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Auditors crack whip, preach tough love post-Enron

NEW YORK, Dec 30 (Reuters) – Accounting firms, after months of criticism that they were too cozy with their audit clients as tales of corporate shenanigans made headlines, have renewed their emphasis on rigorous, honest-to-goodness accounting

The firms have reshaped their auditing practices, spurred by a growing fear of lawsuits and federal scrutiny, coupled with new rules that demand a thorough check on corporate financials, accountants and industry experts say.

And with the collapse of accounting firm Andersen still fresh in their minds, auditors are rolling up their sleeves to ferret out shenanigans and vowing to crack the whip on clients with suspect numbers.

“There is certainly a renewed sense of, 'We better get it right the first time,'” said Dennis Beresford, a former chairman of the Financial Accounting Standars Board who serves on the audit committees at WorldCom Inc.WCOEQ.PK , Legg Mason Inc. LM.N and Kimberly-Clark Corp. KMB.N .

Earlier this month, PricewaterhouseCoopers launched an advertising campaign featuring a letter signed by its U.S. Chairman and senior partner, Dennis Nally, promising the world's largest accounting firm would be tough on clients.

“In any case where we cannot resolve concerns about the quality of information we are receiving or about the integrity of the managements teams with whom we are working, we will resign the client,” the letter read.

PricewaterhouseCoopers was partly trying to come to grips with the gap between what accounting firms do and what investors expect them to do, Nally said in a recent interview.

The other top accounting firms also point to steps they've taken after the Enron scandal triggered a bout of industry soul-searching.

KPMG says it brought together its quality control resources under a new position in charge of risk and regulatory matters, which reports directly to the firm's chairman.

Ernst & Young has appointed a senior partner to reevaluate everything from how the firm accepts and resigns from clients to how it hires and promotes employees, Beth Brooke, the firm's global vice chair of strategy said in an interview. This postition, too, reports directly to the firm's chairman.

AUDITING RESHAPED

Some changes have also been dictated by legislative reform.

Audit firms previously focused on evaluating the risk profile of clients — or how risky a client was compared with its peers, Nally said. Now, the focus is on analyzing and testing internal controls — or procedures within a company designed to dissuade fraud.

That's largely because the Sarbanes-Oxley bill, a sweeping corporate reform law passed over the summer, requires accounting firms to attest to the adequacy of the internal controls at the companies they audit.

“There is much more intensity around the adequacy of a company's internal control environment,” PwC's Nally said. “As a result of that, you're going to see much more auditing, not only by the external auditors but also by the internal auditors, directed at compliance.”

Accountants have also moved away from relying solely on number crunching and analyzing trends within financial statements to make sure that the books aren't cooked. Auditors now are increasingly visiting warehouses and property to verify the existence of assets, Beresford said.

“You still have to get your fingernails a little dirty by digging into the details,” Beresford said.

In addition, auditors now work to detect fraud, rather than relying on data provided by corporate management after that practice found little favor with investors and regulators during a spate of accounting scandals this year.

As a result, accountants themselves have pushed to include fraud detection techniques in the normal course of an audit. The American Institute of Certified Public Accountants, the main trade group for accountants, has put out a new standard on fraud to boot.

“Audit committees should expect increased audit activity directed to the possibility of fraud,” said Michael Young, a lawyer with Willkie Farr & Gallagher, who frequently represents the accounting industry. “Over the years auditors have learnt that a bad environment or an unhealthy environment is where financial misreporting often gets its start.”

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