Faced with lawsuits and regulatory pressure, William Parrett, chief executive officer of one of the world's Big Four accounting firms, says the investing public is demanding more from auditors than they possibly can deliver.
Like other auditing firms, Deloitte Touche Tohmatsu has been on the defensive since Arthur Andersen LLP was forced out of business three years ago, as a result of the failure of its auditors to sound the alarm over financial chicanery at Enron Corp.
Deloitte is facing several high-profile lawsuits, including a class action suit by investors in the near collapse of Italian dairy giant Parmalat Finanziaria SpA, as well as some embarrassing regulatory wrist-slapping by an oversight board that recently reviewed and criticized several of its audits.
In an interview in his Manhattan office, Mr. Parrett acknowledged the industry, including Deloitte, has had to improve its performance in recent years, both in terms of the rigour of its audits and in eliminating any potential conflict of interest between auditing and consulting work.
But he also argued there are limits to what an auditor can detect -- and that those limits often fall far short of what investors expect from the process.
"We've always had this expectation gap between what the auditor really can do and what the investing public wants the auditor to do, or wants the audit to represent," he said.
He said investors expect a level of detail that audits are not designed for, and expect a certification to assure the company's financial health when it simply is meant to attest to the accuracy of the financial statements, based on information provided by the company.
Auditors are now being held responsible for failing to detect outright fraud perpetrated by several company insiders who go to great lengths to hide their illicit activity, he said.
And he gave the Parmalat scandal as an example of such "collusive fraud."
Two partners from Deloitte's Italian branch have been indicted along with several Parmalat executives and bankers for allegedly conspiring to hide nearly $17-billion (U.S.) in debt in an intricate web of offshore companies.
At the same time, shareholders are suing Deloitte and several international banks for allegedly enabling Parmalat's financial deception.
Mr. Parrett would not discuss details of the lawsuits, except to broadly defend the firm's actions.
"It's really extremely difficult for the auditor to find a collusive fraud. We fundamentally were on top of this issue but it had been going on for a number of years," he said.
Earlier this month, Deloitte was embarrassed by the Public Company Accounting Oversight Board -- a monitoring agency set up by the U.S. Congress -- when it reviewed 125 recent audits by the company and criticized eight, including four in which companies had to restate earnings.
Mr. Parrett said the company moved to correct deficiencies revealed by the oversight board's review and disagreed with some of its conclusions. Contrary to public impression, he said, auditing work requires judgment calls in which different professionals can reach different conclusions -- including on items as fundamental as earnings per share.
The demands of the post-Enron age have fundamentally altered the business landscape for accounting firms like Deloitte, which spans the globe with member firms in 148 countries including Canada.
After years of consolidation, the demise of Arthur Andersen left only four major, global firms, Deloitte, KPMG LLP, Ernst & Young LLP, and PricewaterhouseCoopers LLP.
As a result of Enron and other corporate scandals, U.S. corporations are required under the Sarbanes-Oxley Act to allocate more resources to auditing, with senior corporate executives personally responsible for certifying the results.
The increased emphasis on accounting rigour would suggest a windfall for the Big Four auditing firms. But, while business is good, Mr. Parrett said the industry is facing a shortage of qualified people and has had to shift resources from other areas of practice.
Deloitte saw the global revenue of its member firms rise 10.2 per cent to $18-billion (U.S.) in the fiscal year ending in May. Auditing revenue was up 15 per cent.
"I don't think there was an economic windfall for the firms," he said. "On balance, I wish we could all have forgotten about the last five years because it's been negative for everybody."
The CEO said his firm has been working hard to address the shortcomings that have been identified by investors and regulators.
It has appointed an ethics officer in each of its member national companies, which are separately incorporated partnerships. It has beefed up audit teams, required deeper investigation to confirm results, and expanded its use of review teams to check the initial audits.
"We need to continue to be diligent around our procedures and continue to focus on doing a better job to meet these expectations," he said.
"But with all the proper procedures and checks and balances, there's no way that fraudulent activities will ever be fully eliminated from the business community or the world at large."Report Typo/Error