As observers of the profession, our role is to evaluate these claims. Even if correct, we also must assess the relief they desire.

Since these points are critical and we must be careful to analyze the precise arguments that are put forward, let's quote the main passage in toto. On page eight of this document, the correspondent writes:

The conference attendees believe that too much may be demanded of the auditing process. Auditing financial statements, by definition requires more judgment and more subjectivity than has been recognized. It is unrealistic to now demand a greater degree of certainty. Rather, we believe we must demand greater use of judgment -- particularly the judgment of experienced auditors most likely to detect the early signs of fraud or malfeasance -- of the accounting profession in the years to come. Simultaneously, we must revitalize the professionalism of accountants and attract more highly qualified people with diverse skills to the field. We recognize that by making this call for an increased use of judgment, we expose the auditing profession tom ore litigation. We recommend that the SEC and the newly created PCAOB explore ways in which the profession may be protected from frivolous lawsuits.

To begin, it would have been constructive had the author indicated to the reader who is demanding more from the auditing process and precisely what is being demanded improperly. Nowhere in the document is the identity clarified or the specifics of their claims. I can only guess that the writer means investors and creditors expect that they not be surprised with false and misleading financial statements. But then, doesn't the independent auditor claim that it has examined the financial statements, that they have been prepared by management in accordance with generally accepted accounting principles, and that they fairly represent the results of the business enterprise?

We encounter a partial answer in the second and third sentences in the quoted paragraph. Auditing requires more judgment than users recognize and that users unfairly hold the auditors to higher standards than warranted by the fuzziness within the accounting numbers. These assertions are straw men in that they lump all users into one group. A more useful analysis would create at least two groups: sophisticated users and naïve users. I doubt that these assertions are true with respect to sophisticated users. They know that accounting involves a ton of estimates and various choices among accounting alternatives. Moreover, there is no evidence that sophisticated users are unaware of the judgment calls that auditors must make as they garner evidence and collectively decide on the fairness of the report as a whole.

Naïve investors, on the other hand, may indeed misunderstand financial reporting nuances and the amount of judgment within the auditing process, but so what? As long as they rely on the advice of professionals, the claims become trivial. For example, CALPERS had a major stake in Enron's stock and currently has several huge lawsuits against various managers and professional advisers in the affairs of Enron. We could analyze this situation as a constellation of hundreds of disgruntled state employees, who clearly are naïve investors. Such a stand would mischaracterize the situation because these state employees turned over their money to the professional fund managers at CALPERS. It was the professionals at CALPERS who made the mistake of investing so heavily in Enron and Enron's SPEs because of the much dissembling by Enron's managers.

I think we shouldn't even worry about the small investor in this case. We need to concentrate on fund managers such as those at CALPERS. Do they understand the softness of accounting numbers? Do they understand the judgments that auditors have to make? It seems to me that the answer probably is yes, and so we need to dismiss the arguments put forward in this monograph. If the participants at this conference insist that even professionals don't understand auditing, then they ought to provide some evidence rather than merely asserting these matters as fact.

The demand for "greater use of judgment" seems peculiar. It looks odd in part because the conference reporter later states that "accountants increasingly have sought to avoid making independent judgments about fairness" (page 12) but instead metamorphosed into "rule-checkers" (page 13). And after the results of 2001 and 2002, we now know that some weren't even doing that!

Also, the author desires more judgment on the one hand, but revitalization of the profession on the other, including hiring more qualified people. This almost sounds as a confession that some of today's auditors are not too qualified for their positions and that the profession faces some major problems. Maybe the problem isn't investors demanding too much from auditors, but auditors not delivering the goods to the investment community.

The last two sentences of the above quoted paragraph provide the greatest illumination about the real intents of the conference participants. Some auditors performed slip-shod audits and not surprisingly investors have sued them and their firms. The firms want relief from these "frivolous" lawsuits, but how many of today's lawsuits against the profession are actually frivolous? Given an accounting world with the emphasis on generating profits from consulting and the consequent phenomenon of underauditing, as existed during the 1990s, I think many of today's lawsuits contain much substance.

I shall conclude this essay with this tantalizing sentence from page 25 of the report. "Going forward, auditors should be prepared to offer, and investors to accept, more limited attestations when the facts require them." Prior assertions notwithstanding, the sentence reveals that the conference participants really want the profession to make fewer judgments, to have less responsibility for the judgments that it does make, and to avoid lawsuits when they fail to deliver a professional service.  I am curious whether investors want the services of a profession that desires to offer them less and to offer it without recourse.

To obtain a copy of "The Future of the Accounting Profession," go to http://www.americanassembly.org

Did you miss previous articles in this series?  Part One  |  Part Two

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.