Rider Prof, Former Anderson Auditor Offers Tips to Restore Accounting's Respectability
With the accounting profession facing a credibility crisis in the wake of Arthur Andersen's involvement with the Enron scandal, Dr. Dorothy McMullen, CPA -- a former senior auditor for Arthur Andersen who is now an associate professor of accounting at Rider University in Lawrenceville, N.J. -- offers the following 10 points to restore respectability to accounting:
* Prohibit auditing firms from providing both external and internal audit functions.
"It is not in the best interests of anyone, including the audit firm itself, to perform both services," says McMullen. "It would appear to the public that the external audit group would be hard pressed to critique the internal auditors, even if that were not the case. Independence in appearance is just as important as independence in fact for the validity and credibility of the audit function."
* Prohibit audit firms from designing and installing computer systems that deal with financial reporting.
McMullen feels that some consulting, such as tax work, should be allowed since it is intricately related to the financial reporting. "But by limiting consulting work, there is less of a chance that the auditor could be viewed as being 'soft' on audit in order to obtain and retain other consulting work," she says.
* Clients should have to wait two years before hiring audit personnel.
"Another problem uncovered by the Enron saga is the hiring of audit personnel to top financial positions with the client. The problem is that the audit staff knows the person who is joining the client, and thus their objectivity is diminished with regard to answers they obtain from him or her," McMullen says.
* Make auditor rotation mandatory, perhaps after a 10-year period.
While McMullen reports that it is costly to change auditors since a new auditor will need much time to understand the business, she believes "new blood can be a good thing and allow for less skepticism." She also urges partner rotation on a client every five years.
* The audit opinion as it exists also needs to be changed.
"Today, approximately 90-percent of all clients get an unqualified opinion, yet the aggressiveness of accounting methods among these companies varies greatly," she says. "Perhaps opinions that rank the accounting strategies employed by the clients would help to differentiate the risk associated with certain companies and industries versus others."
* A new independent body should be created that would oversee audit quality, peer review, disciplinary actions as well as standard setting for the auditing profession.
McMullen proposes that this new body should be separate from the profession and not be affiliated with the American Institute of Certified Public Accountants (AICPA). Instead, she believes it should be composed of individuals with finance and accounting backgrounds, who are not employed by auditing firms.
* Make self-regulation more effective.
"Self-regulation, as it exists, has not been very effective. Consider that disciplinary actions take years for the AICPA's Division of Ethics to pursue. Even the Securities and Exchange Commission (SEC) has been limited in its pursuit of fraudulent financial reporting charges against CPAs. It imposed a $7 million fine on Arthur Andersen for fraudulent financial reporting by Waste Management. Andersen accepted the fine without admitting guilt. While the fine was the largest imposed by the SEC, it didn't even amount to 10-percent of the $79 million audit fee Andersen received from Waste Management for the 2000 audit," she says. "Obviously, this type of reprimand has no effect on the behavior of auditors and there needs to be a more effective penalty."
* Put the Financial Accounting Standards Board (FASB) under the umbrella of the aforementioned regulatory group.
"The FASB is under fire because of its slowness in implementing rules. It might also be more effective if it was under the proposed regulatory group because it has to find a way to become proactive to accounting changes -- rather than reactive -- to best serve the public's interests with rules that are relevant and up-to-date," says McMullen.
* Reform is needed with regard to the audit committee and its role in the reliability of financial reporting.
"The concept of independence with regard to audit committee members should ensure that past officers of the company -- and others with ties to company management -- are not placed on the audit committee," she says.
* Mandatory audit committee chairperson rotation should be required after five FASB years.
If you like McMullen's ideas and would like to follow up with her further, please call her office at 609-895-5518, or her home at 215-750-3511. Her e-mails addresses are [email protected], and [email protected].
Feel free to call us at 814-867-1963, or e-mail me at [email protected] if you have additional questions or needs. Dick Jones Communications assists Rider with its public affairs work.
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