Accountants often bear the brunt of disparaging jokes that depict them as boring "bean counters" hunkered down under green eyeshades. Over recent years, that impression has worsened. Shaken investor confidence has smeared accounting's reputation, as auditing firms have been seen as stoically bearing witness to corporate fraud perpetuated by the likes of Enron and Worldcom.
Well, that's about to change. The bean counters are fed up and they're not going to take it anymore.
Accountants are preparing to swap their green eye shades for X-ray goggles and Kevlar protective gear as they confront the challenges facing their profession and worldwide capital markets.
At an international policy conference held last week in Paris (see, already their image is changing -- they didn't meet in Dubuque), the heads of the world's six largest accounting firms discussed new ways by which to report financial information, and released a report called "Global Capital Markets and the Global Economy: A Vision From the CEOS of the International Audit Networks."
The items discussed by PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young, KPMG, Grant Thornton, and BDO Seidman included proposals ranging from the nature of audits to the utility of quarterly reporting. Specifically, discussion centered on whether companies should be subject to regular forensic audits designed to ferret out fraud, whether such audits should be required by stock exchanges, and even whether investors should choose the intensity of an audit.
Rather than seeking unanimous agreement on the course of action, the firms really wanted to spark a public conversation meant to narrow the focus of what investors expect from an audit. While the easy gut reaction from an investor might be "Go for it -- get the nasty crooks before they eat my pension," that desire must be balanced against the higher costs associated with more complex and wide-reaching investigations. Corporations have already complained for quite some time about the high costs of compliance with Sarbanes-Oxley, a criticism noted by many top U.S. officials and often cited as a reason for an increasing number of public offerings occurring overseas.
The firms believe reforms can foster more efficient markets, increased financial stability, and greater focus on the long run in terms of a company's financial position. While those goals sound admirable, it's the means which require deliberation. Calling for the elimination of quarterly reporting, the firms advocate using technology to provide more up-to-date financial information and other non-financial disclosures which investors could then tailor to their analytical needs. This idea dovetails with the push by SEC Chairman Christopher Cox for XBRL interactive financial data which is tagged and available for manipulation by investors. The accountants also complain of inconsistencies between U.S. generally accepted accounting principles and international standards, and they suggest harmonization. As a final point, the firms conclude their paper with a plea for limited liability from civil litigation and criminal prosecution.
So, here's the rub. The paper's acknowledgement that its suggestions will provoke debate is legitimate. There are many questions to ask. Are the firms posturing to absolve themselves from ferreting out every malfeasance? If so, is that due to a practical evaluation of the state of business practices? After all, with an ever-increasing array of sophisticated financial instruments, accounting no longer involves simply counting the number of widgets in one's inventory. Is there something really broken with routine auditing functions which may occasionally allow malfeasance to pass undetected? Who should bear the cost of policing the current complex capital markets? Who is to blame if things go wrong?
Althought the questions are varied and clear, the answers have not yet emerged. Personally, it seems plain to me that accounting standards should be rationalized and that the last thing we want is to penalize an industry for the faults of a few. So, too, more timely informational flows would appear to benefit the investor. But standards of reference such as quarterly reports provide guideposts, and doing away with them could lead to informational chaos. Enough companies have trouble meeting their reporting obligations as it is. I would prefer to both maintain those reports and supplement them with additional data.
Interestingly, not much has hit the press regarding such a major proposed overhaul of the current financial reporting system. While The Financial Times first published news of the report, I still have not found the document posted on any of the accounting firms' websites. After much searching on the Web, I eventually found the report's link.
Read the paper yourself and consider whether accountants have outlined a road map for a brave new world which can really bring about an investor's utopian dream or whether they are seeking to insulate themselves from the fury of shareholders burned by fraud and seeking vengeance from their nightmare. Quite probably, the answer lies somewhere between, and that's OK. The conversation has been initiated, and now it's up to all stakeholders in the financial system to give thoughtful consideration to the ramifications of globally complex capital markets and business operations, and their contingent burdens of responsibility.
For more on the SEC's push for interactive financial data, see "It's Your Turn to Manipulate Data!"