Accounting's power slips into loss column
chicagotribune.com
By Greg Burns
Tribune senior correspondent
November 10, 2002
For an accounting industry that depends heavily on friends in high places, it's a worrisome tally: One down, one likely to go.
With Harvey Pitt's resignation from the helm of the Securities and Exchange Commission last week, the industry lost a vital supporter. More threatening still, Pitt's departure puts the heat on industry favorite William Webster to resign from the post he just accepted as chairman of a new federal accounting oversight board.
The potential successors to those key political allies are widely expected to be more skeptical and adversarial toward the profession. The short list of hot candidates to replace Pitt even includes Michael Chertoff, the assistant attorney general whose relentless prosecution torpedoed Chicago's Andersen accounting firm.
The changed landscape likely means a contentious battle ahead for the nation's accountants, who are especially vulnerable in the wake of this summer's Sarbanes-Oxley reform legislation.
Although the departure of Pitt will slow the momentum initially, a consensus is building for an aggressive approach as the new law gets translated into specific rules. In a dozen states, too, legislation modeled on the federal program presents additional worries for an industry that some say has lost credibility through energetic efforts to resist reforms.
"This is going to be a very different ballgame. There is a lot of potential for mischief," said Michael Cook, former chairman of the Deloitte & Touche accounting firm. "This is the worst of times in terms of the public's image of the profession."
Indeed, critics say much more action is needed because the accounting industry has done so little to safeguard the interests of the investing public.
"They're in denial about the extent and magnitude of the problems that have cropped up over the years. They haven't really stepped up to the plate with a list of problems and solutions," contended Rajib Doogar, an accounting lecturer at the University of Illinois at Urbana-Champaign. "The market is reacting with cold indifference. The message is, `We don't believe anything has changed.'"
Such criticisms are "very unfair," countered William Ezzell, the Deloitte veteran who chairs the American Institute of Certified Public Accountants, the profession's trade group. The industry was first to suggest forming a public review board last December, for instance, but "got no credit for that," he said.
Even though Ezzell doubts that public accounting has any systemic problems, the profession is ready, he said, to embrace the provisions of Sarbanes-Oxley for the sake of restoring confidence. "We've got the law. If we need to make further changes, we can always do that. The best thing we can do is get started."
The first meaningful steps could be months away, as Pitt departs and his eventual successor takes over. On Friday, the profession lost another ally when Robert Herdman, the SEC's chief accountant, followed Pitt out the door.
For the industry, it's the latest phase of a struggle that began in earnest when Andersen disclosed in January that it had shredded documents connected to its flawed audits of Enron Corp.
By early March, Ezzell's trade group and the four other top national accounting firms--Deloitte, PricewaterhouseCoopers, KPMG and Ernst & Young--had hired a prominent lobbying firm, pointedly excluding Andersen from the coalition. The lobbyists at Clark & Weinstock were charged with heading off restrictive new mandates in the aftermath of the Enron crisis.
At first, they met with success, working to defeat a reform bill sponsored by House Democrats that required companies to change corporate auditors every few years, among other steps that accountants considered unreasonable. A Republican-sponsored bill that opponents described as a gift to the accounting industry passed in April.
Within a couple of months, even as Andersen faded into history, the WorldCom Inc. financial crisis demonstrated how the industry's problems were not limited to Enron. Public outcry led to Sarbanes-Oxley, a stronger measure signed into law by President Bush in July.
The accounting profession regained its voice in the weeks that followed. Although some insiders say its influence is grossly exaggerated, it worked last month to block the appointment of John Biggs to the accounting oversight panel that forms the centerpiece of Sarbanes-Oxley.
Biggs, retiring chairman of pension fund TIAA-CREF, has said he ran afoul of the profession in part by advocating steps that would eliminate conflicts of interest, such as rotating auditors and strictly separating audit work from consulting.
The SEC's Pitt withdrew support from Biggs and instead backed Webster, the former FBI and CIA chief, whom the profession favored. But Pitt neglected to inform the White House or his fellow commissioners that Webster headed the audit committee at a troubled public firm known as U.S. Technologies, and the brouhaha led to Pitt's resignation Tuesday night.
To the degree the profession inspired the opposition to Biggs, it made "a serious mistake," said Cook, the former Deloitte chairman.
Not only will it be difficult to find a new candidate as knowledgeable and hard working as Biggs if Webster steps down, he said, but the industry also "managed to finish off Harvey Pitt with the same bullet."
Even as they brace for a tougher regulatory environment, the nation's remaining top accounting firms are enjoying respectable financial results.
Taking on the bulk of Andersen's former clients has helped. And concern about the quality of corporate audits is translating into more work and higher fees, as the audit committees of corporate boards step up their scrutiny of a service that had come to be regarded as a mere commodity. The extra attention has had a substantial practical effect on reining in financial abuses, many say.
For smaller firms, although the risk of federal regulations inspiring a flurry of copycat state action is a serious concern, some elements of the new environment spell opportunity as well.
At Chicago's Gleeson, Sklar, Sawyers & Cumpata, a new law against independent auditors simultaneously handling internal auditing in public companies could lead to additional business, said partner Alan Sklar.
While many smaller players hold the national firms responsible for bringing shame on the profession, Sklar said the impact is limited.
"It's more their problem, but I'd like to see them solve it," he said. "The profession once was among the most respected. Now it's the brunt of jokes it probably deserves. I like the attorney jokes better."
Yet reform programs within the industry appear to be limited. Three of the Final Four have completed spinoffs of their consulting businesses, and the fourth is in the midst of taking the same step.
With that, the top firms give the impression that no further action is needed, critics say.
"There is a sense among many in corporate America that the Big Four think they are free and clear," said Arthur Bowman, of Bowman's Accounting Report. "I'm not sure they are cleaning up their act. There's sloppy work everywhere. Nobody can point the finger without looking in the mirror."
Each of the Final Four has at least one corporate disaster on its client roster, and perhaps more coming. Just this month, the Federal Deposit Insurance Corp. sued Ernst & Young in a $2 billion case alleging fraudulent accounting at the failed Superior Bank in Oakbrook Terrace, adding another name to a list that includes Adelphia Communications Corp., Tyco International Ltd. and more. Ernst & Young disputes the allegations.
Former PricewaterhouseCoopers auditor Mark Cheffers predicts additional Andersen-style disasters.
"It's only a matter of time before another of the Big Four fails," said Cheffers, who runs a Web site that serves as a resource center for accountants (www.accountingmalpractice.com). "The steps they've taken are insufficient. They are subject to the same temptations."
Although Ezzell disagrees with such assertions, he points out that by its complicated nature, public accounting never will be problem-free. "This is never going to be a situation with a zero error rate," he said. "We are addressing many things that will help. There is not a silver bullet."
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