A Vision Problem at Top Audit Firms

Do the CEOs of the top audit firms really want to use technologies such as XBRL to revolutionize financial reporting, or do they simply want to insulate their firms from liability?

The story, at first, seemed startling. In early November, The Financial Times reported that the chief executives of the six biggest accounting firms were set to come out with a plan for a completely new model for reporting corporate financial information.

The Big Four-plus-Two’s idea would be to replace ungainly quarterly and annual reporting with a “real-time” model that wouldn’t rely so heavily on 10-Qs and 10-Ks, according to the newspaper. Besides timeliness, the model would have a second linchpin: the unveiling of a whole slew of nonfinancial data to complement the financials.

Coming hard on the heels of commissioner Christopher Cox’s announcement of a $54 million outlay aimed at putting the Securities and Exchange Commission’s EDGAR system into an XBRL format, a forward-looking stance on financial reporting by the top accounting execs seemed certain to boost the momentum for change considerably.

Sure enough, soon after the FT article, a report with the weighty title “Global Capital Markets and the Global Economy: A Vision from the CEOs of the International Audit Networks” came out under the bylines of Samuel DiPiazza, CEO of PricewaterhouseCoopers; William Parrett, CEO of Deloitte; Mike Rake, chairman of KPMG; James Turley, chairman and CEO of Ernst & Young; David McDonnell, CEO of Grant Thornton; and Frans Samyn, chief executive of BDO.

But now there seemed to be less to the plan than met the eye. The “essay,” as it’s called, leads off with a set of proposed current and near-term solutions that seems more self-serving than visionary.

Most notably, the report argues for curbing auditing firms’ liability and relaxing the rules governing auditors’ scope of service. (The theme of legal and regulatory loosening was echoed on Thursday by the report by the Committee on Capital Markets Regulation, which called on Congress to look carefully at “the case for caps on liability or safe harbors to prevent the failure of another auditing firm” like Arthur Andersen.)

Such a beginning isn’t likely to overcome the considerable inertia of CFOs toward the subjects of XBRL and more extensive reporting of their business operations. Many feel that the upfront costs and administrative burdens will continue to underwhelm finance chiefs’ appetite for huge reporting innovations.

But at least one corporate executive, Bob Laux, Microsoft’s director of technical accounting and reporting, thinks that once finance executives get past the initial burdens of complying with the internal-controls provisions of the Sarbanes-Oxley Act and AS2, the related audit rule, they’ll be more open to new reporting models. (Microsoft, it should be noted, is one of about two dozen companies participating in an XBRL pilot program with the SEC, and has also included some XBRL plug-ins in recent versions of Excel.)

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