Auditors need to return to basics

James Kallman, PT Grant Thornton Indonesia, Jakarta

The fallout from the collapse of Enron continues and it is not just the accounting firm Andersen that is feeling the backlash. The Enron debacle has resulted in a crisis of confidence by U.S. society in the profession that supports the capital market. The decades-old gap between the expectations of accountants and those of society in general has been thrust to the fore.

According to a recent survey published in The Asian Wall Street Journal, business is far from happy with the performance of accountants, giving them an overall performance mark of just 61 percent, a "D" grade. Compare this with business-to-business services, which averaged 80 percent approval, or a "B" grade rating, while top-performing firms having the strongest client relationships scored in the 90 percent to 100 percent range, definitely grade "A".

While only 55 percent of respondents rated their auditors' performance as very good or excellent and worthy of recommendation to business colleagues, similar scores for professional services groups ranged from 75 percent to 80 percent. Perhaps surprisingly, it was not the auditor's integrity that was in question -- most respondents rating their business ethics very highly -- but the performance and value of services delivered.

The same holds true in many parts of the world, not least in Indonesia where many wonder how the auditors managed to miss so many pointers to economic meltdown. As was shown during the Asian economic crisis though, it is the conduct of directors and poor standards of corporate governance, not audit failures that are the most frequent cause of corporate collapse. And even when audit failures do occur, they are normally caused not by institutional deficiencies within firms, but by individuals making poor judgments.

Nevertheless, there have been cries for more accountability within the accounting profession, enforced by regulation if necessary. Yet a knee-jerk reaction that brings more legislation or regulation requiring audit firms to separate non-audit services, such as tax and consulting, from audit services will only lessen the value of services that can be delivered by auditors.

This does not mean that the accounting profession should not take a close look at itself. The market demands for audit and assurance are moving away from merely reporting on historical information as in the past. Today, there is a need for the provision that businesses identify the key risks they face, establish effective control systems to manage those risks and have reliable information systems that ensure the financial information they use and publish is both reliable and transparent. Wide scale prohibition of auditors from providing advisory services would mean that the audit profession could not react to these new demands from the capital markets, just when they are most needed.

This is particularly true in Indonesia where to rebuild the economy, businesses will have to be entrepreneurial in spirit. Companies need access to a whole range of financial and business advisory services, and because of the understanding of the business they acquire through conducting the annual audit, no one is better placed to provide these services than audit firms.

If clients are forced to obtain this advice from other sources that have less understanding of their business, it is likely to add unnecessary extra costs or may well deter the company from seeking the advice when most needed.

Either way, the end result will be a decline in the competitiveness of the business. Thus the call should be for more service from the audit firms, not less. Obtaining it is what most businesses have a problem with.

Even in Indonesia it seems that the accounting profession is far more interested in fees than service, size of portfolio rather than ability to perform and their own rather than their client's prosperity. This at a time when it should be all hands to the pump to help the nation in its war to regain economic independence. Surely fees should be structured to what the client can afford, telephone calls should be returned promptly and more than lip-service paid to clients' needs.

What is needed is a return to the right old principles on which the great accounting institutions were founded -- putting the customer first, unquestioned integrity, top class personalized service and above all, value for money. Sadly, in growing to become megaliths, these ideals have been lost to the pursuit of wealth. Fees have gone through the roof as the emphasis has been placed on the partners first, then the staff and finally the client. Many consultants seem to have forgotten that their primary purpose is to help the customer grow and prosper, not just themselves.

If the accounting profession is to regain the trust of not only the public but also the business community, then it won't be due to enforced government regulations. Rather it will be through a return to the tried and trusted principles of yesteryear when integrity and customer service by accountants were taken for granted. If this might seem old fashioned, consider that some styles are so classic they never date.