Re:Balance -- Jim Peterson

Catastrophe for the Audit Firms ... and the Talk Goes On, and On, and On ....

Did anyone really think that the endless chatter about saving the system of privately-provided audits for large global companies would come to anything?

If so, that fantasy was dispelled on June 3, in the closing minutes of the latest meeting of the U.S. Treasury’s Advisory Committee on the Auditing Profession – webcast here. In his summation, Co-Chairman Don Nicholaisen explicitly stated that, with an insubstantial exception, the Committee’s recommendations “do not address catastrophic risk” of the loss of the Big Four.

Why not? The Committee’s very mission is to “examine the sustainability of a strong and vibrant auditing profession” – here.

But if its members cannot face the potential for catastrophic failure of the Big Four, the Committee is serving no purpose. None of its other minutely examined but anodyne topics of inquiry – such as tweaking the standard for fraud detection or probing yet again the criteria for an accounting degree – will have any effect when another Big Four firm’s collapse takes down the entire business model.

Those durable enough for the entire webcast observed that the civility level of the dialog was frayed and degrading, even while the members spent the day largely talking past each other:

•    Testimony from the Big Four and the insurance industry provided the count of death-threat litigations: 27 cases with damage exposures above $1 billion, of which 7 exceeded $10 billion – with the estimated total between $100 and $140 billion. The large firms cling to their tactically sound but politically tone-deaf refusal to offer comprehensive data on their own financial condition, but the litigation potential to overwhelm their partners’ limited capital is unrebutted.

•    A committee member with a union background took the position that loss of another large accounting firm was an acceptable risk, asserting a risk comparison between an audit partner and a coal miner or a police officer. What he omitted was that while no single actor could threaten the entirety of the coal industry or the justice system, one more blown audit on the scale of an Enron or a WorldCom could end the deliverability of audits as known for 160 years.

•    Former SEC chief accountant and persistent critic of the profession, Lynn Turner, showed his hostility to the option of liability protection with the ring of a jury argument: “Do you believe that an auditor found to have been aware of financial reporting problems but never reporting them to the public should be the subject of liability caps or some type of litigation reform protecting them?” Yet Turner’s position that “this is about regulating a federally mandated and authorized cartel,” involving a “too big to fail” condition where market forces no longer work, is perilously close to a concession of how bleak the future is.

•    Committee member Gary Previts, historian of the profession and professor of accounting at Case Western University, put it in an academic’s genteel way: “I have often wondered if we aren’t trying to fix a business model … that is not subject to being fixed … if you started with a blank sheet of paper, whether we’d be organized the way we are today?”

The position that the Big Four must be left exposed to risks so dire that they could fail, clashes with the large firms’ showing of their inability to staunch the outflow of their limited resources in settlements of cases too large and dangerous to take to trial.

Further – so far as the availability of large company audits assumes the viability of the large audit firms themselves -- it is in conflict with the simultaneous view that the assurance function is so vital to investor interests that it must be preserved. Yet that is the very theme sounded in October 2007 by Treasury Secretary Hank Paulson in launching the Committee – that “a vibrant auditing profession is essential for a well-functioning financial reporting system (here).”   

So what is needed is a different cliché.

It’s not that the Big Four are “too big to fail.” Life is no safer for the survivors since the 2002 demise of the Andersen firm. They can fail. And the Committee’s co-chairman has now admitted that nothing is on the table to save them.

Rather, despite the lip service paid to the importance of audits to the capital markets, the regulators and politicians are themselves “too weak to stop failure.”

Put another way, those sincerely believing in the importance of large-company assurance are avoiding an election between two unappealing choices: Either put every effort to assure that the Big Four are insulated from the very catastrophic risks that the critics insist they must remain exposed to, or start the process of designing the new audit model that must arise after the collapse of the Big Four under the abdication of the Treasury Committee and its counterparts.

In the loud clanging of the Committee’s cognitive dissonance is the tolling of its usefulness. Chairman Nicholaisen’s concession of futility in the face of catastrophic risk says as much.

So the most the Committee can do is declare its one achievement – the comprehensive laying out of mutually-defeating antagonistic positions – and spare further contribution to the global level of greenhouse gasses.

Federal Charters for Accounting Firms -- A Blank Page Approach

Six years on from the disintegration of the Arthur Andersen firm, the fragility of the last Big Four and their franchise to provide large-company audits attracts a discussion that is steadily louder – but not more productive.

