Are independent auditors tough enough?

Posted Oct 17th 2007 6:14PM by Zac Bissonnette
Filed under: Management, Law, Newspapers, Scandals

After being embarrassed by the collapses of Enron and Worldcom, the auditing industry appears to be growing a stronger backbone when it comes to dealing with aggressive clients. According to (subscription required) The Wall Street Journal, "In recent weeks, the accounting firms, operating through a new industry group, have taken views at odds with at least some of their clients about the use of market prices for hard-to-trade securities and over how banks should deal with their exposure to losses in off-balance-sheet lending vehicles."

This is certainly good news. Strong, independent accountants are an absolute necessity in preserving the integrity of the financial system. But more needs to be done. Investors and regulators need to be asking the following questions:

Shouldn't companies be required to change accounting firms (rather than just employees within the same firm) every few years to avoid entrenchment and cozy relationships. When accountants see colleagues leaving for lucrative gigs at the company they once audited, can that lead to a conflict of interest?
Should companies be allowed to choose their own auditors, or should the SEC consider implementing a system where auditors are appointed by a third-party? Allowing companies to hire and fire their own independent auditing firms raises questions about whether they are really independent.

Tags: Accounting, Auditors, enron, worldcom