Accounting: Auditing the Auditors

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In the often murky and bewildering world of annual reports, the job of an independent auditor is to shed light. He examines the numbers in company records for accuracy, and describes his findings in a letter that becomes part of the annual report. The Security and Exchange Commission last week accused Price Waterhouse, one of the nation's oldest and most prestigious auditors, of not doing its job. As part of a crackdown on financial fraud, the agency charged that the company had winked at errors in the 1980 financial statements of AM International, a maker of copiers and other graphics equipment. AM entered bankruptcy proceedings in 1982 and was reorganized and emerged in 1984. It earned $67 million in its most recent fis- cal year.

The SEC alleged that Price Waterhouse, the fifth-largest U.S. public accounting firm, had failed to note discrepancies in AM financial statements and thus was "materially false and misleading." As a result, the SEC said, AM was able to report inflated revenues and profits. Price Waterhouse denied any wrongdoing in the audit and contended that the SEC was trying to blame it for the mistakes of AM management.