I hope to provide an overview of the report in this essay. Because the list of attendees constitutes a who's who in the world of accounting and finance, and because the report misses the mark on some terribly critical aspects of the profession, I shall address certain details with greater scrutiny in future columns.

The best part of the report comes early in the introduction when it acknowledges "that auditors have far too often yielded to management pressure to paint the most favorable picture possible of a corporation's financial health." Immediately the pamphlet shifts gears with "But." These "buts" focus on limitations within the accounting craft, too-high expectations of auditors by the user community, and the need to improve corporate boards. hile there is some truth in these other factors, especially the last one, the problem is that they move the light off of the auditing profession and on to others. The effect of this attempt to soften the mea culpa offered in the original admission is to enervate the impact of the confession and steer the discussion away from a thorough investigation of what happened to the auditing profession.

I wish the group had tarried at this point. What happened to the profession, to the audit firms, and to the auditors themselves? What social and psychological and economic forces drove them to yield to management pressure? The report states that "we can blame these lapses on the way accounting firms structured compensation polices …, rewarding those partners who generated the greatest amount of new auditing or consulting assignments…." Clearly, that point is correct, but what are we going to do to correct that issue? Nothing more is said; no alternatives are discussed. We have no idea whether auditing firms have replaced these defective compensation schemes with better ones. Indeed, we would like to observe any new compensation contracts so that we can rest assured that the problems are addressed and that no new crisis is lurking in the future.

The report cites only the compensation issue as a cause of auditors' yielding to management pressure. It remains silent about ethical norms practiced by auditors today; it ignores the impotence of the American Institute of CPAs (AICPA) and state ethics boards; it says nothing about the culture within the large accounting firms; and it overlooks institutional features such as corporations' hiring and firing those who audit them. In short, the commentary skimps on most of the really critical issues facing the economic and social system of financial accounting, thereby ensuring that the reader possesses no idea of what the future holds for the accounting profession.

After the admission that auditors have often yielded to management pressure, the communiqué by the American Assembly blames the current model of financial reporting inasmuch as it generates a "brittle illusion of accounting exactitude." Of course accounting involves estimates and judgments, and every professional investor and analyst and advisor knows this. If markets are mostly efficient, as academics inform us, then these professionals would drive the price of the stock, and the naiveté of the amateurs would be irrelevant. Even if the professionals don't know what they are doing and market efficiency an illusion, the explanation is bogus. The frauds at Enron, Worldcom, Global Crossing, Rite Aid, Royal Ahold and Lucent, among many others, had nothing to do with misestimation or judgment errors. Managers at these business enterprises did not just make some mistakes -- they lied to us.

The report also states "that too much may be demanded of the auditing process." Maybe I have lived in the ivory tower too long, but I just don't get this statement. As I have said many times, if the auditors aren't going to look for fraud and provide us some assurance that the financial report is free from such contamination, then why bother having an audit? Let's save money by eliminating the audit opinion. Here too the argument is a smoke screen. The auditors at Enron, Worldcom, Global Crossing, Rite Aid, Royal Ahold and Lucent didn't just make some judgment errors. They weren't held to some unreasonable expectations, and they didn't face a tsunami of ambiguity and subjectivity. Let's call it as it was -- they flat out didn't conduct a professional audit. In effect, they allowed the managers to lie to us.

The report also chastises boards of directors for sleeping on the job, which is correct. Directors have not served the public interest very well. Unfortunately, the report doesn't provide too much guidance on what the directors should do in the future to avoid another economic collapse.

Overall, the report appears too self-congratulatory. Everybody is slapping everybody else on the back for cleaning up the problems. If only it were true!

To obtain a copy of the report, go to http://www.americanassembly.org

J. EDWARD KETZ is accounting professor at The Pennsylvania State University. Dr. Ketz's teaching and research interests focus on financial accounting, accounting information systems, and accounting ethics. He is the author of Hidden Financial Risk, which explores the causes of recent accounting scandals, and columnist of The Accounting Cycle for SmartPros.com.