The Theory of Holes
Barron's Online (08/28/00) Vol. 104, No. 34 p.13; Whitney, John O.

The Securities and Exchange Commission's decision to cut down on accounting firms doing consulting work for their audit clients is the opposite of what is needed to improve auditors' ability to understand and work for their clients, writes Columbia University business professor John O. Whitney. Because managers often deliberately cover up bad figures, and auditing teams can lack the experience to spot such behavior--and also because accountants are better at working with the past than the future--it is not unheard of for companies to go bankrupt shortly after getting a "clean" audit from independent accountants. At a World Congress of Accountants in 1997, Whitney proposed that accountants could serve clients better by offering consulting services as well as accounting and financial services, but they should stop giving their certification to financial reports. This would help investors understand that the company reporting its results, and not the auditing firm, is responsible for the information in a financial report. In addition, Whitney says financial reports should be prepared using the SFAS 95 Direct Method for cash flows, Activity Based Costing techniques for line of business operations, and three-year graphics for key ratios.

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