Keeping the watchdog healthy.

• Author: Saul, Ralph
• Position: Accounting profession - Viewpoint

Mr. Saul was a member of the advisory panel reporting to the Public Oversight Board on auditor independence. But it's not just the panel that feels the tug of the auditor's short leash. When Saul sent an advance copy of this article to the heads of several Big Six accounting firms, one of them responded succinctly that the paper is, "Thoughtful and, unfortunately, accurate."

What ails the accounting profession? It seems the least likely of all professions to be in a state of ferment, but it's at a critical juncture. Forces at work both inside and outside the profession could erode its independent role as watchdog for the public. If present trends continue, I believe auditors will end up supplying companies with a boiler-plate certification to satisfy regulatory requirements.

We've had no shortage of thoughtful studies of accounting during the past 25 years, all aimed at strengthening the independent audit. But most of their recommendations have focused on procedural improvements. While these changes have substantially improved the audits of corporate financial statements, some have inadvertently made audits more rule-driven and compliance-oriented, diverting attention from the harder issue of professional independence.

The stakes in this matter are very high. The investing public relies on the integrity of financial statements and, despite audit failures, it still reposes great trust and confidence in auditor independence and objectivity. So anything that threatens to undermine that trust and confidence has an impact far beyond the narrow interests of accountants.

Corporate America has a stake in the independence of its auditors, too. That independence enhances the reliability of management's financial statements and gives them a credibility they wouldn't have without certification. If the relationship between management and the auditor works as it should, the board and shareholders have an important check and balance in the reporting process, one that works to the advantage of all parties.

The auditor's job is to determine whether the financial statements corporate management has prepared accurately represent the enterprise's financial position in conformity with generally accepted accounting principles and to audit those statements in accordance with generally accepted auditing standards. This division of responsibility builds tension into the auditor's relationship with management; he or she must work closely and harmoniously with management and preserve professional objectivity and independence at the same time.

In preparing the financials, top corporate management can't avoid getting...