How can Enronitis be cured? Everyone has their own remedy
By MATHEW INGRAM
Wednesday, June 19, 2002 – Page B10
So Arthur Andersen has been found guilty of obstruction of justice, a conviction that U.S. authorities desperately wanted in order to bolster their case against disgraced energy trader Enron -- but one which they only got by the skin of their teeth. After deliberating for 10 days, the jury ignored all the evidence about document shredding, and didn't believe the government's star witness was guilty of anything, despite the rather inconvenient fact that he had already confessed.
By now, most of the English-speaking world is convinced that Andersen is guilty of something, given its repeated failure to call attention to questionable accounting at Enron and several other corporate flame-outs over the past few years -- and the fact that its consulting arm actually helped structure some of the questionable entities that its auditing arm then overlooked. Even if Andersen isn't guilty of obstruction, the theory goes, it is clearly guilty of doing something bad.
That's the easy part. What Andersen did exactly, and who -- if anyone -- should be held accountable for it, is a thornier issue. By now, there are no doubt plenty of people who see a simple solution to Enron and any other accounting-related debacles: send a whole pile of people to jail. But who? The CEO? The board of directors? The senior partners at the accounting firm? And would that be enough to prevent similar situations in the future?
Andersen's main crime is a betrayal of trust -- the trust that investors and the marketplace in general had, or felt that they were entitled to have, in an auditor's signature on an annual report. After all, aren't auditors supposed to be the impartial arbiters of financial rectitude, watchdogs of financial virtue with the investor's best interests at heart? Now they look to be just another hugely conflicted part of the corporate structure, like stock analysts.
Like the U.S. Securities and Exchange Commission, the modern idea of having an impartial firm "audit" a company's financial performance came into being after the stock market crash of 1929, because of the perception that companies were deluding investors by playing fast and loose with their reporting. Accountants were given the right to act as "auditors" on the assumption that they would prevent -- or at least call attention to -- those kinds of financial shenanigans. So how does the accounting business go about regaining that trust? The answers are still all over the map.
The Senate Banking Committee in the United States has approved a bill proposing a national accounting oversight body similar to the SEC, which would enforce rigorous standards on the profession. For its part, the SEC yesterday released a blueprint for a Public Accountability Board that would review auditors reports and give a stamp of approval to those that comply. Others argue that more laws won't necessarily stop the kind of behaviour Andersen engaged in, because much of what it did fell within accepted guidelines.
So change the guidelines, some say. Generally accepted accounting principles, or GAAP, are a fairly fluid concept in many ways, and offer all kinds of loopholes and grey areas. Some accounting critics make the case that the problem lies with a profession that hasn't kept pace with the complicated financial gymnastics that go on in the modern world -- not just stock options, but derivatives of all kinds and other arcane tools. Much of what makes up modern accounting, these critics argue, is still based on rules that were developed 500 years ago by an Italian monk.
Others argue that creating more laws will only aggravate the problem, and trying to tighten one loophole often creates even more in its place. For his part, former Andersen chief executive officer Joseph Berardino says firms have their hands tied by the way the auditing function is structured. It is a "pass or fail" system, he said, in which an auditor who disagrees with a particular strategy has only three choices: get the company to change, sign off on it, or write a letter saying the firm no longer has confidence in the report. A more sophisticated grading system should be created, he said.
Some choose to blame the fact that accounting firms such as Andersen supply consulting services to the same companies whose balance sheets they are supposed to be auditing, an obvious conflict of interest. The solution? Force accounting firms to separate their consulting and auditing functions. But how then do you prevent the auditing part of the firm -- which is now forced to rely solely on its auditing services -- from becoming even more subservient to its customers?
Another argument is that Andersen has already effectively been executed by a firing squad composed of its own customers -- most of whom are now former customers. This libertarian or laissez-faire approach holds that the capital markets and the industry have convicted Andersen, and carried out a sentence more harsh than any government or court could come up with. That functions as a deterrent to similar behaviour, the theory goes, because other firms will be afraid that a reputation for bending the rules might result in a potentially lethal lack of customers.
More laws, fewer laws, new accounting rules, a national accounting regulator, stiff jail terms, free-range hunting of accountants for sport -- everyone has their favourite remedy for Enronitis. Until some kind of consensus develops, unfortunately, the problem is likely to be more obvious than the solution.
Mathew Ingram writes analysis and commentary for globeandmail.com
mingram@globeandmail.ca |
