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  • LYCEUM: KPMG's Flynn Comments on Auditing Today, the Future


    5/2/2006

    Timothy Flynn.Timothy Flynn, chairman and CEO of KPMG LLP, offered undergraduate accountancy students a clear and concise picture of the current status of the audit profession during his Lyceum presentation in late April.

    Detailing the health of the audit profession is a pertinent subject for students because, with the loss of Arthur Andersen LLP, the audit profession suffered one of its greatest setbacks. In fact, said Flynn, the audit profession has been the focus of only two pieces of legislations, both occurring immediately after major losses of public faith: the Securities Act of 1933-34 and the Sarbanes-Oxley Act of 2002.

    Living under Sarbanes-Oxley is actually good for the profession, he argued. Negative publicity in part stemmed from the opinion that the profession should already have been carrying out the quality assurance duties assigned to the Public Company Accounting Oversight Board or PCAOB. The very existence of the PCAOB, created by the Sarbanes-Oxley Act and charged with overseeing the auditors of public companies to protect the interests of investors, itself augurs well for audit quality said Flynn.

    Corporate America is getting more complex by the day, he said, thanks in no small part to globalisation and achieving a “transparent structure driven by accounting rules” is of paramount importance. To this end, he said he's seen companies implement a variety of new strategies, from re-examining long-standing business practices to supplementing their in-house audit resources. “Before 2002,” he said, “it was very difficult for company's audit partner to ever get to talk to the CEO. Now, all CEOs have at least one meeting with their auditor every quarter!” That, he believes, has to be good for the profession.

    The mainstay of Flynn's talk, however, dealt with the larger philosophical issue of rules and principles and the current debate raging thereon. “Accountants want rules,” he said, “while managers demand principles.” Ultimately, though, the debate is a false one, he said. Strict adherence to principles, without regard to rules, can lead one down the wrong path just as easily as adherence to rules without regard for principles can. It is very important to use judgement and experience to evaluate the environment and chart out the appropriate path, keeping an eye on both standards. When accounting is used to obtain certain pre-conceived results, that's a sign of sticking to rules with little regard to principles, he said. Generating a large number of applications with no consistency is a sign that one's headed for the other extreme.

    “What would be the pros and cons of the SEC appointing auditors for companies?” asked a budding accountant, extrapolating the concept of the PCAOB to its extreme. Not such a good idea for a variety of reasons, said Flynn. If, for example, one were to rotate auditing firms, a tremendous loss of knowledge would occur in the ensuing activity. If there were to be a state-owned auditing firm, it eventually would be unable to attract talent.

    Overall, Flynn’s talk reassured students that the auditing profession, while experiencing a period of enormous change, is in good health and is rapidly becoming even stronger.

     

    --Shweta Sundararajan  

    UIUC College of Business Department of Accountancy