Summary

The incentive system of the accounting and auditing function has two problems that have the potential to decrease the effectiveness of auditors as monitors . The first problem is that auditing firms want to keep the public company as a client over the long term . This makes it less aggressive in rooting out problems because management can easily threaten the firing of the auditing firm. Indeed, accounting firms have become more like the hired guns of management instead of the sheriffs they are supposed to be. The second problem is that auditors are frequently asked to sign off on the dubious gimmicks that their own accounting firm recommended through its consulting group . The government seems to be attempting to rectify this second problem by not allowing accounting firms to provide both consulting and auditing services for the same public company. As explained in Chapter 12, we do not believe that this solution is the best remedy. We offer an alternative in Chapter 13.