Governance in Audit firms- time for change?

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See if you know the company in this story. Co-founded by 28-year-old accounting professor, in 1913, the firm quickly built up a significant reputation for integrity.This was the first firm to invest in the use of sophisticated training facilities, for its world-wide staff. It recognised the need for formal professional ethics training, and developed ethics cases and educated accounting professors to teach ethics. By 1978 it had become one of the largest professional services firms in the world. Yet the firm that had taken 90 years to build an enviable reputation lost it all in 90 days.

Many have theorized on how it happened. But fundamentally when the culture of the firm starts to decay due to leaders with bad governance, the writing’s on the wall. The change in culture was caused by one division doing better than the other and when generation of revenue took priority. Leadership wanted to go to the lowest levels in search of fees and more power. There was a strong desire to retain clients at any cost. Audit approach was changed to spend minimum time and increase profits. This was also caused due to partners having to ‘wrestle in the mud’ with low quality jobs to make more revenues. Tighter time budgets led to focus on other non audit services, with growing conflicts.

Outcomes of such change was conflicts of interest in effectively self-auditing their own work, in the fear of losing large and prestigious clients. Also noted was the changing of partners who were disliked by clients, as they didn’t support covering up of non-compliances. It was apparent that a good ethical culture amongst top management was lacking. It is also apparent that it wasn’t Enron that brought down this company!

Yet, accounting firms are following this model. Unless they are on self destruct mode, hope the top leadership will change sooner than later. May be the regulators should take action against the ones responsible for governing the firm when there are issues, rather than going after the small fish. That will definitely change the approach of these firms to take their obligation to the public more seriously. Otherwise, regulators are going to come up with ridiculous measures to get auditors to do their job.

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About surenraj

“Views expressed are my own”
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