After the Fall

The experts weigh in on how to prevent future Enrons.

Willens: I assume that even when it’s priced correctly, auditing is still the least-profitable activity. But if you do separate the auditing out, how do we make that a profitable situation?

Nusbaum: You have to separate nonaudit services from what’s in consulting. There’s a lot of stuff in nonaudit services — for example, internal audit outsourcing, which is a conflict of interest, in my view — that is not normally in consulting. Even providing accounting advice or tax advice is not traditionally considered consulting.

Some people would argue that you shouldn’t provide any tax services, but I think you need to provide tax services to be a public accounting firm and do a decent job. So there are some things you’re going to do. Something as simple as a letter to the underwriters, which is now classified as a nonaudit service, it’s hard to believe you would do the audit and not do the letter to the underwriters.

If we’re charging appropriate fees, then the auditing should be extremely profitable. So we’ve got to limit the services that we can provide, and then set up controls.

Political Pressures

Ed Jenkins, do you feel that the way FASB is financed is a constraint on your ability to create standards effectively?

Jenkins: Only to the extent that we don’t have enough financing. [Laughter] No, I think it’s not an issue. The fund-raising is done by our trustee group. The FASB board members and staff are prohibited by our own charter from getting involved.

We get out of our budget about $20 million. And $14 million comes from the subscriptions and licensing of our own materials. Of the remaining $6 million, about $4 million of that comes from the accounting profession, a good chunk of which comes from a simple check-off in the AICPA News. The rest comes from the accounting firms, but they are limited to a consistent amount. That leaves a couple of million dollars that we raise from the business community generally. The contributions are relatively small.

So you don’t feel that the financing of FASB opens the standard-setting process to politicization?

Jenkins: The process certainly does get politicized, but it has nothing to do with contributions. At least not contributions to us. It gets politicized in the Congress. But I think the record will show that, except for stock options — that’s the big exception, in 1995 — we basically have stood up to [political pressure]. We now reflect derivatives on the financial statements. We were able to eliminate pooling of interests. So I think we’ve demonstrated we’ll stand up to that kind of pressure, whether it comes through Congress or whether it’s direct — and we get some of both.

Cliff, you guys are paid by issuers for your ratings. You are also getting more into the consulting business. At what point do you run up against the same problems that the auditors have?

Discuss

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