Time To Get Rid Of The Auditors
The Enron debacle isn't an isolated incident, reminds J. Edward Ketz, associate professor of accounting in Penn State's Smeal College of Business.
J. Edward Ketz
(J. Edward Ketz is associate professor of accounting in Penn State's Smeal College of Business. He specializes in corporate financial reporting issues.)
UNIVERSITY PARK, PA--The Enron debacle isn't an isolated incident, reminds J. Edward Ketz, associate professor of accounting in Penn State's Smeal College of Business.
"Let's remember Cendant, PharMor, RiteAid, Waste Management, and Sunbeam. And while we're at it, we might as well recall Xerox and MicroStrategy and Baptist Foundation of Arizona. We could call to mind even more, but this list is long enough to ask the question for the umpteenth time, "Where were the auditors?" The answer, of course, is either the golf course with top management or doing some consulting work for them," says Ketz, who specializes in corporate financial reporting issues.
The audit profession finds itself at yet another crossroad because society has asked it to perform one task, and the profession doesn't bother to carry it out, says Ketz.
"As an investor, the only thing I would like the auditor to do is to tell me whether I can trust the financial statements published by managers. In short, I want to know whether managers are lying to me, whether in the form of exaggerations, omissions, mismeasurements, nondisclosures, or red herrings. Tell me that managers are telling the truth, the whole truth, and nothing but the truth-or announce to the world that these guys are frauds," says Ketz.
It is as simple as that but Ketz believes that the profession for years backed away from the idea that their responsibility included ferreting out fraud.
"Only when forced to accept that responsibility did they accept it grudgingly in 1988. But, it's doubtful whether that change of heart has affected the auditing profession given the results of recent history. Clearly, they prefer to do the consulting instead of the auditing.
"Worse, when the public catches the manager with their fingers in the till and the auditor sitting in the same room just watching, the auditing profession does virtually nothing. Seldom do auditors receive anything more than a mere slap on the wrist. They don't get fined or charged with a crime or censured for unethical behavior. Oh, the accounting firm itself often gets sued a lot of money and often has to pay something, but the individual auditor goes on to not audit another day."
The real task today is either to decide whether to have government auditors carry out the labor or to get rid of the audit altogether.
"Since I still do not trust managers, given that their jobs and
their stock options are on the line, I suggest we try government auditors.
With the litany of failed audits by the Big Five, government auditors
cannot do worse. Without the temptation of consulting dollars, government
auditors would be better able to resist the pressures from top management
to look the other way," says Ketz.
-SMEAL-
Editors: For assistance, please contact Steve Infanti of the Smeal College Media Relations' Office is at smi3@psu.edu or 814-863-3798.
Penn State's Smeal College of Business is a pre-eminent learning community, shaping business practice for tomorrow's converging economies. With 5,900 undergraduates, Smeal College has the third largest undergraduate business program in the country. In addition to the nationally ranked undergraduate program, Smeal College is home to internationally ranked MBA and Executive Education Programs. Smeal College's seven academic departments, as well as its ten research centers and institutes, present programs and studies in leading-edge areas such as converging economies, supply chain management, e-business, and entrepreneurship along with the traditional areas of marketing, management, finance, real estate, accounting and information systems.
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