The latest example of a collection of the wise, talking past each other, was the June 3 meeting of the US Treasury’s Advisory Committee on the Audit Profession, summarized on Edith Orenstein’ blog – here – and webcast here.

A reason the discourse is so barren is the circularity of the blame-mongering. Rather than recognize the interlocking web of entanglements, the focus is on the problems of “the other guys.” The list includes:

•    Issuers’ incentives to manipulate their results
•    Overly complex accounting standards
•    Persistently inadequate audit performance by a too-small oligopoly
•    Regulators with over-lapping but parochial interests
•    Liability standards that lack precision in practice or predictability in outcomes, and
•    The overhang of catastrophe-level litigation that would overwhelm the audit firms’ fragile capital structures.

If there is ever to be a comprehensive, holistic solution, a blank-page approach is essential. There is such a framework at hand – although it would require a clean, robust and full-blown debate and a fresh legislative mandate. What is lacking, but essential in the organizational and legislative discussion, is the broad buy-in and ready participation that might actually replace today’s antagonistic finger-pointing.

Namely, national-level “charters” or “public company audit licenses” – the naming is less important than the concept – could authorize and regulate newly organized and re-structured firms -- that would do the audits of all public companies.

Applied in the United States – a jurisdiction necessary for any worldwide solution -- a new system would be administered by the Securities and Exchange Commission and the Public Company Accounting Oversight Board, having as analogies the government oversight of American stock exchanges, credit rating agencies and broker-dealers.

Newly organized “public company audit licensees” could be in corporate form. They could be owned by existing accounting networks or other new market entrants. Their resources – personnel, methodologies and technology – could be internal, or out-sourced from the existing Big Four or from emergent niche competitors.

For quality and enforcement purposes, audit engagement personnel would be individually licensed along with their employers, in coordination between federal authorities and existing state regulations over education, examination and training.  

Minimum capital requirements could be set, geared to the firms’ turnover or the capitalization of their client list. Governance structures could include independent outside directors, and accountability of management to agency oversight – measures not presently achievable under the constraints of state regulation and the laws of partnership and bankruptcy.

Collateral benefits to federal “chartering” abound:

Because these SEC licensees would be “audit only” enterprises, the multiple overlapping restrictions on scope of services would be finessed, and the endless debate over independence and permissible ancillary services could at last be ended.

Associated non-audit entities – whether parent or affiliate companies – would be freed from independence and compliance requirements, able to evolve beyond the one-page statutory report that now looks so obsolete. Targeted assurance reports could be designed that users in the capital markets would actually value and pay for. Immediate examples ripe for attention would have been Shell’s petroleum reserving, the internal trading controls regime at Société Générale, and the black hole of inter-company money transfers at Parmalat.

In aide of enhanced competition and expanded auditor choice, segments of the public company market could be specifically identified to encourage new entrants – such as high-risk or technically specialized sectors (IPO’s, troubled companies and financial services come to mind) – whose audits could be segregated, underwritten and priced as now done with high-risk insureds.

Under the aegis of the licensees’ regulators, a privileged forum could be organized to scrutinize cases of accounting and audit insufficiency for lessons and areas for improvement – drawing for experience on the airline, engineering and medical models for the successful study of failure.

As to liability -- the elephant in the room – and taking at their word the investor advocates who would prefer improved information over the capricious and low-return litigation lottery: the investigation and prosecution of all auditor claims based on public company financial statements would be pre-empted into the hands of the supervising agency. A specialized tribunal of expert jurists would hear all cases, levying fines and sanctions against convicted wrongdoers, both firms and individuals.

Compensation for legitimately damaged investors would be determined through the agency process rather than the caprice of juries and settlements, and be funded through a system of fee schedules rather than the hazards of limited firm capital.

Modifications of existing regimes would include elimination of the tax code’s incentives to maximize distribution of current revenues, and a cut-off above which audit firms would not audit their own owner/investors.

And with firewalls of corporate organization and bankruptcy infrastructure in place to limit liability, the conditions for insurability could be brought once more into alignment with manageable litigation and enforcement risk.

With this array of stabilizing governance changes in place, the new structures could at last be attractive to outside capital, which would be needed by offerors of new services in order to fund the necessary research, personnel and technology.

Given the dead-end nature of the debate these last years, the bare bones of this proposal should include something to excite or insult nearly everyone – which could be a signal that it is broad enough to be worthy of pursuit.

