Opinion Shopping and the Role of Audit Committees when Audit Firms are Dismissed: the US Experience

Citation

Vinten, G. (2003), "Opinion Shopping and the Role of Audit Committees when Audit Firms are Dismissed: the US Experience", Managerial Auditing Journal, Vol. 18 No. 6/7, pp. 618-618. https://doi.org/10.1108/02686900310482740

This is a compact, timely and valuable publication on a topic of high significance in the post Enron situation. It lets a few “cats out of bags” that were always suspected and often secretly acknowledged. Now there is proof, and it makes for disturbing reading. With the highly diversified share portfolios held by US investors, there is little incentive to monitor senior management (p. 2). So there goes one control. US auditors are permitted to disclose “emphases of matter” if deemed appropriate for the interests of shareholders, but they rarely do so in fact only in 0.43 per cent of the sub‐sample of 2,405 unqualified but modified audit opinions out of the 19,273 sample of company‐year observations between 1996 and 1998 (pp. 3 and 28). The Americans stand accused of being overly legalistic and rule‐based in their approach to accounting, and this is confirmed by when they have the opportunity to break out, they rarely take it. So there goes another potential control.

The overall findings are deeply disturbing and indicate senior management manipulation reigns supreme. First, companies do successfully engage in opinion shopping, swapping auditors to suit their narrow self‐interest. Second, audit committee meetings are held at a low level of activity, and only an estimate of 85 per cent engage in auditor dismissal decisions. Third, companies often dismiss auditors despite audit committee disapproval. Fourth comes higher audit committee member turnover when audit committees disapprove. Rather than hang around to raise Cain and Abel, they simply clear off, thus reinforcing the undesirable tendency. For those innocent investors who believe they are being well served, the uncomfortable message is that mandated corporate governance initiatives may not reduce the incidence of accounting scandals since they do not address the temptations of senior management, well portrayed in agency theory. Perhaps granny was right to invest her money under the mattress, and had a canny intuition not to trust companies and the financial markets.

So folk, in lieu of stricter regulation, enforcement, comprehensive treatment of the issue, audit professionalism, and seriousness of intent of audit committee members, expect senior management to get away with what they have traditionally got away with, and await the Messianic arrival of the next Enron‐imaged anti‐Christ. Unless issues relate to going concern, you can bet on the auditors to keep their mouths shut. There is no impetus on either audit firms or audit committee members to whistleblow on behalf of investors, who are patently not well served in the USA. May those in other jurisdictions examine their situations and their consciences. Thanks go to the Scottish Institute for sponsoring such a pertinent publication.