Future of Auditing

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The future of auditing
Called to account
The auditing industry has yet to recover from the damage inflicted by an era of corporate scandals Nov 18th 2004 |From the print edition
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NO ONE becomes an auditor because the job is adventurous. In recent years, however, the profession has been really rather racy. Auditors have been implicated in fraud after fraud. The Enron scandal brought down Arthur Andersen, which had been one of the profession's five giant firms. Now a scandal at Italy's Parmalat that was uncovered in late 2003 threatens Deloitte & Touche, another global giant, as well as Grant Thornton, an important second-tier firm. And new scandals are still emerging: most recently, financial manipulation was discovered at Fannie Mae, America's quasi-governmental mortgage lender, and at Nortel Networks, a telecoms-equipment group. Investors depend on the integrity of the auditing profession. In its absence, capital markets would lack a vital base of trust. So it is no surprise that scandals have triggered changes in the profession. In America it has seen self-regulation dissolved in favour of the Public Company Accounting Oversight Board (PCAOB), in effect, a new regulator. It has been deluged with new rules, restrictions and requirements as part of the Sarbanes-Oxley act. In Europe the Eighth Company Law Directive, which, among other things, deals with the auditing profession, is progressing, albeit slowly, towards enactment. Britain's Office of Fair Trading is in the midst of scrutinising its audit industry. One consequence of all this change is that audits have become tougher. The requirement introduced by Sarbanes-Oxley that auditors report to independent non-executive board directors rather than company management has reduced one overt conflict of interest. The certification of financial reports by chief executives and chief financial officers has focused minds. And the PCAOB has begun its inspections of audit quality and internal controls at auditing firms. Its first, mostly reassuring, reports were published in August. Related items

* Auditing: Half measuresNov 18th 2004
Related topics
* Public Company Accounting Oversight Board
* United States
* Industries
* Accounting and payroll services
* Professional services
Auditors themselves say they have toughened their standards and beefed up internal controls. And checks-and-balances in the financial system have been working better. Audit committees are taking their roles more seriously and asking tougher questions of management and auditors; activist shareholder groups, such as Calpers, are holding company auditors to standards that are higher even than those required by law, especially when it comes to their provision of non-audit services. Auditors even have more business, thanks to the new rules they must implement. Yet despite this flurry of activity, behind the scenes there is a feeling among auditors that they are still a long way from meeting all the challenges they face. True, there are promising solutions to, say, the problem of conflicts of interest. But leading auditors point to one central concern: what, if anything, can be done to reduce the industry's alarming concentration? That problem seems almost intractable. The world's biggest companies rely for their annual audits on a tight oligopoly of just four accounting firms. According to the General Accounting Office, a congressional watchdog, the “Big Four”—Deloitte & Touche, PricewaterhouseCoopers (PWC), Ernst & Young (E&Y) and KPMG—audit 97% of all public companies in America with sales over $250m. They audit more than 80% of public companies in Japan, two-thirds of those in Canada, all of Britain's 100-biggest public companies and, according to International Accounting Bulletin, they hold over 70% of the European market by fee income. This dominance raises two concerns. Is concentration stifling competition and lowering the quality of audits? More...
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