The Future of Auditors as Gate-Keepers -- A Glossary of The Non-Solutions

Do investors get real value from their gate-keepers? It was a main question at a conference of international investment managers where I spoke last week.

This group -- who sit over funds across the spectrum from public employee and union pensions to hedge funds and private equity – had common concerns: corporate governance, ethics, compensation and performance, and the quality and reliability of the third-parties – the analysts, rating agencies and outside auditors.

On the subject of the auditors, I had a brief opportunity to offer this three-fold view – familiar enough to regular readers here, but beyond orthodoxy to many in the audience (and with thanks to Mark Cobley at Financial News Online for the uptake):

•    That the traditional form of auditor’s report is obsolete and provides no investor value, especially compared to the possible forms of assurance that are impossible under the current model -- here;

•    That the overwhelming pressures on the Big Four firms render their current business model unsustainable, and their litigation-based exposure makes disintegration inevitable, absent a radical and comprehensive re-engineering – here;

•    That the current dialog on achievable solutions is vapid and sterile, due to denial, blame-shifting and the limited vision of all of the interested constituencies -- here and here.

In the ensuing barrage of panelists’ skepticism, audience questions and post-session follow-up, I was challenged to answer in single sentences to all the standard one-dimensional “solutions” to the fragility of the current Big Four structure.

Bringing those exchanges together here, with links to their more extensive treatment elsewhere, seems worthwhile – even if only in sound-bite form: 

•    Q: Why isn’t the litigation threat to the Big Four well handled by insurance?

A: Having learned from the savings & loans in the 1980’s the expensive lesson that auditor liability fails the basic criteria for insurability – diversification, predictability and quantification – the insurance industry has voted with its feet -- here.  

•    Q: If lack of auditor choice is the issue, how about creating competitors by splitting up the Big Four?

A: For starters there’s no workable legal theory. Either industry and geographic expertise would stay concentrated, in which case nothing is achieved, or they would be so split up that today’s talent level would be severely diluted.

•    Q: Can’t the issue of Big Four concentration be solved by built-up competition from the smaller firms?

A: The size gap is just too large to bridge – see here – and the smaller firms are if anything even more at litigation risk – see here. Anyway, smart risk managers in those firms would avoid global-scale engagements for which they lack either the skills or the risk appetite.

•    Q: If the rules on audit firm ownership were relaxed, wouldn’t outside capital both strengthen the Big Four firms and support new competitors?

A: The Big Four don’t want or need extra capital to run as they do – here. And the bankers have shown they are smart enough not to sacrifice new money that would only fuel the litigation fires.

•    Q: How about improving audit quality by requiring the rotation of auditors?

A: Italy being the only large country to mandate changes in auditors, experience provides a one-word rebuttal: “Parmalat.”

•    Q: Doesn’t a system of joint or dual audit promote higher quality of performance?

A: Proponents in France, which has almost no history of auditor liability litigation, would quickly change their tune when joint auditors became subject to 100% joint and several liability in the courts of other countries.

•    Q: Isn’t the problem of impaired audit independence the fact that it’s the clients who pay the bills?

A: Consider the alternative: funding audits through an agency or regulator amounts to nationalization – and no one makes the case for audits by government civil servants. 

•    Q: How about caps on litigation liability – either money limits or percentage allocation of fault?

A: Because the size of claims arising out of large corporate failures so completely dwarfs the limited financial capability of the Big Four – here – the political process cannot set a survival bar so low as to ensure the stability of a large firm under serious litigation threat.  

•    Q: Wouldn’t performance standards based on principles rather than rules recognize the judgmental nature of auditing?

A: Standard-setters cannot reduce the liability threat, so long as it is courts and juries who assess auditor fault and liability, unless there is the readiness – so far unseen – to enact “safe harbors” to protect the auditors’ judgments.  

•    Q: If another Big Four firm were failing, couldn’t regulators waive the scope of service limitations so that another firm could step in?

A: Even if the large firms weren’t so ostracized already that this solution is politically untenable, they are already fully-stretched and without resource capacity, so that when another firm crashes, the three survivors could not possibly pick up the pieces out of the wreckage. 

•    Q: If another firm is threatened with disintegration, how about replacing its tainted management with a credible outsider?

Q: As shown by the failure of Arthur Andersen despite Paul Volcker’s well-meaning initiative, the speed and complexity of a disintegration would out-strip any outsider’s powers or resources – see here.   

•    Q: In the end, won’t the regulators act to prevent the collapse of another global audit firm?

