[This is the default assignment. Students who wish to develop alternate course-related topics should check with me for approval.]
The writing assignment topic now is: Reforming the Structure of the US audit Industry
Please choose (or invent) some particular reform proposal, describe it and explain whether or not it should be adopted. What problems would the reform proposal fix, and how would it benefit the public? Some lines of reasoning in support of the need for change are given below: you can choose which ones to develop or come up with others.
Opponents of reform may minimize the problems/benefits, or explain why the proposal is impractical and wouldn't solve the problems, or point out new difficulties that would result from the supposed solution.
Your paper will not be evaluated based on support for, or opposition to, any particular proposal. Instead, the evaluation will focus on how well the paper analyzes the issues, uses evidence gathered from credible sources in support, organizes points in a logical progression and is written clearly without distracting errors in grammar or spelling.
Possible Reform Proposals
Here are some of the reforms that have been proposed recently:
- Make audits optional, not required, for publicly traded companies.
- Have the Federal Government itself conduct audits, at least for the companies that receive Federal bailout funds
- Limit the maximum damages in lawsuits against auditors -- for example, cap them at 3 times the audit fees received.
- Have companies take out insurance policies that compensate shareholders for losses due to misstated financials, and have the insurance companies then hire the auditors.
- Repeal the limits on audit firm ownership by non-accountants, so other companies can enter and compete in the audit market.
Possible Arguments Why Reform is Necessary
- Has the present audit process been effective in controlling risk, and has it given sufficient advance warning of failure? The recent sudden collapse of major financial corporations such as New Century, Washington Mutual, Lehman Brothers, Bear Stearns and AIG resulted in huge losses, and the cost to the public of bailing out the troubled credit markets continues to rise. "Where were the auditors"?
- For several years now the business of auditing publicly traded corporations has been dominated by just four firms, which leads to concern about potential anti-competitive behavior or loss of market efficiency.
- The audit segment of the accounting profession is now subject to standard-setting and the control of misconduct through a confusing and inconsistent mix of US Federal authority, State agencies and professional organizations.
- Some are concerned that there may be a shortage of qualified people entering the profession in the future, and that there are too few qualified accounting educators being trained to replace those who are about to retire.
- The huge potential securities lawsuit liability that hangs over every one of the big-4 audit firms, combined with they way they are organized as professional partnerships, creates a significant risk a firm will blow apart like Arthur Andersen did, causing major disruption to the securities markets.
Pooling our research
I plan to put the research summaries from all the groups online as a pooled resource. After you read the summaries from the other groups, you can decide whether the underlying material is relevant to the way you are approaching the topic. If it is, you'll be able to link to it and read it. Please try to get all summaries to me as e-mail attachments by Saturday, 12/6 at the latest, so I can put them online before the class on 12/11. They can be .doc, .docx or .htm files. Summaries should include links to the source documents, so students in other groups can find them later.
We'll discuss what we've found during class on December 11th, and the final written paper will be due by December 18th.
This approach to a course project is experimental, so please feel free to contact me by e-mail as questions come up.
