Auditors Must be Independent
If an auditor is hired by the company it's supposed to audit, is it truly independent?
I ndependence is an important issue in statistics, so I found the article, " Ethics, Auditing and Enron ," by Denis Arter and J. P. Russell, in the October 2003 issue of Quality Progress quite interesting.
In the second section of the article the QP editor asks, "Must auditors be independent?" to which Arter responded, "No."
The QP editor followed up on the negative response by asking for specifics. The author then explained that in the financial field, the auditor is a certified public accountant (CPA) who works for the auditing company. He goes on to say that outside auditing firms are hired by the client company and they are paid for their services when the client accepts the audit report. At that point the relationship stops. He then adds that the relationship apparently did not stop at Arthur Andersen (the now infamous auditors for Enron who helped them "cook the books").
I do not believe the relationship ends when the audit report is accepted. I think the evidence is contained in the author's own words, "the company hires the auditing firm." In essence, the auditing firm is an employee of the company it is auditing. Do you think that the "employee" is going to bite the hand that feeds it? If the auditing firm wants to continue to be employed by the client in future audits, they will tend to see things the same way the client does. For this reason I think that auditors must be independent. Oh, and by the way, for those in the quality assurance world, I think this same argument holds for the quality management system standard from the International Organization for Standardization, ISO 9001, and other management systems standards that are audited by a third party. See my letter to the Quality Progress editor, in the January 2004 edition.
How can this be achieved? A simple and inexpensive approach would be to have the auditing firm selected at random and assigned to the client company. In the case of business audits, the American Institute of Certified Public Accountants (AICPA) could perform this task. For example, each time an audit or filing was required, the company would contact the AICPA who would select, at random, a few auditing firms capable of performing the service. These auditing firms would quote the job and the company would select the supplier they wished to use. The company would pay a small fee to the AICPA for performing this service function.
Generally this would mean that each time a company would probably have a different auditing firm, thus helping to prevent an ongoing relationship. This would promote truly independent audits, because this approach breaks the company/auditor ("employer"/"employee") financial link, which serves as the root cause of malfeasance and corruption of the financial reporting system.
In the quality assurance world, the American Society for Quality (ASQ) could have taken on the same role as the AICPA with respect to ISO audits. The ASQ promoted the ISO auditing program but unfortunately abandoned their ethical responsibility by doing nothing to assure that the audits were independent and reflected real quality performance. I know of one company that was ISO 9001 certified and had a 15-percent defect rate, proving that, from a quality perspective, the company's ISO certification meant nothing.
Unfortunately our government legislators chose yet another path. They created the Sarbanes-Oxley bill, which does nothing to address the independence issue and at the same time adds significant cost and inefficiencies to both business and government. Their solution is to have government oversight auditors audit the company auditors. This creates another layer of government bureaucracy (which we taxpayers unfortunately pay for) and it still leaves the good-old-boy financial auditing program firmly in place. Companies just have to be a little more careful or wait until funding is cut to the government auditing function in some future conservative administration that thinks the free market is self-regulating and regulations are not necessary.
Of course regulations and verification by audit are necessary in many aspects of society and industry as the Enron disaster proved. As a society we just need to assure that the audits are efficient and effective. A key factor in achieving this requires that auditors be truly independent.
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