A: There is no more candid response than the concession of William McDonough as he neared the end of his term as chairman of the Public Company Accounting Oversight Board: as to what the regulators would do about another disintegration threat, “they don’t have a clue.”

These are sound-bites only, as I said, and I may have missed a point or two. Either way this compilation should be a good reference point. Please don’t hesitate to write with your reactions and suggestions.

Auditor Independence -- If There's No Value, What's the Point?

The latest example of finger-pointing in the credit market turmoil is the examiner’s report placing blame for the bankruptcy of subprime mortgage lender New Century Financial upon its auditor, KPMG. Released yesterday, and available here, the report echoes the drubbing that fell upon Andersen over Enron – a no-win subject for the auditors: “By which are you more corrupted – your breadth of client relationships, or your fee levels in general?”      

Public discussion is finally beginning to focus on the reality that the familiar model for auditor assurance on large-company financial statements is flawed to the point of requiring fundamental re-structuring. Especially in the absence of coherent and achievable solutions, however, one element deserving attention is the obsolete and over-valued concept of auditor independence.

So this column, originally published in the International Herald Tribune on March 24, 2006, retains its relevance.

Setting Free the Auditors

The American writer Dorothy Parker, who never shied from afflicting the comfortable, put it this way: "If you can't say something nice, come over and sit by me."

Parker would have been aghast at the self-congratulatory atmosphere among the regulators of the world's securities markets. According to them, the problem of dubious corporate accounting has been solved by strictly limiting the kinds of services the auditors can provide to clients.

There is nothing more sacred in auditor-client literature than the notion of auditor independence, which dates from the founding of the profession in the 19th century.

Yet with auditors today stumbling under the weight of litigation - each of the surviving Big Four accounting firms having a list of cases large enough to be fatal - this unexamined burden has become yet another millstone. And a proposed solution circulating in the halls of Washington - involving a waiver of the Sarbanes- Oxley rules limiting the scope of auditor services to clients - is a political nonstarter.

So I say it is time to stop making nice and to discard a 150-year-old piece of conventional wisdom. The concept of auditor independence does not serve the interests of investors.

Audit performance - and more immediately, the survival of the large firms to serve their global clients and the capital markets - would be better achieved if the current independence requirements and constraints were scrapped altogether.

Auditors should be free to provide their clients with any services within their skills. The only thing that should be required is comprehensive disclosure of all relationships, to be evaluated and decided by the voting power of the marketplace.

Some will be scandalized by the suggestion that the sacred cow of auditor independence should be led off and humanely put out of its misery. But there's a reason it should be done.

Regulators confess to being clueless about what will happen when the next of the Big Four accounting networks disintegrates under the combined pressures of hostile law enforcement and overwhelming shareholder litigation. (Think it can't happen? After Enron and Arthur Andersen - and the $456 million fine over questionable tax shelters paid by KPMG to escape indictment? It's Russian roulette out there, and the gun is full of bullets.)

The purest argument for driving the profession back to audit-only basics has always been that as clients pay the fees, for services of any type, auditor independence is inevitably subject to compromise.

But to finish that thought, in a system so inherently subject to corruption, auditors should never take any fees from their clients. So who will pay? Inserting a government-run fee and license structure amounts to nationalizing the audit function - an idea that figures nowhere in rational dialogue. And there are no other volunteers around.

Likewise, the argument that consulting fees corrupted auditor behavior was always a bit stretched. Heady as that stream of revenue was, it was the money itself, not the source. It could be said, in fact, that auditors who depend on audit fees alone are under even more pressure to accommodate client wishes. And whenever that accommodation has turned ugly - Andersen's travails with Enron being only the most egregious example - it's the firms that pay. As recent history shows, they have neither the reputation nor the capital to bear the terrible cost.

Clearly, the accountants garner neither respect nor liability protection by complying with these enforced codes of independence. They, and their clients, would deliver better value if audits were based on a comprehensive understanding of and involvement with the business. In other words, auditors need to be closer to their clients, not farther away.

Who better to ensure that financial statements are free of error than a professional who designs, installs, operates and maintains the system that accounts for the transactions of an enterprise - the very services from which today's auditors are barred?

This does not dismiss the importance of accountability or of oversight. Regulators have their place - but only under systems of liability that address the reality of today's deadly threats.

The Big Four's Litigation Cost: A Matter of Survival

What litigation cost would kill a Big Four accounting firm? Since this column first appeared, the responses have been remarkably quiet on two aspects: neither any disagreement with the shockingly small numbers, nor any credible claim that a political or regulatory solution is achievable. 

