1。Consulting and auditing

While CPAs may advise their clients about accounting matters, they may not make man- agement decisions for them。 In maintaining independence in fact and appearance, CPAs should understand that the information that management may wish to report to the public can differ from that which financial statement users need to make informed investment de- cisions。 However, rather than focusing on the usefulness of certain economic transactions, public accountants have often helped their clients paint too rosy a picture by misapplying vague, arbitrary accounting rules。 For example, Andersen provided consulting advice to help Enron execute its “fuzziness” strategy through its use of SPEs, but did not fulfill its professional responsibilities in connection with Enron’s audited financial statements。

Weber et al。 (2002) state that Andersen may have become too “chummy” with its high profile client, as when its personnel and Enron management were seen regularly together in social settings。 At Enron’s offices in Houston, distinguishing between Enron employees and Andersen employees was often difficult。 Many Andersen employees simply showed up for work every morning at Enron。 Andersen’s accommodating attitude went so far that Enron’s hard-charging executives often told Andersen’s people how to do their job。 Enron also influenced Andersen on who would be sent to audit and oversee them, as when Carl Bass, a member of Andersen’s Professional Standards Agency, was removed from day-to-day duties on the Enron account when he disagreed with Enron’s accounting practices。 In what would seemingly be a tremendous impairment to Andersen’s independence, Enron’s internal audit staff effectively became Andersen staff when they took over Enron’s internal audit pision (McRoberts, 2002c)。

Simon and Francis (1988, p。 257) found that audit fees have become “loss leaders,” often seeming to serve primarily as a means to meet (privately) with high-level company executives in order to sell them lucrative consulting services。 Andersen and virtually all other national and large accounting firms boosted their profits (in part to cover prior audit failure settlements) by focusing on non-audit services (Brown and Weil, 2002), as evidenced by the intense pressure to generate millions of dollars of fees per partner。 Thus, marketing non-audit services had become a staple of the accounting profession。 Andersen pushed to have fewer partners do more work and generate more income。 It rewarded partners who brought in new business even if they were responsible for bad audits in the past, and fired partners who sought to protect the integrity of the audit function if they didn’t generate enough revenue (McRoberts, 2002b)。 In 1991, 31% of the accounting industry’s fees came from consulting; by 1999 it climbed to 51%, and clients spent $2。69 for non-audit consulting for each $1 of audit fees (Byrnes et al。, 2002)。 Ultimately, greed led to the demise of both Andersen and Enron (McRoberts, 2002a)。

Based upon an analysis by the Office of the U。S。 Chief Accountant (2001) of selected CPA firms’ professional fees for the year 2000, Table 1 shows that all Big 5 firms earned much more in non-audit fees than in audit fees。 Moreover, given the trend of large CPA firms targeting their partners’ fee levels, regardless of technical expertise or engagement supervi- sion ability, many such partners often seek to “sell” such non-audit fees in order to maintain their professional positions, thereby inducing the CPA firm to make expedient, short-term decisions。 Nussbaum (2002) notes that the enormous pressures to produce earnings turn many auditors into “enablers” rather than objective guardians of financial credibility。

1。1。Risk-based approach to auditing

Statement on Auditing Standards (SAS) Nos。 47 (1983), 82 (1997) and others require auditors to focus their procedures on areas deemed most risky, which may seem logical and cost-beneficial。 The CPA profession has long (incorrectly) believed that traditional “detail” sampling and testing of many accounts and transactions was not cost efficient and did not justify the risk that client accounts or financial statements might be misstated materially。 Advances in personal computer technology and software have led to increased substitution of complex analytical procedures for detail testing。 While such risk-based approaches have much potential, they also require auditors to master their clients’ unique business attributes。