WHEREAS auditor selection by boards of directors encourages auditors to give board-friendly audits;
WHEREAS shareowners would be better served by tougher audits;
THEREFORE USG Corporation shareowners request the Board of Directors to conduct an annual poll of auditor reputation, so as to encourage auditors to build their reputations for serving shareowner interests. The poll would be conducted by including in the Company proxy an item asking each shareowner to rank two or more specified auditing firms. The Board would choose which auditors to include in the poll. The tabulated results of the poll would be released to the news media.
The Board would still choose the Company’s auditor. The poll would be in addition to the usual proxy item in which shareowners ratify the Board’s auditor selection.
Wall Street Journal, January 15, 2002:
“The accounting industry is in urgent need of reform.
The Enron fiasco is only the latest in a string of episodes involving Big 5 accounting firms in which outside auditors repeatedly blessed questionable financial maneuvers -- until companies’ fortunes collapsed under mountains of previously undisclosed debt and phony profits.”
The Economist, October 28, 2000:
“There is plenty of evidence that financial statements often fail to come up to scratch. The number of companies restating their accounts—never in ways that make them appear healthier—has been rising so fast as to have become almost commonplace. Well-known firms whose audited profits shrunk in a restatement include Waste Management, Sunbeam and CUC International, during its merger with Cendant. Investors have lost billions of dollars, and much of their faith in auditors.”
This proposal would encourage auditors to build their reputations in the eyes of investors as well as in the eyes of management, creating new pressure for higher standards.
The average investor may seem ill-equipped to assess auditor reputation on her own. But she need not do this on her own. She would benefit from consensus-building discussion by the entire investment community. It is much easier to assess and communicate reputations of auditors than of board members for example, because there are only a handful of auditing firms, versus hundreds of board candidates for a diversified portfolio of stocks over the years.
Even though the Board would continue to select the Company’s auditor, a public ranking of auditor reputation among shareowners would push auditors and boards to give greater weight to shareowner concerns. This is not to imply that there are accounting biases at USG Corporation in particular, but no one knows when and where problems may occur.
Further information on this proposal is on the Corporate Monitoring website at www.corpmon.com .