A New Attitude

A New Attitude
Expert: Auditors Wield More Power in Post-Enron Era

In the eyes of one New York litigator, the biggest problem facing the accounting profession is the detection of financial statement fraud, but auditors have much more control over this issue than they may realize.

“The only way to protect yourselves is to catch it,” said Michael R. Young, a partner with the New York law firm of Willkie Farr & Gallagher, LLP. “Catch it or you’re toast.”

Though initially alarming in tone, Young’s message to those attending the June 24 Foundation for Accounting Education’s Anti-Fraud Conference actually carried a strong conviction that the auditing profession is on the brink of a new golden age, but old attitudes must first change. To begin with, Young says the profession needs to develop a new mindset toward high-risk clients. Firms must be prepared o reevaluate their willingness to issue audit reports of these clients, even be willing to disconnect from them if they believe something is amiss.

In today’s environment, auditors also need to understand the power that they wield. Clients, Young told the audience, have little interest in changing auditors and even less to gain by alienating their auditor. Auditors should be candid with the client, especially the audit committee, and if they spot a significant deficiency in an internal control system, for example, they should “tell it like it is.”

If they see evidence of an illegal act, auditors have professional responsibilities to fulfill, including, in certain instances, recommendations to the audit committee that specific employees be terminated. The client, Young reminded the attendees, is well aware that these recommendations can have a big impact on the audit committee.

“What stands between a company and disaster is zeal and the excellence of the outside auditor,” Young said.

But it’s not just the players who have changed. The pieces have too. The audit itself is no longer regarded as the accounting profession’s “loss leader,” in which audits were undersold to clients in the hopes of gaining more lucrative consulting service contracts.

“There is tremendous value associated with the audit report now,” Young said. “Audit fees should be going up.”

The NYSSCPA’s Litigation Services Committee, chaired by S. David Belsky, sponsored the Anti-Fraud Conference. Litigation Services Committee member Timothy P. Hedley and Professional Ethics Committee member Debra A. Cutler cochaired the event.