An earlier column of mine focused on his first proposition; today's essay examines his second thesis.

In the speech, Cox complained about the small number of accounting firms that are capable of auditing large corporations. He didn't exactly tell us why, but we can divine some possible reasons.

1. Perhaps the chairman worries about privacy issues: if an accounting firm audits several firms in one industry, then perhaps some problem might emerge. At least, that was the enunciated reason several years ago when Pepsi and Coca-Cola chose different auditors.
   
   
2. Maybe Cox is anxious about independence and selectivity. If a large business enterprise chooses one accounting firm for tax advice and another for business consulting, there aren't too many choices left for the external auditor.
   
   
3. Possibly the chairman thinks audit fees too high and believes that more competition in the auditing market will reduce those fees. Certainly, many CEOs would agree.

Of these three reasons, the first two appear either small or dubious, but the third seems plausible. After all, higher audit prices are universal. Remembering that Cox befriended many corporate managers and that the latter has complained bitterly about audit fees in recent days, I think the chairman wishes to return some of the favors he has received in the past.

Cox knows quite well that the accounting oligopoly (his term) only recently has had the power to demand additional auditing tests and has investigated more thoroughly corporate internal control systems, thanks to Sarbanes-Oxley (SOX). These activities naturally have led to higher auditing costs. Given that his solution is to reduce barriers to entry, it is obvious that Cox wants more competition, which in turn will lead to lowering prices, and probably fewer auditing tests and checks on the internal control system.

I take the opposite view. For many decades accountants have had little power with respect to managers because there used to be the threat of losing the "client." Becoming an oligopoly has raised the economic and social power of the auditor, and CPAs may employ this power to curb the rogue behaviors of managers. That power exists in part because the threat to fire the auditor has abated substantially.

There has always existed a large tension between management and its auditors, but the institution of auditing in the U.S. has generally benefited the corporate executive. Managers hire somebody to perform an audit (something that many managers foolishly claim is non-value-adding, which reflects how little they know), and the auditor attempts to meet professional obligations while at the same time making profits from the engagement.

Some have described this institutional setup as a patronage system, meaning that large corporations have a need for accountants, but they retain significant influence over what the accountants do. The corporations -- large and autonomous and powerful -- act like patrons in doling out funds for various services. The accountant, as a recipient of the funds, must recognize that these patrons are the sources of those funds and kowtow to their whims. While performing the attest function, auditors remain loath to cut off their source of revenues.

I have often advocated a reexamination of this institution in which those audited hire and fire their auditor. Many think that point too extreme, and they do not even want to discuss the issue. Barring that debate, we have to find some other way to increase the power of auditors. And it looks as if we have stumbled on to a partial remedy.

While I do not like the way we have arrived at the Big Four, at least we have a small enough group that can wield some real economic power. I still am not impressed with SOX, but Section 404's requirements give the auditing firms a powerful tool to fight the antics of managers. While managers still have more power than their auditors, the discrepancy in the relationships has decreased.

Auditing firms should use this leverage to increase their hourly rates and to increase how much work they perform. Audit fees are still too low, given the risks borne by auditors when managers lie in the financial statements. Managers still push the envelope with respect to good and ethical financial reporting, and corporations continue to restate their accounting numbers. Auditors should draw attention to this growing number of restatements as evidence that audit risks remain high; then they should exercise their newfound power and raise prices today. Audit fees must cover the risk that corporate executives will commit accounting frauds in the future.