Verification key to financial market rebound.

• Author: Scroggins, Stephen R.
• Position: Viewpoint

Trust, but verify: Ronald Reagan's philosophical mantra during arms treaty negotiations with the Soviets in the 1980s was based on the premise that when it comes to human nature, without verification, trust eventually is eroded. We see that lesson in the current crisis surrounding the loss of investors' confidence in the reported numbers of public companies.

The heart of the issue is verification: Whose numbers do you trust? The numbers that can be verified. Not enough boards, investors and senior managers have valued verification of basic financial reporting facts and standards. Inevitably, Congress and the Securities and Exchange Commission have tightened the legal and regulatory requirements for external auditors. Audit committee requirements likely will be modified, and there may be internal auditing reforms, as well.

But for internal auditing, companies shouldn't wait to be told what to do. Beyond the scramble to restate their numbers, companies should take a number of steps to reestablish trust in their financial reporting.

1. Value and respect the auditing process. Thirty years ago, Arthur Andersen was known for the rigors of its St. Charles training center, a sort of Marine boot camp for the accounting profession. By the 1980s, however, Andersen and the other major accounting firms turned the basic audit service into a loss leader to their consulting services. The quarterly session with the audit partner that had once been a respectful give-and-take became a sales call for consultancy by the 1990s. The end result: corporations got bigger and more complex, with more sophisticated information systems, but audit resources did not keep pace.

   Today, boards and senior managers must commit to the sanctity and efficacy of the auditing, process and assert their will into verifying the results. This task requires their moral, ethical and intellectual commitment, as well as a financial one.

   We are seeing some signs of this happening. A year, Russell Reynolds Associates had been asked to find only one head internal auditor for a major company in the prior five years. In the last six months, we have undertaken these searches have indicated that a primary motivations has been the intensifying pressure for verification of their financial report.

2. Compensate the internal auditor as you do the comptroller. Corporations may be...