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US accounting industry in for `major overhaul'

Pratap Ravindran

MUMBAI, Feb. 4

WITH public confidence in corporate financial disclosures hitting rock bottom after the Enron crash, the accounting industry in the US, found wanting in satisfactory self-regulation, has initiated a massive damage-control exercise.

Thus, the American Institute of Certified Public Accountants (AICPA), Arthur Andersen and KPMG have announced that they will not fight a ban on accounting firms from offering their clients other services such as information technology and consulting services and from conducting internal audits for these clients.

It may be recalled that, two years ago, the then Chairman of the Securities & Exchange Commission (SEC), Mr Arthur Levitt Jr, had tried to ban auditors from providing these services.

The AICPA, KPMG, Arthur Andersen and Deloitte & Touche had vigorously opposed the move and had, in fact, threatened to sue the SEC, finally prevailing upon the watchdog body to back off.

While the first three of the above entities have now reversed their positions, Deloitte & Touche has merely said that the firm would not "accept or reject any single proposal whether we agree with it or not, because the effectiveness of a complete set of reforms is what ultimately needs to be assessed.''

As for PricewaterhouseCoopers and Ernst & Young, which had not fought the SEC two years ago, they have said that they maintain their position.

PricewaterhouseCoopers, which had announced two years ago that it intended to spin off several businesses, including its consulting business, is understood to be moving aggressively now to make its $6.7-billion management consulting business into a separate public entity. Meanwhile, one of its audit clients, Walt Disney Co, has said that it would no longer use the firm for consulting in view of the public concern about audit independence.

Now that it has revised its position, KPMG is not losing any time in getting its act together. The KPMG Chairman, Mr Stephen G. Butler, has called for a "major overhaul'' of the financial reporting and disclosure model in the US and urged the accounting industry, regulators, standard setters and other interested parties "to confront the real challenge of ensuring timely, relevant and high-quality information to the investing public.''

Tagging the issue of non-audit services a "red herring,'' Mr Butler has said that it has been "raised anew'' by the Enron controversy and that it "is making it difficult to move on to the larger issues of modernising the financial reporting system.''

"Therefore, KPMG supports prohibiting auditors from performing systems integration consulting and internal audit outsourcing services for public audit clients. I believe that we should accept previously proposed limits on non-audit services and move forward.''

Andersen hires ex-Fed chief

Meanwhile, in what is arguably one of the more significant developments in the US accounting industry, Enron's erstwhile auditor, Arthur Andersen, has announced that the former Federal Reserve Board Chairman, Mr Paul A. Volcker, who is now Chairman of the trustees of the International Accounting Standards Committee Foundation, has agreed to chair an Independent Oversight Board (IOB) to work with the Big Five firm in making fundamental changes in its audit practice.

Further, Arthur Andersen has announced that it will no longer accept assignments from publicly traded US audit clients for the design and implementation of financial information systems (although it will fulfil existing commitments); and it will no longer accept engagements to provide internal audit services to publicly traded US audit clients (although it will honour its existing commitments or, if the clients prefer, immediately enter into discussions to develop an appropriate transition).

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