Sunday, January 15, 2012

Reducing Accounting "Shenanigans"

We can't change human nature, but we can organize ourselves not only to prevent malfeasance but also to make it easier to adhere to ethical standards in situations that aren't black and white. The accounting profession is currently discussing whether to impose term limits on the auditor-client relationship.

The statement of the problem:
Auditors work for the same company for so long that instead of being independent, they end up co-dependent.
The most common objection to term limits:
Rotating audit firms every few years would raise costs, reduce the familiarity of accountants with a company's books and impair the quality of audits.
Given the complexity of modern information systems, there's some truth in the argument against auditors' term limits. However, this is one instance where the greater cost to society may be in the audit failure of a "too-big-to-fail" institution, versus the higher cost of individual audits spread across the universe of public companies.

The WSJ writer also calls for restrictions on the revolving door between audit personnel and their clients. I've witnessed many instances of companies hiring accounting talent from their CPA firms. (I've never seen it done for nefarious purposes; if one works with someone who is likeable and smart, why waste time going through hundreds of resumes and dozens of interviews?)

But if you're going to impose the revolving-door rule on auditors and their clients, create one as well for government employees and lobbying firms. In the latter case the damage to the budget and society has been obvious.

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