude, particularly the lack thereof, do not seem to be an impediment.
Accounting as a profession was established because the business community felt 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.
The additional principles of consistency, conservatism and relating the statements to the accounting conventions prevalent at the time have been added over the years.
But accountants, led by the major CA firms, have compromised their ability to provide an independent view by insisting on offering all manner of ancillary services. It is impossible that they not identify with the objectives of their clients when they have some participation in so many aspects of these goals -- assisting clients in disclosure issues, putting the best possible light on things to facilitate acceptance by the reader, is only one example.
One need only read the newspapers to see the number of lawsuits commenced against the accounting firms. It is somewhat frightening to consider the expertise which they have gained in contriving circumstances to the advantage of their client base now being used to defend their own actions. The profession does not seem to have the capability or desire to limit itself to fields dictated by the ethical and moral principles of accounting forbearers.
The business community needs independent opinions on financial statements. Since accountants are the only professionals capable of delivering the service, the only solution seems to be the separation of audit divisions from other areas of the modern accounting firm.
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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