How seriously has accounting been damaged by Enron? It seems like these financial numbers that accountants were responsible for verifying were the coin of the realm, the factual basis that business was based on. Now, these “facts” seem suspect.
The damage to the accounting profession is very serious in terms of credibility — that’s the one asset that the accountant needs most, and hardest to replace after damage. Think about it. What’s the auditor selling? His opinion. You have to have credibility. People have to have faith in your opinion if you’ve got anything to sell. And that, I think, is the most damaging thing to the profession right now.
Is that irreparable?
Right now, when everyone at cocktail parties are talking about Enron, when late-night comedians are making jokes about Enron, yeah, it’s probably damaged really bad. But I think it can be repaired. Time heals. I think what they need is a long stretch where nothing happens. Right now, every reporter is out there trying to get a Pulitzer for breaking the next Enron, whether there’s one out there or not.
Years ago, when the SEC announced they were investigating, I don’t know, revenue transactions at a company, that stock would get hit. Now, not just that sector but the whole market gets hit because it’s the deepest fear. I hope that subsides. If this is the only game we’re going to play for the next five or six years then I think we’re going to have some real problems in the capital markets. When this paranoia blows over and a few years go by without a mega, mega meltdown, a la Enron, Sunbeam or Cendant, then, I think, [accountant’s] credibility will start to seep back. It’s going to be a long trust rebuilding process.
What are some things that can be done to mend the industry and give investors their confidence back?
Cooperation with those who are calling for the division of auditing and consulting of the same clients would be the most immediate thing they could do.
I think what the accounting profession in general has to do is work more closely with the standard setters and not in an adversarial way. I think there’s been minimal support from the Big Five [accounting firms] toward the Financial Accounting Standards Board when they put out something that’s difficult for companies to like. [Accounting firms] generally tend to take the client position. That creates rifts within the profession. I don’t see much unity there in trying to produce higher quality standards that would provide more meaningful information to investors. There have been some pretty crucial times when [the accounting firms] could have backed up FASB and they didn’t.
As for investors, seeing the accounting profession cooperate in accepting such a division would help. More than that, not seeing meltdowns for a while would help the profession get investor confidence back.
Do accountants need a watchdog, someone to check off on their work after they have checked off on a company’s books, as former SEC Chairman Arthur Levitt has suggested?
I agree I just can’t work out the right mechanics. The public oversight board that we have now has been a toothless tiger. It doesn’t have any enforcement powers, it doesn’t have much of a staff, and it’s more or less a token. It’s just not effective. Levitt is right. There needs to be some kind of oversight body that can actually corral auditor’s work papers, examine them and force actions.
My question is what kind of body do you want to set up? Everything that’s been talked about the SEC can do. Why not enlarge their role instead of creating another body? The problem you have with the SEC is that there is some congressional influence perhaps. So what do you do then? Anything that you set up has got to be funded.
Maybe the best thing would be if it was funded by the users of financial statements. If institutional investors would step up to the plate and fund something like that, maybe that’s where the funding should come from, from the people who benefit the most.
I think you need to have more active involvement from the people that benefit the most from having good financial statements. That’s the investors. How you get them to put money into something, I can’t figure out the mechanism, but it seems to me you’ve got interests aligned when you do that.
Do you expect to see more accounting revelations in the coming weeks and months that will bring other firms down? Will the Enron rot spread?
Revelations in the Enron sense — no. Typical investigation activity as the SEC always will be around, and moreso as the annual reports bring more facts to light. But investors and the press are so sensitized that anything the SEC investigates will probably be overamplified.
They’re never exactly the same. There could be something else that happens, but I don’t think it will be “just like Enron.” Look at it this way, Sunbeam wasn’t just like Cendant, Cendant wasn’t just like Enron. There’s always the possibility that something truly awful is going to happen, but I can’t say there’s another one out there just like this.
Will this be the end of Arthur Andersen? Could the Big Five become the Big Four?
I don’t know. What’s Andersen’s final culpability going to be in the thing? I don’t think there are enough facts yet. I’d hate to see them go.
But you wouldn’t want to be working for them right now.
You know I wouldn’t want to be working for PwC [PricewaterhouseCoopers] or Deloitte & Touche, either. I kind of like working for [myself.]
Put it this way, nobody’s going to look for an employer that can only promise you a murky future and a social taint. It’s like having a big red “A” on your forehead. Or an “E” I guess would be more like it. The Scarlet Letter.
Finally, why now? Are these accounting issues something new or were people just more willing to overlook them while the stock market was going through the roof?
I think many of these issues are old enough to have a beard. A cheery market made things less scrutinized, and a debacle like Enron hyper-sensitizes everyone — and not without justification.