The Impact of Unheard Bullets 

Originally published in the International Herald Tribune on December 16, 2006

Business vocabulary borrows freely from the military: control battles, hostile raids, road warriors, chain of command.

Today's example is this axiom of warfare: "You never hear the bullet that kills you."

Last week I was with a retired partner of a Big Four accounting firm who has plenty of reason to be on full alert for silent killers: His pension is contingent on the doubtful durability of the large firms' cartel to audit the world's large companies.

The discussion of possible changes in the regulatory regimes for corporate financial reporting is rapidly expanding. It includes a full menu of ideas proposed in Brussels, London and Washington. But the reactions to any proposal for serious adjustment to the American auditor liability regime range all the way from lukewarm to downright hostile.

Those antagonistic views are based on the disbelief that there will be another collapse. That, in turn, is based on the persistently erroneous view that the disintegration of Arthur Andersen in 2002 was caused by its Enron-related indictment.

Hear this now: The unheard deadly bullet was Andersen's litigation exposure. And that has grave implications for the remaining Big Four.

How likely is it that another big- firm implosion could happen? As with Andersen, it would involve an emotion-driven breakdown in confidence — the simultaneous outflow of clients, collapse of an international network and flight of partners.

Although client flight will be severely constrained the next time around, with the lack of auditor choice available when the current Big Four drops to three, the other two factors can be quantified. And it's not a matter of exposure to prosecution.

While we await a promised talking paper from Charlie McCreevy, the European Union commissioner for internal markets and services (now available -- see here) , a supporting report prepared for him on Oct. 4 by London Economics, a consulting firm (here) , has calculated the size of the litigation hit that would disintegrate a large European linchpin accounting practice.

The report's assumptions, extended to the more threatened U.S. litigation environment, are truly scary in that they demonstrate the fragility of the large accounting firms' franchise.

To set the stage, recall that there are three reasons why the large accounting networks are forced to finance their large litigation settlements out of their partners' future profits:

First, by local codes they are barred from access to public shareholders or other equity investment.
Second, the partners' personally invested capital is on demand for working purposes.
Third, the insurance market no longer provides real risk transfer, but instead is at most a source of time- shifting finance.

The key to survival, then, lies in the willingness of the partners to stay committed and at their desks — something that the Andersen partners did not possess, as proved by the two- week period in 2002 during which they bailed out en masse and thus smashed the firm beyond recovery.

The study done for McCreevy calculates that the partners of a European firm would bolt, in numbers large enough to be destabilizing, rather than be forced to finance a litigation payment that extracted a profit reduction of 15 percent to 20 percent spread over three to four years.

Applying those assumptions to the Big Four's latest reported U.S. revenues of $4.7 billion to $8.7 billion (write me if you want to hear the numbers crunch), the dispiriting result is that the U.S. firms will confront partner flight and possible failure at liability levels as small as $450 million and up to $1.8 billion.

Those amounts are modest to the point of insignificance against the size of this decade's financial debacles — examples ranging from the $20 billion hole in the balance sheet of Parmalat to Enron's own $67 billion bankruptcy. Little wonder there is no public support for liability caps in the auditors' favor at levels low enough to protect them from collapse.

These assumptions also make plain that the Enron-inflicted blow on Andersen was mortal. The firm's 2001 worldwide revenue was $9.3 billion. It confronted plaintiffs' lawyers claiming that the case would be the first against accountants to reach $1 billion. The crippled firm was already dealing with claims involving Baptist Hospital, Waste Management and Sunbeam, and it was about to receive the incoming bombardment of WorldCom and Qwest, among others.

So to blame Andersen's death on the Enron indictment misses the point. The firm was like a terminal patient on late-stage life support who happened to succumb to a fast-moving staph infection: Its demise was imminent, and inevitable.

The report this month (here) to the U.S. Treasury secretary, Henry Paulson Jr., on a broad-ranging set of proposals for regulatory change,  notes that the Big Four's litigation inventory in the United States includes 22 actions, each with damage claims exceeding $1 billion — and that's without contemplating their lesser but not trivial cases, or the new matters that will inevitably arise in the months to come.

All of these will eventually be settled; witness the announcement last week that Deloitte will settle the shareholder piece of its Adelphia litigation for $210 million. Managements are too risk-averse to risk a life-threatening jury result at trial.

