I am disappointed in Samuel P. Gunther’s critique (“Independent Auditors Are Not Fiduciaries,” June 2017, http://bit.ly/2uJWYYF) of Richard Kravitz’s April 2017 article, “Serving the Public Interest: Improving Government Reporting and Promoting Sustainable Corporate Governance” (http://bit.ly/2w5se17).
My reaction is summed up by the famous line from Cool Hand Luke: “What we’ve got here is a failure to communicate.” Essentially, Gunther argues that auditors do not have a fiduciary relationship to those they do not have a contractual relationship with. That might be true if you took the narrowest definition of the term fiduciary that you could (fiduciary as part of a legally contractual, “privity” relationship). He argues, “Independent auditors cannot be fiduciaries. Independence causes an independent auditor to assume a responsibility that transcends any employment relationship with its client. That auditor cannot be a fiduciary. Legal decisions support this conclusion.” He then rants a bit about how such a view will bring on the end of capitalism and throws in the specter of a left-wing socialist agenda for good measure. I have personally grown tired of critiques that misstate the character of the underlying article or use conspiracy theories to somehow make a point.
Gunther is correct that auditors’ responsibility transcends any employment relationship with the client; however, I believe he mischaracterizes its meaning. I direct him to the article “Eroding Auditor Independence a Concern for PCAOB Member” (Chris Gaetano, The Trusted Professional, Jan. 26, 2017, http://bit.ly/2firrqp) which quotes PCAOB member Steven B. Harris as saying:
The auditor’s gatekeeper role has been cemented since United States vs. Arthur Young & Co.—the 1984 case in which the Supreme Court unanimously held that “the independent auditor assumes a public responsibility transcending any employment relationship with the client”—as the result of various financial crises in the intervening years, investors have called into question auditors’ independence and quality of work.
Harris goes on to state, “No matter what changes are ahead, I encourage you to strive to improve audit quality, be vigilant in protecting your independence from management, and not lose sight that your client is the investing public.” As this quote indicates, the term “client” for our profession is not bound by what is printed on a contract. Therefore, we clearly have a fiduciary relationship with those outside of the contract.
I believe Gunther also fails to acknowledge the critical role that independence plays in our profession and what a poor job the profession is doing maintaining that independence. We as CPAs are known as the keepers of the public trust. Gunther appears to imply that independence gives us a pass from our obligations to society; however, independence of the auditor is critical to our being able to keep that trust. I view Kravitz’s article as one that challenges us to do better. He asks us to live up to our responsibilities as the keepers of that public trust. He does so because he cares about our profession and those that we purport to serve, and because we currently are not.
The need for improvement appears to be a point that Gunther did not address. In my opinion, one of the greatest things to come out of the Sarbanes-Oxley Act [of 2002] was the creation of the PCAOB and their reviewing the work we do. The public now regularly hears what a terrible job we are doing with the attest services we provide. We have an unacceptably high level of materially deficient audits being performed and too high a level of independence violations as well. Kravitz questions this status quo, and I applaud him for his efforts.
If we truly want to claim we are independent in our performance of attest services, then we should not be entering into direct contractual relationships with the companies we are performing those services on. While we may claim we are independent, by definition we are not. I would like our profession to embrace that thought, to take ownership of it, and to do something about it. We need an independent entity like the PCAOB to dole out audit assignments to those in practice who can perform them with the due care they deserve. Either that, or we need to stop claiming we are something we are not: independent.
The Editor Responds
I want to thank William Miller for his defense of my article. I believe that the gap between public expectation and auditor self-interest is the most significant issue facing our profession today.
Leslie LaManna, board member and former president of the California Board of Accountancy, couldn’t have said it more clearly: “The biggest misconception is regarding our mission … I discovered early on I had to focus not on what is necessarily best for our profession, but what serves the public best … if the industry were to adopt ‘serving the public’ as their highest priority, the expectation gap would diminish and CPAs would again become the most trusted profession” (Interview with the editor, 2013).
Miller argues: “We have an unacceptably high level of materially deficient audits being performed and too high a level of independence violations.” This does not go unnoticed by the business press and the investing public. There is today a question of how relevant financial information has become. Financials currently contribute to only 5% or 6% of decision-relevant information used by investors, according to Baruch Lev and Feng Gu (The End of Accounting and the Path Forward for Investors and Managers, 2016). How relevant, then, is Gunther’s argument about the sanctity of our independence?
What is more important today is how we serve the public interest. Tony Bromell of the Institute of Charted Accountants of England and Wales (ICAEW) expanded on this in a recent opinion piece (“What is the Public Interest Role of Accountants?” August 2017, http://bit.ly/2xftEYh). More importantly, the ICAEW acknowledged that our public interest responsibility from a historic perspective is very different than today. Prior to the 1920s, “the detection of fraud was recognized as a primary audit objective” (Audit Quality Forum, ICAEW, Expectations Gaps, Feb. 14, 2006).
Would audit services carry higher value if the demands of the public and the demands of commercialism were once again in alignment? What would happen if we went back to our historical roots? I will leave it to our readers to weigh in.