|Reprint permission from the August 7, 2000 issue of Crain's Chicago Business.
The accountant is now an entrepreneur — someone who aggressively markets and cross-sells his products and services. But that evolving business model has brought the accountant's professional independence into question and jeopardized the integrity of his work.
Other entrepreneurs, including those at the mercy of the capital markets, may pay a price, and so may the investing public, to whom auditors owe their greatest duty.
Traditional accounting and tax work have become loss leaders. Accountants are really after lucrative engagements involving network and database architecture, risk management, corporate finance, actuarial services, merger and acquisition analysis and asset management. The accountants' business mix raises some disturbing questions because it gives them an extraordinary stake in their clients' loyalty, profits and share prices — a stake with the potential to color their judgment and undermine the sacred covenant between the auditor and investor.
The Big Five are committed to meeting the needs — and grabbing the opportunities — of the new economy, even as talent is departing their offices for dot.com start-ups that can offer attractive stock option packages. They profess concern about conflicts of interest. Yet they are in danger of losing their way.
The tension between independence and entrepreneurship is starkly highlighted by the financial facts of life.
Auditing fees, which represent less than one-third of the revenues earned by the biggest accounting firms, have been growing at an annual rate of only 9% since 1973. In sharp contrast, consulting service revenues have grown over the same period at a NASDAQ-like annual rate of 27%. And when an audit firm charges fees based on the answers it gives, or earns incentives when it achieves results, one can't help but wonder about its objectivity as an auditor.
The Securities and Exchange Commission knows what's going on and doesn't like it. The SEC fears that auditors may already have relaxed their standards to encourage audit clients to buy more consulting services and keep them happy.
Accountants defend themselves by trying to keep their audit and consulting functions separate. But firewalls installed to minimize conflicts despite profit-sharing and other links simply haven't worked. Any Auditing 101 student knows that auditors must steer clear of financial entanglements in the companies they audit and give shareholders a fair count. When self-interested auditing firms worry about non-audit profit centers and Wall Street's reactions to their findings, they sabotage their own credibility, and the companies that deserve investor confidence see it evaporate.
The accounting industry is fighting proposed federal regulations that would prevent auditing firms from offering consulting services to their clients. The accountants' not-so-thinly veiled threat is to spin off their consulting businesses and thus thwart SEC oversight. Then, they can turn around and hire their former partners, on the payrolls of new, but incestuous spinoffs, to offer consulting services to audit clients. We all deserve better.
Whatever temptations they face, accountants should police themselves. If they don't, they will have invited all the scrutiny Congress and the regulators can bring to bear.
Marc J. Lane ([email protected]) is a Chicago lawyer and financial planner and an adjunct professor of law at Northwestern University School of Law.
Copyright © 2000 by Crain Communications Inc.