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AICPA announces major initiative to strengthen financial reporting and further tort reform prospects.

The American Institute of CPAs unveiled a historic initiative to bolster public confidence in financial reporting and to improve the climate for tort reform by expanding auditors' efforts to detect fraud, assuring auditors' independence and enhancing the reliability of information for users.

"This initiative represents the unified effort of the accounting profession," proclaimed AICPA board chairman Jake Netterville, who reported it was unanimously approved by the Institute's board of directors.

AICPA President Philip B. Chenok termed the project "one of the most significant initiatives put forward by the accounting profession during my 13 years as president of the AICPA."

Joining Chenok and Netterville at a Washington, D.C., press conference to announce the initiative were several leaders of the profession, representing both public accounting and commerce and industry.

Fighting fraud

The initiative, in part, is a response to economic changes that have placed new demands on the financial reporting system, even as some prominent business failures have reduced public confidence in that system. According to Netterville, decisive action is needed to solidify public trust by strengthening financial reporting.

"Fraud detection is our job," said Netterville. "The public expects auditors to uncover financial manipulation. Our goal is 100% detection, and we will continue to strive to meet it." Netterville noted, the AICPA has already endorsed the federal Financial Fraud Detection and Disclosure Act, which accelerates the auditors obligation to report suspected fraud to management and, ultimately, to government regulators. (See "AICPA Supports Fraud Detection Bill," JofA, May93, page 15.)

Other proposals - independence

& discipline

"We are proposing that the revolving door between engagement partners of publicly accountable entities and their audit clients be closed," Netterville said. "We also believe that, when practical, audit committees of public companies and other organizations entrusted with other people's money should be composed entirely of independent directors."

The AICPA board believes public confidence in the existing disciplinary process has been undermined because it goes into action only after related civil litigation is concluded, said Netterville. "We intend to sharpen the teeth of the profession's self-regulatory program and remove the bad apples from our profession."

Confronting the liability crisis

J. Michael Cook, the chairman and chief executive officer of Deloitte & Touche, said pointedly, "The status quo just isn't good enough." Cook reported litigation-related expenses rose nearly 50% for the six largest accounting firms over the last two years and now consume 11% of their accounting and auditing revenues.

He also referred to an AICPA survey that showed claims against other firms rose by two-thirds between 1987 and 1991, helping to drive insurance premiums up threefold since 1985.

"For these reasons," Cook said, "we strongly support the restricting of joint and several liability as well as punitive damage awards to instances of |knowing fraud.' At the same time," he added, "we support the call for a new national disciplinary system to enhance the profession's ability to root out substandard performance and professional misconduct."

Cook said that, subject to appropriate regulatory oversight, sanctions should include fines and debarment from auditing public companies and other publicly accountable entities.

Restoring public confidence

Paul Kolton, former chairman of the American Stock Exchange and an AICPA public board member, noted "a number of sudden business failures and some spectacular instances of financial fraud" have eroded the public's trust in the reporting system and the audit function.

"Whatever the reason for the failures," Kolton said, "the public's first response often is to ask, |Where were the auditors?' Today, with this initiative, the accounting profession is making it clear: The auditors are here."

The commitment to discipline wrongdoers swiftly, to block the door between accounting firm engagement partners and their audit clients and to give new urgency to antifraud efforts will help end the debate about what auditors can and can't do, Kolton said.

"By addressing the public's most fundamental demands - for greater protection against fraud and punishment of wrongdoers - this initiative should recharge investor faith in financial reports," he predicted.

Benefits to business

"This isn't just an accountant's problem," said Eric Schindler, an AICPA board member and vice-president of finance and administration of Columbia Paint & Coatings. "Public doubts about the credibility of financial data can drive investors out of the market - raising the cost of capital for all and drying up the supply of capital altogether for some."

Schindler said historically the business community has resisted proposals for auditor reporting on internal controls, fearing added costs would not be justified by the few resulting benefits.

"I urge them to think again," Schindler said, noting that the increasing speed of information exchanges and the dispersion of management control as enterprises expand globally have complicated senior management's ability to monitor day-to-day operations.

"Good internal controls return power to senior management," he said, "making it harder for lower level officials to cook the books or misrepresent their performance."

A milestone

AICPA Chairman Netterville said the initiative would be the focus of an AICPA task force now being formed, which will work out detailed proposals.

Some of the reforms can be addressed by the AICPA alone, such as establishing a systematic review of alleged accounting failures. Others, however, must be enacted by Congress or a regulatory body, in many instances the Securities and Exchange Commission. For example, SEC action would be necessary to prohibit a public company from hiring the CPA firm partner responsible for its audit for at least one year. The board will move forward with each of the proposals independently.

Calling the proposals "a milestone in the fulfillment of our public mission," Netterville promised, "We will do everything we can to make them a reality, moving ahead as aggressively as we possibly can. We call on all others with a stake in the country's financial reporting system to join us in this effort."

The full text of the AICPA board of directors' statement follows.

Mr. Miller is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.
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Title Annotation:includes text of the initiative
Author:Miller, Stephen H.
Publication:Journal of Accountancy
Date:Aug 1, 1993
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