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The idea the SEC missed By John Sterlicchi, San Jose [02-12-2002] All
the new rules coming out of the SEC are failing to clarify the relationship between
the auditor and client organisation. A New York Professor, Joshua Rouen,
believes that he has the answer. External auditors and
their clients are facing dozens of rule changes, which are being proposed for
discussion by the Securities and Exchange Com-mission in the wake of the
Enron, WorldCom and Tyco debacles. Yet not one of those new
rules addresses the basic issue inherent in the relationship between a
corporation and its auditors, which is that the corporation pays the external
auditors and no matter how much the latter protest their independence there
is a clear conflict of interest. Eliminating this conflict
has, for many years, occupied the thoughts of Joshua Rouen, the Professor of
Accounting at the Stern School of Business, New York University and he
believes he has come up with a workable solution. He has developed an idea
for "Financial Statements Insurance (FSI)," which is a way of
changing the employer of the auditors and thereby ending the conflict of
interest. Instead of hiring external
auditors, corporations would be obliged by, for instance, the Securities and
Exchange Commission to buy FSI, which would indemnify investors against
losses suffered because of shenanigans in corporate reporting and auditing. As with the issuance of
any insurance, the carriers would have to gauge the risk posed by each
company. Auditors would be hired to assess the risk that financial statements
of their prospective clients may contain misrepresentations. This would be
followed by the usual external audit and would be co-ordinated with the risk
assessment findings. This will see the end of
companies hiring the auditors. Instead their new bosses would be the carriers
and auditors would know full well the consequences of forgetting who pays
their bills. For instance, if another
Enron came to light and the insurance carrier was suddenly faced with a claim
from fuming investors, the auditors might as well uninstall their
spreadsheets because no other carrier would ever employ them again. Professor Rouen's scenario
is that the auditors' risk assessment report would enable the carriers to
decide on the coverage and premium. Both the amount of coverage obtained and
its cost would be made public, which would give investors an accurate insight
into the corporation. "By knowing how much
insurance coverage comes with the securities they buy, investors would be
able to tell which stocks are more reliable and which corporations are more
trustworthy. This would also solve the problem of auditors' having conflicts
of interest, since they would not be hired by the companies they audit,"
wrote Professor Rouen in an op-ed piece in the New York Times. That article set in motion
a groundswell of interest. He is in fact in the process of explaining FSI to
the US insurance industry. The concept caught the attention of many people.
He has even discussed FSI informally with a senior official, whom he declined
to name, at The Bank of England. Openly supporting the plan
is the senator for North Carolina, Elizabeth Dole. In her "Dole
Plan", which she will take to Congress in January 2003, she said
"FSI will ensure loyalty to accuracy, not to corporate interests, by
changing the incentives to restore investor confidence." Under what is called the
Dole FSI proposal, "the Securities and Exchange Commission would require
companies to buy FSI, in much the same way they now buy officers and
directors insurance, and the insurance company hires the auditor. The
insurance company has every reason to hire the best auditor, and the auditor
has every reason to guarantee an accurate report." Why did Professor Rouen
sit on his idea for years before springing it on the world? Through the late
1990s, he said, everyone seemed happy with the status quo. The fallout from
Enron and its relationship with Arthur Andersen changed all that. His main concern is that
it may take too long for the plan to work its way through the corridors of
power. "If it takes too long complacency will set in," he warned.
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KPMG
reports growth in Europe
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UK
Magazines: Accountancy Age
| Financial Director
| Management Consultancy
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