week of 2/20/02
 
 
 

WCU faculty member’s research gains attention after Enron fiasco
SMN
With the collapse of the Enron Corp., a faculty member in Western Carolina University’s College of Business is receiving international interest in her recently published — and unexpectedly timely — research into the external auditor’s function as financial reporting watchdog.

Clyde resident Susan Swanger, an assistant professor of accountancy at Western whose research centers on the role of the certified public accountant in society, first published the results of her studies on external auditor independence in the September 2001 issue of “Auditing: A Journal of Practice & Theory,” an academic journal. Little did she know then that she would soon have people from around the world clamoring for copies of her findings.

“I have received comments from partners in certified public accounting firms from as far away as Seattle and numerous requests for the full text of the research, including requests from British Columbia, South Africa, and from one of the ‘Big 5’ CPA firms in none-other-than Houston, Texas, home of Enron,” said Swanger, whose research also was summarized in the January issue of the Journal of Accountancy.

In her research, Swanger examined how individuals in the market react when auditors perform more than the traditional external audit for a client, and specifically looked at what happens when an external audit firm also performs the internal audit function for a client. More than 250 financial analysts from across the country — stock portfolio managers, pension fund managers, stock analysts and others — participated in the project, designed to gauge their perceptions regarding such a dual role.

“I found that the analysts perceived no problem with regard to auditors maintaining their independence in the annual audit, as long as the other work, namely the internal audit work, was being performed by a different team of auditors,” she said. “That is, as long as no one person served the client in both capacities, there was no perception of a problem.”

Of course, that may have changed in the wake of the ever-widening Enron scandal, Swanger said.

“Things become contentious when the external auditor starts taking on additional roles, such as tax adviser, technology consultant, merger and acquisitions specialist, internal auditor, human resource consultant, and the list could go on and on,” she said.

In Enron’s case, she said, the audit fees were $25 million, but other fees totaled $27 million. “The sheer magnitude of the fees calls into question the independence of Enron’s CPA firm, Arthur Andersen. After all, the loss of Enron as a client would be devastating, not only to the careers of Andersen’s people involved with the client, but also to the entire Houston office of Andersen,” Swanger said.

When a CPA firm “wears more than one hat,” she said, there is an inherent conflict of interest. “Can a CPA firm really maintain its objectivity in auditing when it has been a consultant on many of the transactions that are the subject of the audit? It’s a very difficult question to answer.”

As the controversy continues to swirl, Swanger already has identified her next research project — a post-Enron study to determine if there has been an erosion of confidence in the integrity of the financial reporting process and the independent audit function.