It's Time to Go on the Offensive.

• Author: WELLS, JOSEPH T.
• Position: Auditing standards - Brief Article

Like a punch-drunk fighter, America's audit industry is struggling to its feet amidst a barrage of criticism. The SEC, the press, and a horde of shareholders' attorneys have all taken a swing.

This summer we listened to a contrite former executive describe the "culture of fraud" that flourished for 12-plus years in what is now the Cendant Corp. We could list other cases, but the point is the same. Unless auditors do something decisive, the whole profession is going to the mat.

As chair of the Association of Certified Fraud Examiners, I've watched the latest round of financial bloodbaths with dread. For too long now, we've hung back, allowing our critics to set the pace. In looking at the development of auditing standards in this century, we find the most significant advances have been forced on us by criminal circumstances.

SWEDISH MATCH KING

In 1932, Congress debated what to do about a worsening economic depression. Many leaders argued that intervening in the capitalist system would plunge the country deeper into the abyss. They pointed out that Ivar Kreuger, a Swedish-born tycoon who built his worldwide empire selling matches, was supporting a number of European governments with loans from his private treasury. Time magazine ran Kreuger's picture on its cover Thursday, Oct. 28, 1929, the day before Black Friday. Inside, Time writers praised Kreuger, popularly known as "The Swedish Match King," for keeping his head in difficult days.

Then, in March 1932, Kreuger put a bullet through his brain in a Paris apartment. A post-mortem of his ledgers showed Kreuger had used accounting tricks, shell companies and psychological bully tactics to simulate the activities of a thriving multinational corporation. Losses to American investors exceeded $500 million.

The Kreuger debacle was taken up by critics of capitalism like Sen. Huey P. Long, who revealed that no one at the New Yorkbased audit firm handling Kreuger's business had ever personally examined the books of the Swedish Match Co. Instead, the auditors received an annual report on the Swedish operation, prepared by Kreuger himself, and accepted the numbers without question.

Kreuger's infamy as the dark prince of capitalism helped ensure the passage of the Securities Reform Act of 1934. With relatively minor revisions over the past 66 years, the SRA remains the industry's fundamental regulatory legislation.

The next significant revision to auditing standards was prompted by the suicide of...