The Big Four might each survive one such impact from this barrage of lawsuits — although even that is a big if. But a second direct hit on any of them would be the last explosion they ever heard.

The Accountants' Own Search to Establish Real Value

Accountants and Auditors: Time to Part Company?

Originally published in the International Herald Tribune on November 18, 2006

"Sell when you can. You are not for all markets." --
    Rosalind to Phebe, "As You Like It," Act III, Scene V

In advising a country girl to accept her suitor's offer, Shakespeare had it right: Seizing the opportunity to adapt a narrowly focused product or service to changed conditions is a challenge.

Especially these days for the global accounting firms. Last week the six largest global networks - the Big Four of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers, joined by Grant Thornton and BDO - issued a joint report that finally brought into the open a theme long recognized but little discussed: the uselessness of the current financial reporting model.

As laid out in the report - snappily titled "Global Capital Markets and the Global Economy" and available here -- the traditional backward- looking "snapshot" of a quarterly or annual report is obsolete and requires replacement. It vaults into the 21st Century by proposing, among other things, an Internet-based system in which extracts of corporate information are delivered to users on a customized, real-time basis.

This evolution in information reporting is probably inevitable. But whether the large accounting firms can achieve their aspirations - either to lead the dialog or to provide whatever assurance the new world may want - is another matter that faces several hurdles.

The first is the prospect of the large firms obtaining the relief they seek from life-threatening litigation risks. That prospect was never likely under the profession's post-Enron scrutiny, and became even less so with the last U.S. elections, that delivered both houses of the legislature into the control of the plaintiff-friendly Democrats.

The large accounting firms are also floating the trial balloon of selling special "forensic audits" - investigations of an enforcement-type character, to be done at random or even on a regular schedule. The greater user cost would in theory be offset by a higher likelihood of fraud detection.

Which brings us to the second hurdle: The market's understandable skepticism. If the auditors really knew how to detect fraud more effectively, why for their own survival's sake would they not be doing that work already?

Finally, an unexplored issue in the failure of the profession to move public perception lurks in their very identity: "accountants and auditors."

No other profession needs two words to name itself. Think of about it: Doctor. Lawyer. Engineer. Priest. Soldier.
Right beneath the surface of the nomenclature lies the unreconciled duality of the competing functions. Put simply, while accountants are at least tolerated if not always welcomed in the corridors of commerce, nobody really wants an auditor around.

Accounting functions have been essential since the first trade routes opened along the Mediterranean coastline. As soon as contracts spanned time periods, transferred risk among parties, or crossed currencies, someone had to set and apply the rules and conventions for their recording and valuation. From the simplest issues of bad debt reserves to the most exotic design of complex off- balance sheet financial derivatives, the expertise of the accountants has been needed for the sake of trade.

But nobody ever welcomes the auditors - the snoopy little creeps. If the financial reporting system were put in medical or health care terms, the auditors would be the proctologists: intrusive, probing around in the dark, leaving a client feeling uncomfortable and invaded, and unable to promise that the next year's exam might not reveal a rapidly growing malignity.

As for the lack of value in the core product, the auditor's report, it has been decades since a candid banker or sophisticated investor would admit to actually reading one. If it weren't for the outmoded requirements of the securities regulators, no chief financial officer would ever pay for one.

The duality could be resolved, although compliance and regulatory regimes would be subject to fundamental change.

Here's how: The audit function could be spun off by the large firms to newly formed specialist units - perhaps linked with their global structures or freestanding - or even to the governments themselves.

With such a restructuring, the capital markets would quickly establish whether the compliance-driven output had any user value other than zero.

Freed of both the liability burden of statutory compliance and the deadening hand of out-of-date regulation, the large accounting firms would then finally have the room and freedom to invent and market new forms of both reporting and assurance, for which users would be happy to pay.

They would have to compete with the niche consultancies already working to fill the space. But they would at last be able to offer reports tailored by geography, industry, product line or materiality - all matters presently outside the limits of their liability- constrained sphere.

The prospects of change are dire, of course.

Although the large firms' recent paper is so bold, or so feckless, as actually to presume that liability reform will occur, the poor accountants are essentially friendless. Even purveyors of misery like the tobacco companies and the handgun manufacturers can buy both influence and affection in the legislative chambers. But the poverty of the accountants' message is all the more stark for their failure to attract support, much less friendship, to their cause.

For their future's sake, however, they had better improve the selling of their message. The recent report may be their last chance to make a start.