Auditing The Auditors

In a world informed by the accounting scandals that engulfed Enron (ENRNQ ), Time Warner (TWX ), Freddie Mac (FRE ), and other formerly trusted giants, J.D. Power & Associates is now evaluating the very audit firms that are supposed to protect investors from such improprieties. And it's a report card no grade-schooler would want to take home to Mom and Dad.

Power surveyed nearly 2,000 chief financial officers and audit committee chairmen, asking them to rate auditing firms on 13 traits essential to reviewing the books properly. Among larger companies, Deloitte & Touche gets top marks, Ernst & Young comes in second, and PricewaterhouseCoopers and KPMG are third and fourth. But even at No. 1, Deloitte can't exactly celebrate. Out of a possible 1,000 points, it got 734, or roughly a "C." KPMG, which ranked last of the big firms, barely passed with a 673. Among smaller companies with under $1 billion in sales, Grant Thornton International and BDO Seidman LLP finished on top, with the smaller firms getting points for industry and company knowledge.

Most worrisome, only 44% of those surveyed said they were "extremely" or "very" confident in the accounting profession, down from 53% last year. Ron Conlin, the J.D. Power partner who headed up the survey, blames the fact that auditors are expected to do more work these days to comply with Sarbanes-Oxley and are getting stretched too thin. Auditors reached for comment say they're committed to boosting quality.

Deloitte did well largely because its most senior personnel handle its largest clients, and its auditors have the deepest knowledge of each customer's business and industry. Conlin, who hopes to sell the report to the audit firms, says there is a strong correlation between auditors that clients say ask the toughest questions and those that got the highest scores. That sounds good, but how would Enron's CFO and audit chair have rated their auditor?

By Nanette Byrnes in New York

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