By Melody Petersen
October 24, 1998
After putting their stamp of approval on the financial statements of Asian financial institutions that then collapsed, the world's five largest accounting firms are coming under increasing pressure to strengthen their auditing procedures in Asian and other emerging markets.
The Big Five, which audit almost all major corporations in the United States, also audited most of the big Asian banks that failed last year, according to a new study by the United Nations Conference on Trade and Development. Investors and lenders had been given a false sense of assurance that the banks were strong, the study said, when they saw the accounting firms' names on the audited financial statements.
The study, an early draft of which was obtained by The New York Times, concluded that the Asian crisis would have been detected sooner if the banks and companies had been forced to follow stronger accounting rules than those now in use in most Asian countries. The study urged the Big Five firms to do the same strong auditing tests on financial statements in Asia that they do in the United States and Europe.
The World Bank is also pressing the accounting firms to do more to get Asian banks and companies to use better accounting. The lending agency wants the accountants to ask the companies they audit to follow international standards, which are stronger than the rules now followed in Thailand, Indonesia, China and other Asian countries.
If the companies refuse, the World Bank wants the accounting firms not to sign the financial statements with their world-famous names - PricewaterhouseCoopers, Ernst & Young, KPMG, Deloitte Touche Tohmatsu and Arthur Andersen.
In many Asian countries, the global accounting concerns have gained a presence by taking over local firms. The World Bank wants the big firms to instead sign the name of the local accounting firms if their clients apply the weaker local rules in preparing their financial statements. "There is a major expectation gap when they put their global names on accounts that don't meet international standards," said Jules W. Muis, the World Bank's vice president and controller.
Mr. Muis said the big accounting firms "have been in the forefront" of an international effort to get Asian governments to adopr stronger accounting rules. "But at the moment," he said, "it's not enough."
The Big Five say that they must follow the accounting and auditing rules that are now in place in every country, And, they say that they are doing what they can to move countries toward using a single set of global rules.
"Just like electrical outlets are different in every country, so are the accounting rules," said Robert A. Campbell, regiohnal managing partner for the Asia-Pacific region at Deloitte and Touche Tohmatsu. "The Big Five are eager to apply consistent standards around the world."
The accounting firms and the World Bank are both helping a group known as the International Accounting Standards Committee complete its work on a set of global rules.
The group hopes that most countries will adopt the international rules so that investors can easily compare companies around the world.
But even the international rules are weaker and less detailed than the accounting standards in place in the United States, so it is doubtful that Washington regulators would allow companies following the international rules to trade their shares on exchanges in the United States.
Mr. Muis said it would be difficult to get other countries to adopt the more detailed American accounting standards.
"Throwing those at the world would probably be counterproductive," he said, "because the world would not understand."
The United Nations study, which will be released early in November, reviewed the financial statements of the largest companies and banks in South Korea, Thailand, Indonesia, Malaysia and the Philippines.
In its preliminary conclusions, the study said that poor accounting did not directly cause the Asian financial crisis that began in the summer of 1997. But it said that the Asian financial difficulties would have been detected sooner, and the crisis would have been less severe, if the accounting methods used by the companies and theit auditors had been stronger.
The study also attributed part of the blame for the crisis to internatinal money managers, financial analysts and credit-rating agencies.
Knowledgeable international investors continued to pour money into East Asia, the study said, even when they knew that the companies followed weak accounting rules and could easily hide their financial problems.
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