It's one of the nastiest political campaigns in recent memory. And we're not talking about the Presidential election. The bitter conflict between the accounting profession and the Securities and Exchange Commission over new rules on auditor independence has left both sides bruised and battered, but mostly steadfast in their seemingly incompatible positions.
"Shame on everybody," says Michael Cook, who retired in May as chairman of Deloitte & Touche LLP, one of the Big Five firms most vigorously fighting the SEC efforts. "This situation--the high level of distrust and name- calling--is awful. The bickering has deteriorat-ed to the point where no one is acting in the public interest."
While there is some agreement about the need to modernize rules on investments by auditors and their families, the accounting profession is largely apoplectic about the SEC's proposals to restrict the consulting services that firms can provide to their audit clients. "I just don't see where the ability to reconcile the different views is," says Cook.
For his part, SEC chairman Arthur Levitt has been adamant in his conviction that auditors' judgments are clouded by their efforts to sell nonaudit services, which are growing at a much faster clip than traditional assurance work. In a widely cited statistic, he has noted that audit services have dropped to about 33 percent of revenues at the major accounting firms, down from more than 50 percent a decade ago.
"I can't help but wonder what impact this changing business mix has had on a culture that has prided itself on objectivity," Levitt remarked in a recent speech.
To which Big Five executives would respond: no impact at all. "I'm not aware of a single documented case in which a bad audit happened because the auditors were intimidated" by a consulting relationship, Jim Copeland, CEO of Deloitte & Touche, told CFO magazine in a recent interview. The worry, if Levitt curtails the types of nonaudit services a firm can offer, is that audit quality would diminish and the profession would be less attractive to new recruits.
At a Senate Banking Committee hearing on the issue, Sen. Phil Gramm (RTex.) said that given the sweeping nature of the proposal, the burden of proof remained on the SEC, which asked for a closed-door briefing with lawmakers in early October.
As for CFOs, they wholeheartedly support the SEC's aim of enhancing investor confidence in the integrity of financial reports. But many have been less than enthusiastic about the need for new regulations in this area.
In testimony at the second of three public hearings, Merck & Co. CFO Judy Lewent described the "rigorous evaluation process" the audit committee used before permitting Merck's auditor, Arthur Andersen LLP, to provide nonaudit services in "limited circumstances." Deeming this approach "effective in addressing potential issues of independence," Lewent expressed concern that the SEC might "substitute a detailed set of rules and regulations for Merck management and audit committee oversight."
Similarly, Gary Pfeiffer, CFO of DuPont, stated that the SEC's proposals "would be best used as guidelines for audit committees rather than as detailed rules." He also agreed that companies should disclose the nonaudit fees they pay to their auditors--something DuPont has done since 1992 --but suggested that the disclosures the SEC has called for go too far.
But even without concrete proof that auditor independence has been corrupted, Levitt seems determined to enact new rules by the end of the year. Two Big Five firms, Ernst & Young LLP and PricewaterhouseCoopers LLP, have offered a compromise in which they would accept limits on some consulting, such as internal-audit outsourcing and information- systems work. But the three other major firms have been more willing to play hardball, including lobbying Congress to intercede.
Ironically, the profession's best hope of winning this ugly war may be to delay any action until after the Presidential election, when a new SEC chairman, who has one of Washington's choicest political positions, is expected to be named.