Blogger: Mark Diodati
I began my career as an auditor in the early 90’s at a “Big 6” CPA firm. After a long day at a remote engagement, the audit team went out for dinner. I’ll never forget the question that we stumbled upon, because it seems to come up often in the news. Can auditors be independent if they are compensated by the companies they audit?
The job of the firm is to certify that the company’s financial statements (e.g., balance sheet, profit and loss statement) are accurate. Without auditor independence, the company’s financial statements cannot be trusted, and the entire financial system is at risk. Investors can lose their money (and employees can lose their jobs) when an apparently strong company suddenly goes under. In this scenario, the company frequently “cooks" the financial statements to meet financial goals (e.g., revenue numbers and expense ratios). The company gets the audit firm to certify the deceitful financial statements, either by hoodwinking the auditors or applying subtle pressure to “ignore” certain areas of the business. Enron, Satyam, and WorldCom come to mind. Two of the partners at PriceWaterhouseCoopers (the firm that audits Satyam’s financial statements) have been arrested.
Most of the financial auditors I’ve come across are ethical and diligent. They realize the importance of their endeavors and do a great job. Additionally, the Sarbanes-Oxley regulations proscribe audit firms from doing customer consulting engagements (a very lucrative income source), which improves independence. Still, I can’t help but think that the current compensation mechanism makes auditor independence (and importantly, the appearance of independence) an uphill battle.
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