There has been a lot of focus lately on cosy client-auditor relationships that allow companies get away with fiddling their books, even fraud. The uproar over the way Ernst&Young allowed its client Lehman Brother to hide toxic assets through accounting trickery, something I looked at in my blog entry here, is a case in point.
There is no doubt that E&Y had a close relationship with Lehman. As Tax Guru points out in his blog , Lehman Brothers had paid E&Y $160 million in audit fees since 2001 and the relationship goes back to 1994. Now, $160 million represents a significant auditor-client relationship.
Sarbanes-Oxley actually tries to prohibit the sorts of relationships. It introduced the auditor rotation rule which implements a five-year rotation requirement of the lead and concurring audit partners and mandates a five-year "timeout" period after rotation.
But the Lehman Brothers scandal raises the question of whether this goes far enough. Should the law apply not just to partners? Should firms be rotated?
Lawmakers have toyed with the idea but as Sarah Johnson at CFO Magazine says, it would change some very long standing relationships for the Big Four. Deloitte&Touche has been auditing Proctor&Gamble since 1890, PricewaterhouseCoopers has been working with Goodyear since 1898, Ernst&Young with BP since 1908 and KPMG with General Electric since 1909.
It's all so snug. Would these firms take a hard line if they came across examples of accounting fraud at 100 year old clients? Don't bet on it.
no comment untill now