During its recent meetings in Geneva, the Organization of Petroleum Exporting Countries announced a plan to use auditors as adhesive to hold its cartel together: Production quotas and pricing by OPEC's 13 member countries will be tightened and checks will be made on each country to prevent cheating. Auditors will be told to verify "member countries' petroleum sales, shipments, prices, quantities." They will "check the books, invoices, all documents needed," according to an OPEC announcement.
Auditors, OPEC hopes, can save it from itself. OPEC has just announced that it is in the market for "one or more international accounting firms" to launch its cartel audit.
Auditors who work in public accounting firms spend most of their time verifying that the financial reports of publicly held firms are prepared in accordance with generally accepted accounting principles. This verification of financial position and results of operations is essential to the credibility corporations must have with investors.
Now that OPEC needs credibility, auditors are about to win a new client--and a new type of assignment. It will be a big change for both auditors and client.
For almost a decade, OPEC had the muscle to do what every cartel member dreams about: set prices and production quotas. In 1973 it raised prices from a range of $2 to $3 a barrel to $12, and in 1979, pushed the price up to $36 a barrel. No verifiers were needed.
In the last few years, however, the combination of conservation and the discovery of new supplies has started to bring market prices down. In 1981, the price was still $34.50 a barrel, but by 1983 it had dropped to just above $29. In October, 1984, determined to hold the price at $29, OPEC cut production quotas and set strict price rules. But neither of those measures has worked. OPEC members are producing more oil than the cartel quota and selling it below cartel price, and the cartel has lost credibility in the oil industry.
A certified public accountant friend once told me that "to be a successful auditor, you have to have a low thrill threshold." But an oil cartel audit--what an assignment! No rummaging through invoices for months in the back room of a stuffy railroad office for these auditors. They will be out on the docks, aboard ship, in the royal palace. They will cover all deals, including government to government, and all barter arrangements, such as the recent one between Saudi Arabia and Boeing Co., in which oil was swapped for 10 Boeing 747 airliners.
Auditors have always been reluctant to accept assignments outside their traditional verifying role. I first became aware of the reasons for this reluctance in the mid 1960s, at a meeting of the California State CPA society. A speaker was predicting that within a decade, the environmental audit would be a routine part of the auditor's work. "White gloves and strong legs" he told them, would be essential to the auditor's work. The slightly bemused audience had no difficulty seeing themselves climbing industrial chimneys, but they were highly dubious about auditing anything that did not have fairly precise standards against which their findings could be applied.
When I learned of the proposed OPEC audit, I looked up a paper delivered two decades ago by Leonard Spacek, one of the most creative and lively intellects in the profession, on the subject of the accountability of the auditor.
Auditors, he said then, must do three things: First, they must ascertain facts that can be appraised against standards that have been accepted as an appropriate basis for measuring performance or solving a problem; second, they must follow the letter and the spirit of the law in their work, and finally, they must be genuinely independent and not inject themselves into bargaining for a solution. An auditor cannot be both fact-finder and negotiator.
I cannot predict whether auditors will take to the cartel audit with any more enthusiasm than they did to the environmental audit, or whether the scheme can work. My only advice to them would be not to take the job on a contingent-fee basis.