Once the Andersen/Enron dust clears, new regulations will reshape the audit, but for proactive CFOs, the audit of the future is now.

Those who forget the past, the old saw goes, are destined to repeat it. Yet those who stare at it turn their backs on the future. The Big Five, the SEC, the Justice Department, Congress and corporate managers must strike a balance between these worn-out bits of wisdom as they revamp auditing and accounting practices. Federal reform and technology will undoubtedly help dictate how audits evolve, but no amount of regulation or high-tech wizardry can prevent future catastrophes like Enron. That responsibility rests with CFOs and their management teams.

The Big Five accounting firms have already announced plans to stop serving as internal auditor and external auditor for the same client. Ernst & Young will no longer sell IT services to companies it audits. And both PricewaterhouseCoopers and Deloitte Touche Tohmatsu plan to spin off their consulting arms from their accounting businesses. Still, the specter of audit problems haunts Wall Street. In February, the Wall Street Reporter magazine surveyed investment professionals and found that 43 percent were "extremely concerned" about the potential for widespread financial reporting fraud. This finding was trumped by the survey's limited-release selling price. For $32,500, three lucky buyers got an exclusive peek at the report, which included names of companies that respondents thought would be the next Enron. The survey price provides valuable insight into the magnitude of concern about financial reporting.

"You spend $30 million for an auditing firm to tell you something about your financials, and then you receive a paragraph that says they're materially OK?" quips Dean McMann, the Houston-based CEO of consulting firm Ransford. "I don't think that's going to be the audit of the future."

Short-Term Corrections

Most CFOs are emerging from their first post-Enron annual report. "I think most of us have looked at this with a short-term, tactical view of what it means in terms of this annual report," says Phillip D. Ameen, vice president and comptroller of General Electric Co. in Fairfield, Conn., who serves as chairman of the Financial Executives International (FEI) committee on corporate reporting. He adds, "Finance executives want to do everything in our power to give the appearance that we are, in fact, as open as we're trying to be. The only mechanism we have for doing that is the annual report. So I think all of us are reexamining how we communicate in that report. We're all interested in seeing our stories told as effectively and as candidly as possible and having the investor confidence returned and sustained."

Now that the annual reports are behind them, many finance executives are turning their attention to reforms that might result from the Enron investigation. In addition to the Big Five's announcements, SEC Chairman Harvey L. Pitt has proposed a new private-sector oversight panel. Other possible changes include mandatory auditing firm rotation (i.e., a firm could work with a client for no more than, say, five consecutive years), limits on how companies can hire their former auditors, stiff penalties for auditors who break rules, and further changes involving auditor oversight.

"The one thing we've never done well in the auditing profession is learn from our mistakes," says Lynn E. Turner, former SEC chief accountant and director of the center for quality financial reporting at Colorado State University in Fort Collins. "Yet we have a fabulous set of cases we could learn so much from if we only took action, for example, as the National Transportation Safety Board does. When an airplane goes down, they're there immediately to put together a thorough report. The airlines are there too, because they want to find out what went wrong to prevent it from happening again. Otherwise, they'll lose passengers, and confidence in the system will be lost."