Accounting bound to be changed
DAVE BEAL St. Paul Pioneer Press Columnist
Published: Wednesday, January 16, 2002
For decades, the Arthur Andersen name was the gold standard for the accounting profession.
Arthur Andersen, orphaned at age 16, rose from a mail boy on Chicago's West Side to co-found the Andersen Delany accounting firm a dozen years later. The firm soon took his name alone, and quickly assembled a who's who of blue-chip auditing clients in Illinois and Wisconsin.
Then, as the scandal-ridden empire of Chicago utility baron Samuel Insull collapsed in the Great Depression, Arthur Andersen rode to the rescue to make things right. The accounting firm notes in its corporate history, "The First Sixty Years," that its cleanup of the Insull mess won for it favorable recognition from "the highest echelon of officers of the leading banks and financial institutions of this country."
Today, Andersen's reputation is unraveling with laser-like speed as questions about its work for Houston-based Enron Corp. grow. And as the controversy mounts, a growing string of questionable practices at other large accounting firms has raised concerns about whether the profession's process of self-regulation requires a broad overhaul.
"I don't think we're going to have business as usual in the future," says Judy Rayburn, chair of the accounting department at the University of Minnesota's Carlson School of Management. "My own guess would be that there's going to be a major restructuring" that goes beyond the existing, privately run oversight apparatus to one that's more of a public-private partnership.
Last month, two days after Enron went bankrupt, the "Big Five" accounting firms asked the Securities and Exchange Commission to help improve disclosure rules in corporate annual reports.
The move was seen as an effort to shore up the credibility of accounting work in the wake of Enron and other questionable accounting practices.
Arthur W. Bowman, editor of Bowman's Accounting Report, says the plea marked the first time in his memory that the big accounting firms had made such a request jointly.
The Enron crisis "opens the door for further scrutiny of the profession itself," he adds.
The Enron situation heated up yet more on Tuesday when the firm disclosed its auditors destroyed Enron documents after federal securities regulators requested information on the now-bankrupt energy company.
Andersen fired its lead auditor on the account, replaced its management in Houston and took disciplinary action against four Andersen partners there.
The Andersen firm is under the gun for failing to uncover the extent of partnerships that Enron used to push millions of dollars of debt off its balance sheets. Last fall, that practice blew up on Enron, helping to activate a sudden and striking metamorphosis that turned the country's seventh-largest corporation into its biggest bankruptcy ever.
Bowman thinks the controversy has placed the Andersen firm in a life-or-death situation.
"Right now, the firm's credibility is in question around the world," he says. "How the firm handles this, immediately and in the long term, decides its future."
Bowman says that unless Arthur Andersen shows it can deal effectively with its problems, talented recruits graduating from universities will turn elsewhere and top partners will leave. He adds that Andersen could be hit hard by litigation brought by entities that lost money in Enron; clients could leave.
"All of these things are in play now," he says.
By some measures, Andersen was once the world's largest accounting firm. In 2000, according to Bowman's Accounting report, it still ranked fourth with $8.39 billion in revenue. Measured by revenue per partner, it ranked first among the Big Five accounting firms.
Andersen came later to the Twin Cities than did most of the other large accounting firms, so it has never won the dominance here that it achieved in Chicago, Milwaukee and some other cities.
The firm has caught up here, however, in part by winning auditing clients at large and growing companies based in Minnesota.
It closed its St. Paul office in 1994, but currently employs just over 500 people in downtown Minneapolis.
As technology applications exploded in the 1990s, the firm's Andersen Consulting arm grew rapidly -- particularly in the Twin Cities and at a few other sites. Last year, after much tension between the principal firm and Andersen Consulting, the latter entity was renamed as Accenture and spun off as a freestanding unit.
Besides Enron, two other controversies have blemished Arthur Andersen's reputation in recent years.
In 1997, the U.S. Securities and Exchange Commission charged that Sunbeam Corp. and its CEO, "Chainsaw Al" Dunlap, cooked the books to inflate sales and profits. Investors also filed suits.
The SEC didn't allege wrongdoing by Andersen, but the accounting firm agreed to settle shareholder litigation for $110 million without admitting or denying blame.
In 1996, the SEC found Andersen's audit reports on Waste Management false and misleading. Andersen agreed to pay part of a $220 million settlement to shareholders, plus a $7 million civil penalty, and accepted a censure by the SEC without admitting or denying guilt.
Two private groups -- the Public Oversight Board and the Financial Accounting Standards Board -- oversee the accounting profession.
In addition, accounting firms evaluate the work of competing firms in a peer review process.
Peer review and the oversight board have never done much more than slap offending firms on the wrist, says Bowman, and the standards board takes forever to make decisions.
"There are obviously major issues that need to be addressed," says Rayburn.
The boundaries of today's corporations have become much more porous in recent years, she explains, and hence today's system of accounting oversight must be strengthened.
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Dave Beal can be reached at dbeal@pioneerpress.com or (651) 228-5429. |
