Aug. 29 (Bloomberg) -- It's bad enough when a company's outside auditor is a pushover for management. Equally galling would be for the auditor to try telling management how to run the company. Yet that's what U.S. Senator Charles Schumer has asked the Big Four accounting firms to do at the subprime lenders they audit, pronto.

``One of the most promising solutions to the anticipated foreclosure crisis is the voluntary modification by lenders of existing unsustainable subprime loans,'' Schumer, a New York Democrat, said in an Aug. 23 letter to the firms' top executives.

The chairman of Congress's Joint Economic Committee then called on the firms to ``assist this country's mortgage crisis'' and ``urge your clients to do their part to keep our housing markets afloat, by modifying subprime loans that are at risk of default.''

In so doing, Subprime Chuck made a blithering fool of himself, though he probably doesn't realize why. So far, none of the four firms -- PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young, and KPMG -- has responded publicly to his plea for lobbying help.

You see, management's job is to manage, and the auditor's job is to audit. There's also the decades-old requirement under U.S. securities laws that accounting firms must be independent of the companies they audit, both in appearance and in fact.

Under the Securities and Exchange Commission's rules, that means the auditors, among other things, ``must act in an unbiased and objective manner.'' Lobbying audit clients to change their business practices is the mark of a biased auditor, not a disinterested one.

Apple Pie

To see why, let's take the senator's request to its logical extreme.

First, we have a subprime lender about to send default notices to thousands of people who can't afford to pay their mortgages now that the introductory teaser rates have expired. Then, hark! A partner from the company's ``independent'' auditing firm swoops in, brandishing an apple pie, and implores: ``Give the poor folks a break. Chuck wants it that way.''

Bowing to the auditor's pleas for patriotism, the lender softens up. ``Of course,'' its chief executive says. ``We shall extend the teaser rates indefinitely, never mind our investors. That should make you and Chuck happy.'' And it does.

Here's where it gets tricky. Months later, the company's top brass comes back: ``So, dear auditor, what are you going to do for us? Perhaps we could revisit the issue of those loan losses on our balance sheet that you now call `absurdly low.' We think they should stay at zero.''

Time to Resign

Whoops. The ashen-faced accountant suddenly realizes he crossed the line the moment he flashed that apple pie. Unable to opine objectively on the client's financial statements, because management has done him and the senator a huge favor, his firm must resign.

What's more, his conscience belatedly tells him, the firm must withdraw its latest audit-opinion letter, because it ceased being independent when it began lobbying the client at Schumer's behest. (A lot of good those campaign checks did for us!)

Then there's the problem of the clauses in the client's debt agreements that require the company to have audited financial statements. Antsy bondholders, already worried about the company's bleak prospects, rush to declare the company in default on its gazillions of dollars of debt.

Look Back in Dread

Looking back, the accounting firm has done more than its share to, as Schumer put it, ``assist this country's mortgage crisis.'' That's because the lender is headed for Chapter 11, and its creditors are pressing to foreclose as soon as possible on all those cash-strapped borrowers who thought they miraculously had caught a break. Nice going, senator.

There's a long history of politicians meddling in accounting matters. Only a few years ago, even the SEC's current chairman, Christopher Cox, resorted occasionally to accounting demagoguery. This was back when he was a Republican congressman from California, fighting what proved to be a losing battle against the Financial Accounting Standards Board's plans to start treating employee stock-option pay as an accounting expense, rather than a zero cost.

``What we are about to do at FASB is give corporate managers, the new Jeff Skillings, an opportunity to manipulate earnings,'' Cox said on the House floor in July 2004, in a fit of doublespeak that stock-option billionaires surely adored. Cox's old House Web site once said his efforts were ``a key reason'' for the FASB's initial 1994 decision ``to abandon a proposed accounting change that would have hindered small and start-up companies' ability to offer stock options as a way of attracting and retaining talented employees.''

Chuck's Way

In that same tradition of mistaking the accounting profession for the Chamber of Commerce, Schumer finished his letter to the Big Four chiefs by saying: ``The auditing firms of this country have played a critical role in keeping our economy strong, and I am confident you will continue to do so.''

Doing it the Schumer way, though, only would put our economy at further risk. Auditors aren't supposed to act as cheerleaders for the economy. Their job is to ensure that companies tell the truth about how well or poorly they are performing, so that investors and the broader economy can operate efficiently.

Butt out, senator.

To contact the writer of this column: Jonathan Weil in Boulder, Colorado, at jweil6@bloomberg.net

Last Updated: August 29, 2007 00:09 EDT