Accounting reform faces strong industry challenge
Russell Grantham - Staff
Thursday, January 31, 2002
accessatlanta.com
Washington --- Arthur Andersen's failure to warn of Enron's coming collapse is propelling efforts to ban practices that industry critics say have compromised the accounting industry's watchdog role.
But while the drama surrounding Enron's case exceeds that of many past calamities that focused anger on auditors, the accounting industry has weathered many reform efforts.
Support is probably strong enough for "minimal surgical change," but accounting's powerful lobby will likely block any major overhaul, said John C. Coffee Jr., law professor at New York's Columbia University.
Enron's spending on lobbying, including more than $3.3 million in the past two years, "pales in comparison" with the accounting industry's political spending, said Coffee. The Big Five accounting firms rank among the nation's top 20 political contributors and have employees in every congressional district.
"Betting against the industry is not a good bet," he said.
But that's what a growing number of would-be reformers are doing.
Enron is under investigation by about a dozen congressional committees and federal agencies, including the Justice Department and the Securities and Exchange Commission. Legislators are expected to push later this year for stiffer rules from the SEC or for legislation to create an independent oversight board to replace the accounting industry's much-criticized "peer review" process.
Separately, several institutional investors are pushing shareholder proposals calling for about three dozen companies to adopt "auditor conflict" policies. Those would bar companies from hiring the same accounting firm to perform both auditing and consulting services.
At issue is the accounting industry's growing reliance on revenue from its expanding consultant operations, which sometimes dwarf the money generated from their relatively stagnant auditing practices.
Enron paid Arthur Andersen $27 million for consulting and other services and $25 million for audit-related services in 2000, according to Enron's 2001 proxy statement.
The disparity between dollars generated from consulting and auditing is greater at other companies. General Electric paid almost $80 million to KPMG for "non-audit" services, more than three times its audit bill. At Mirant, Southern Co.'s energy trading spinoff, Arthur Andersen's $11.3 million in non-audit fees was five times larger than the audit bill.
Accountants say the non-audit figures include tax preparation and other services traditionally done by clients' audit firms. And because accountants are already familiar with their clients, they argue they can also offer cheaper and more effective consulting than competitors.
But critics say accountants' desire to sell these additional services --- plus their audit fees --- make auditors less likely to raise red flags when companies use questionable financial maneuvers to appear more sound or profitable.
Former SEC Chairman Arthur Levitt Jr. tried to relieve accountants of the potential conflict dilemma two years ago. He sought tough new rules to limit dual accounting and consulting roles for accounting firms. But he met fierce industry resistance, and lawmakers threatened to cut the SEC's appropriations unless he watered down the rules.
Last week, Levitt got a much friendlier reception from the Senate Governmental Affairs Committee when he renewed his call for tougher reforms.
"At a minimum," he testified, auditors should be barred from also doing consulting work, which "only serves to help management get around the rules."
He also said companies should be required to change auditing firms every five to seven years. He called for a "truly independent oversight body" with the power to set professional standards, conduct timely investigations and discipline accountants.
"Levitt had the issue fully in view [two years ago], but he didn't have the dramatic example" to galvanize lawmakers, said Coffee. "Now they have it."
Ideally, Coffee said, the accounting industry needs an independent overseer modeled after the National Association of Securities Dealers' enforcement arm. The NASDR --- the R is for "regulation" --- requires all securities brokers to be licensed and has the power to investigate and fine or expel brokers or firms for wrongdoing. The SEC oversees the NASD and its enforcement arm.
However, the NASD was also criticized in the 1990s for less-than-vigorous enforcement, which led to splitting off the NASDR in 1996 as a semi-autonomous body.
Another proposal is that audits be paid for by the stock exchanges or even performed by government employees, as was originally considered in the 1930s.
Such dramatic measures aren't realistic, said Coffee, and the chances for Levitt's proposal may still be slim.
"I think there is broad recognition there is a problem," he said, but "it's very hard to predict that we will have strong regulation."
The measures proposed by Levitt continue to be opposed by the current SEC Chairman Harvey Pitt, who has served as an attorney for all the Big Five major accounting firms and the industry's main professional organization, the American Institute of Certified Public Accountants.
Pitt announced a plan for a new private-sector oversight body two weeks ago, but critics called it a weak-kneed measure with little enforcement power. It's a "far paler, weaker body," said Coffee.
"There's not enough non-industry control in the board he envisions. Where he's gone so far is a fairly tepid response to a fairly serious problem," said Ed Durkin, director of special programs for the United Brotherhood of Carpenters, which controls $35 billion in pension assets.
Instead, Coffee, Durkin and others think the best chance at reform this year may come from outside Washington, in the form of 30 to 40 shareholder proposals to force a splitting of accountants' dual audit/consultant roles.
The Carpenters union and three other labor unions with pension assets totaling $110 billion have filed proposals at about 30 companies, including Apple Computer, Duke Energy, Best Buy and Johnson & Johnson.
Most of the companies are fighting the proposals, asking the SEC to rule that they don't have to put them to a shareholder votes. Moreover, rarely do such shareholder initiatives pass.
But corporate governance experts nevertheless give the proposals pretty high odds to get companies' attention.
"If management senses that there will be some shareholder support, say 20-30 percent, they may negotiate" limits on the work their auditing firms can do, Coffee said.
The first such measure comes up in mid-February at the annual shareholder meeting of Walt Disney, said Patrick McGurn, vice president of Institutional Shareholder Services, which advises its clients how to vote on proxy issues.
"I think they will probably do surprisingly well," he said. "I think there's still a lot of shareholder anger out there." |
