Ethics and social responsibility of management

Regulating the Accounting Industry

The purpose of this paper is to introduce and discuss regulation of the accounting industry, which is currently self-regulated. Is regulation necessary, and if so, why?

THE ACCOUNTING INDUSTRY

Currently, the accounting industry is a "self-regulating" industry, which means they set their own rules, and abide by them within the industry, with a minimum of outside intervention. The Financial Accounting Standards Board governs companies. The board sets the rules and applications accounting firms must follow.

Many experts feel that self-regulation is no longer working, and the Federal Government needs to place more constraints on accounting firms. "...non-regulation and deregulation of the financial industries has gotten us into this mess. Auditors are allowed to receive income both from auditing and from consulting or 'management advisory services' to the same client, the latter usually being the more lucrative relationship with more potential for growth" (Amato).

She goes on to say, "The accounting profession does not have any meaningful system of internal discipline and the private bar has been constrained by the 1995 Private Securities Litigation 'Reform' Act. The Securities and Exchange Commission has largely ceded its regulatory power over accounting standards to the private sector" (Amato). In other words, no one has been watching accounting firms very closely.

Accounting firms do monitor themselves, there is even a web site for firms who are concerned about malpractice: AccountingMalpractice.com, which includes information on risk management and "firewall protection." Most industry analysts feel however, that the industry needs more controls, and the current regulations proposed by the Securities and Exchange Commission (SEC) are still not enough to ensure another "Enron Scandal" will not occur. "Even if Pitt produces a strong regulatory-reform plan, an SEC heavily stacked by the accounting profession will oversee the new watchdogs. Such industry influence paved the way for Enron's demise and provides little reassurance that this fiasco is the last" (USA Today).

Even the SEC has admitted that the industry needs reform. Chairman Pitt said in a speech in January, "Our disclosure and financial reporting system is still the best in the world, but it has long needed improvement. Its inadequacies are more visible after Enron's failure, and the need for change cannot be ignored any longer" (Pitt).

Clearly, the current system is flawed, if a multi-million dollar company such as Enron can fool the public, the SEC, and its accountants, and go broke in a matter of weeks. Arthur Anderson, for whatever reasons, did not detect the problem, or chose to ignore it. Either way, the situation has ruined thousands of lives, and changed the way America (and the world) views accounting firms. I believe in order to gain the public trust once more, there needs to be a major overhaul of accounting regulatory practices. Even if the SECs findings and proposals are not enough, as many people now believe, something must be done to ensure that this scandal cannot happen again.