Reforms aimed at heightening the independence of corporate audits will not prevent the sort of conflicts that triggered the collapse of Enron Corp. and the dissolution of its auditor, Arthur Andersen LLP, critics charge.
"The auditor is still pretty close to management," says Al Rosen, a principal of Toronto-based Rosen and Associates Ltd. and a partner in investor research firm Accountability Research."An external auditor remains effectively appointed by operating management rubber-stamped by directors and then rubber-stamped by shareholders."
He says attempts to put teeth into Canada's auditing watchdog, the Canadian Public Accountability Board, are inadequate since the board draws part of its operating funds from the Canadian Institute of Chartered Accountants, the country's self-regulating accounting body.
Mr. Rosen contends the watchdog lacks a national securities regulator with a strong enforcement arm -- and its work is not fully transparent to the public.
The CPAB, however, notes that it requires auditors who have restrictions placed on them by the board to provide notice of the fact to regulators and, in some cases, to the public.
CICA spokesman Alex Wooley adds that while the board does receive "bridge financing" from the accountants' institute, the funding will end once the board becomes self-supporting through fees paid by member audit companies. He says the board's decision-making is independent of the CICA.
But Mr. Rosen says the board's effectiveness is further limited because the public accounting profession in Canada continues to set its own accounting and auditing rules. That authority was recently removed from the Certified Public Accountants organization in the United States and given to the U.S. Securities and Exchange Commission.
In Canada, Mr. Wooley says, the Accounting Standards Board does receive funding from the CICA and is chaired by Paul Cherry, an institute member who works at the CICA offices in Toronto. But Mr. Wooley says the rest of the board is composed of volunteers who have no connection to the CICA.
Audit firms in Canada also continue to be paid directly by the corporations they audit -- a potential conflict that would be eliminated if auditors were compensated from a central fund financed by public corporations, Mr. Rosen says.
In Britain, he says, independent audit consultants add to the checks and balances by offering second opinions on an external auditors' work, a practice Canadian auditors have opposed.
Bob Rutherford, vice-president of standards at the CICA, says the concept of a central fund has been considered by accounting bodies and regulators in Canada, the United States and in many other jurisdictions, but rejected because of daunting logistical implications.
"Who is going to manage all of that? It would be a whole different, new bureaucracy. It would be difficult to administer. It's a question of 'how to.' "
He says regulators and accountants have instead sought to bolster the integrity of public audits by compelling auditors to report to oversight boards with independent directors, rather than to company management.
Mr. Wooley adds that CICA responded last fall to the accounting scandals in the United States with a soon-to-be-adopted draft guideline on auditor independence.
A key provision of the draft would limit the type of consulting work audit firms can perform for clients to mitigate against potential conflicts of interest generated by so-called cross-selling of audit and consulting services.
Canadian securities regulators and the Standing Senate Committee on Banking, Trade and Commerce have also attempted to strengthen the independence of audits, mainly through reforms that closely track new laws south of the border.
"Investor confidence" initiatives likely to be implemented in the form of rules or legislation over the next several months include a move that would require external auditors of large publicly traded companies to report directly to an audit committee with at least three members who are independent of management.
But despite the reforms, Mr. Rosen and other critics say inherent conflicts continue to lurk in the background as long as the CICA continues to fund the ASB -- and there is no move to change the way auditors are paid.
© The Globe and Mail
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