The Auditor ’ s Responsibility to the Public

The auditor’s duty to attest to the fairness of fi nancial statements imbues the accountant
with special responsibilities to the public. As we saw in Chapter 4 , these responsibilities give
the accountant a different relationship to the client than those relationships in other professions.
Justice Burger refers to this relationship in his classic statement of auditor responsibility:
“ The auditor does not have the same relationship to his client that a private
attorney does … who 1 has a role as … a confi dential advisor and advocate, a
loyal representative whose duty it is to present the client’s case in the most
favorable possible light. An independent CPA performs a different role. By
certifying the public reports that collectively depict a corporation’s financial
status, the independent auditor assumes a public responsibility transcending any
employment relationship with the client. The independent public accountant
performing this special function owes ultimate allegiance to the corporation’s
creditors and stockholders, as well as to the investing public. This ‘public
watchdog ’ function demands that the accountant maintain total independence
from the client at all times and requires complete fi delity to the public trust. To
insulate from disclosure a CPA’s interpretations of the client’s financial
statements would be to ignore the signifi cance of the accountant’s role as a
disinterested analyst charged with public obligations. ”
Given the sometimes opposing interests between the public and clients, it is clear that
auditors face confl icting loyalties. To whom are they primarily responsible – the public or the
client who pays the bill? Accountants are professionals and thus should behave as
professionals. Like most other professionals, they offer services to their clients. But the public
accounting profession, because it includes operating as an independent auditor, has another
function. The independent auditor acts not only as a recorder, but also as an evaluator of other
accountants ’ records. The auditor fulfi lls what Justice Burger calls “ a public watchdog
function. ”
Over time, the evaluation of another accountant’s records has become a necessary
component of capitalist societies, particularly the part of society that deals in money markets
and offers publicly traded stocks and securities. In such a system, it is imperative for potential
purchasers of fi nancial products to have an accurate representation of the companies in which
they wish to invest, to whom they are willing to loan money, or with whom they wish to merge.
There must be a procedure to verify the truthfulness of a company”s financial status. The role
of verifi er falls to the public accountant – the auditor.
In their article, “ Regulating the Public Accounting Profession: An International
Perspective, ” Baker and Hayes reiterate the accountant ’ s distinctive role:
“ Other professionals, such as physicians and lawyers, are expected to perform their
services at the maximum possible level of professional competence for the benefi t of
their clients. Public accountants may at times be expected by their clients to perform
their professional services in a manner that differs from the interests of third parties
who are the benefi ciaries of the contractual arrangements between the public
accountant and their clients. This unusual arrangement poses an ethical dilemma for
public accountants.

Although auditors ’ clients are the ones who pay the fees for the auditor ’ s services, the
auditor ’ s primary responsibility is to safeguard the interest of a third party – the public.
Because the auditor is charged with public obligations, he or she should be a disinterested
analyst. The auditor ’ s obligations are to certify that public reports depicting a corporation ’ s
fi nancial status fairly present the corporation ’ s fi nancial position and operations. In short,
the auditor ’ s fi duciary responsibility is to the public trust, and “ independence ” from the
client is fundamental in order for that trust to be honored.
As Justice Burger notes, the auditor ’ s role requires “ transcending any employment
relationship with the client. ” Thus, dilemmas arising from confl icts of responsibility occur.
We ’ ll now examine the auditor ’ s specifi c responsibilities.

The Auditor ’ s Basic Responsibilities

We have seen that the auditor ’ s fi rst responsibility is to certify or attest to the truth of
fi nancial statements. But an auditor also has other responsibilities. A document known as the
Cohen Report contains a comprehensive statement of an independent auditor ’ s
responsibilities. They are the same today as when the report was issued. We turn now to that
report.
In 1974, the AICPA ’ s Commission on Auditor ’ s Responsibilities (the Cohen
Commission) was established to develop conclusions and recommendations regarding the
appropriate responsibilities of independent auditors. Another of the commission ’ s tasks was
to evaluate the public ’ s expectations and needs and the realistic capabilities of the accountant.
If disparities existed, the commission was to determine how to resolve them.
 As we might expect, the report defi ned the independent auditor ’ s main role as an
intermediary between the client ’ s fi nancial statements and the users of those statements, to
whom the auditor is accountable. Hence, the Cohen Commission made it clear that the auditor
’ s primary responsibility is to the public, not to the client.
The commission also examined what auditors, given the restraints of time and business
pressures, can reasonably be expected to accomplish. The report pointed out some areas that
are not the responsibility of the independent auditor.
For the actual preparation of the fi nancial statements. Others wrongly believe that an
audit report indicates that the business being audited is sound. Auditors, however, are not
responsible for attesting to the soundness of the business. Recall that Professor Aboody made
this point in reference to the KPMG/ New Century Financial case earlier in this chapter. In
most cases, management accountants prepare the fi nancial statements, and it is management –
not the auditor – who is responsible for them. (We will examine the management accountant ’
s role in the next chapter.)
Auditors are responsible for forming an opinion on whether the fi nancial statements
are presented in accord with appropriately utilized accounting principles. The traditional attest
statement affi rms that the fi nancial statements were “ presented fairly in accordance with
generally accepted accounting principles. ” This is a controversial subject in the accounting
ethics literature. In the 1960s, a committee of the AICPA raised the following questions about
the fairness claim:
“ In the standard report of the auditor, he generally says that fi nancial statements ‘
present fairly ’ in conformity with generally accepted accounting principles – and so
on. What does the auditor mean by the quoted words? Is he saying: (1) that the
statements are fair and in accordance with GAAP; or (2) that they are fair because they
are in accordance with GAAP; or (3) that they are fair only to the extent that GAAP are
fair; or (4) that whatever GAAP may be, the presentation of them is fair?
The Cohen Report recognizes that “ fair ” is an ambiguous word; hence, it is imprudent
to hold auditors accountable for the fairness of the fi nancial statements, if that means the
accuracy of material facts. Rather, the responsibility of the auditors is to determine whether the
judgments of managers in the selection and application of accounting principles was
appropriate in the particular circumstance. Note that this differs from Justice Burger ’ s opinion
that the auditor attests to the “ fairness ” of the picture.
 The Cohen Report would likely fi nd Burger ’ s viewpoint too rigid for three reasons:
(1) In some situations, there may be no detailed principles that are applicable; (2) in others,
alternative accounting principles may be applicable; and (3) at times, the cumulative effects of
the use of a principle must be evaluated. The report calls for more guidance for auditors in
these three areas. Still, the idea prevails that “ fairly ” presented means that the report being
audited will give a reasonable person an accurate picture of an entity ’ s fi nancial status. GAAP
principles, however, can be used by artful dodgers to hide the real health or sickness of a
company. Indeed, one accountant has suggested that accounting is an art, and a truly profi cient
artist can, by the skillful use of GAAP, make the same company look to be a dizzying success
or a miserable failure. We will consider the “ fairness ” debate in the fi nal chapter of this book.
For now, let ’ s return to the Cohen Report and its enumeration of auditors ’ responsibilities.