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By Patty Adversario, Senior Reporter
THE financial collapse of Enron and the
obstruction of justice by its accounting firm Arthur Andersen has
resurrected the need to limit the range of services that accounting
firms offer to public companies — something that many have
advocated as a way to prevent conflicts of interest.
Lilia R Bautista, chairman of the Securities and
Exchange Commission, herself said the Enron case has become a
“catalyst for much needed change in corporate governance and the
accounting profession, in particular.”
In the Enron case, Andersen was both the auditor
and the consultant/partner to management in their appraisal of the
special purpose vehicles used by Enron.
Bautista said this arrangement did not allow
Andersen to be an “objective critic of transactions that could
have triggered the alarm bells to the shareholders with their notes
and opinions.”
The US federal jury in June convicted Andersen
of obstruction of justice for impeding an investigation into the
financial collapse of Enron.
Andersen was charged with destroying
records related to its audit of Enron. The conviction is the first
ever against a major accounting firm.
Taking the cue from the Enron case, Bautista
said the SEC is looking for further safeguards to improve corporate
governance and strengthen the independence of the local
accounting profession.
A provision in the new SEC corporate governance code, however, only
generally states that “non-audit work should not be in conflict
with the functions of the external auditor.” The code does not
mention what are these conflicting functions, except to state the
external auditor cannot simultaneously provide the services of an
internal auditor to the same client.
Bautista said “some non-audit work are not really controversial,
so decisions need to be made on how to separate the work with likely
conflict of interest problems.”
Extreme measures?
Some practitioners advocate extreme measures.
Art Cayanan, a director at the University of the Philippines’
Development Center for Finance, said the gray areas could be
resolved if the consultancy service is completely divested from the
audit operation.
Last month, the US Senate banking committee
approved legislation that would ban accounting firms from selling
various forms of consulting services to their audit clients, limit
the time an individual partner could review one company’s books,
and create a regulatory board made up mostly of people outside the
industry.
The proposal, which seeks to end the problems in the accounting
profession that involve conflicts of interest and lax oversight, was
a response to the collapse of Enron and to accounting scandals in
other industries.
Should local accounting firms then be banned
then from providing services to avoid conflict of interest? Or
should public companies be banned from buying consulting services
from the same accountants who audit their books?
Jaime C. Laya, chairman of KPMG/Laya Mananghaya & Co, said that
not all consulting work compromises an external auditor’s
independence. “The terms of reference of each potential job should
be evaluated to establish the existence or non-existence of a
potential conflict of interest and a decision made to proceed or not
on the consulting work.”
He said an external auditor’s expertise and
knowledge of the company’s financial figures would make him
“perfectly qualified” to give advice on the size and timing of
cash or stock dividend declarations.
But he should not design a mechanism that could
help conceal losses and debts, as that could result in conflict of
interest, said Laya.
Other services that don’t mix are to conduct
an executive search, perform the in-house audit that’s contracted
out by the client, payroll and bookkeeping services, said Manuel O.
Faustino, a partner at C L Manabat & Co., a member firm of
Deloitte Touche Tohmatsu.
”We don’t file and prepare income tax returns for a client if we
are their external auditor. Supposing the tax division made a
mistake in computation. To cover its error, it could request the
audit team not to disclose the error. This could compromise the
external audit team’s independence,” he said.
For some services, it would be difficult to draw
the line, said Editha O. Tuason, a partner at Joaquin Cunanan &
Co., a member firm of Price waterhouseCoopers.
“One company could interpret it one way, while
the other, in another way. There are audit firms that are strict,
sometimes even stricter than local rules. In the US, the big audit
firms have started to divest or segregate certain functions. How
soon that will happen here depends on what rules will be issued.
Existing rules are not clear and the local code doesn’t
cover everything,” she said.
Practical limits
Most external auditors interviewed by THE MANILA
TIMES pointed out that there are practical considerations in
limiting the range of services that accounting firms offer.
Auditors would have find the delicate balance
between declining work that could pose conflicts of interest —and
still give them the sufficient latitude to respond to the needs of
their client firms and investors.
Faustino explained that “most companies
do not engage the services of an accounting firm simply because it
audits well. The real benefit to client companies are the
value-added advice on how to improve their business, avoid taxes,
and how to make their operations more efficient..
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