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Greed, pure and simple, is increasingly being trotted out as the catch-all explanation for the havoc wrought on the U.S. economy and shareholders when the New Economy turned sour and Corporate America became mired in corruption. But in Unaccountable: How the Accounting Profession Forfeited a Public Trust (Wiley, April, 2003), journalist and former KPMG communications director Mike Brewster offers a far more nuanced portrait of how accountants lost their way.
The root of the problem wasn't simply greed on the part of a few individuals, according to Brewster, but a drift by the entire profession away from its long legacy of public service and an accompanying overemphasis on serving clients. The result was that the public-company audit, which shareholders saw as a stamp of approval on a company's books, was undermined and turned into a business tool that could be used to sell consulting services.
One of the only voices against this central conflict of interest in the late 1990s was Securities & Exchange Commission Chairman Arthur Levitt. In the following edited excerpt from Chapter 7, Brewster details Levitt's ultimately only half-successful battle with accounting firms to create new rules requiring greater independence between auditors and their corporate clients.
Chapter 7: The Fight of His Life
Toward the end of his tenure as head of the SEC, Arthur Levitt dreaded airports. It wasn't the actual travel that was getting to him, although Levitt certainly logged plenty of miles spreading the word about the need for protecting individual investors. Rather, it was the trip through the terminal that Levitt loathed, the treacherous few hundred yards where he would see the slick, hyperbolic advertisements from the globalaccounting firms with such slogans as, "There isn't a business we can't improve" and "It's time for clarity." The text of the ads, of course, never said anything about auditing.
"It would bug me walking through the airport to see the accounting firms advertising all these nonaudit services," Levitt said in an interview. "You don't see those signs anymore, not today. Now I know at least one thing: If anything in this fight was worth it, at least we got the airports cleaned up."
Making airports safe from Big Five advertising campaigns wasn't exactly Levitt's goal, however, during his last two years as SEC commissioner. Levitt spent 1999 and 2000 doing "armed battle" with the accounting Establishment over auditor independence, or, more specifically, over his proposal to ban accounting firms from providing most consulting services to their audit clients.
Levitt didn't get all the concessions he wanted from the accounting industry. In fact, he didn't get most of them. Nonetheless, just nine months after he left the SEC, when Enron imploded, this battle became a cornerstone of his legacy of advocating for individual investors. The energy trading company's 2001 annual report showed that in 2000 Enron paid Arthur Andersen $27 million in consulting fees and $25 million in audit fees. The astounding degree to which Andersen's financial interests were intertwined with Enron's became clear only because Levitt's SEC passed a rule in November 2000 mandating disclosure of both nonaudit and audit fees in the annual report.
The Enron/Andersen debacle prompted some of Levitt's biggest critics from the previous year's battle to cry out: "Where were the auditors?" In fact, many of those same people, well-known members of Congress included, tried to intimidate and bully Levitt into dropping his proposed independence rules.
Jon Madonna, a former chairman of KPMG, never agreed with Levitt's characterization of consulting and its potential to adversely affect the audit. But Madonna, who serves with Levitt on the board of directors of the mutual fund company Neuberger Berman, said, "It's hard to see Arthur these days. Whenever we talk about this, I have to say, 'Yes, Arthur, you were right and we were wrong. Can we change the subject now?'"
Accounting 101 for Levitt It wasn't long after he was sworn in as SEC chief in 1993 that Levitt began to suspect that auditors weren't so much critically examining this raw data as much as parlaying it into lucrative consulting contracts. Knowing he had to confront the global firms that audited almost every Fortune 500 corporation, Levitt, famous for his affability even with avowed enemies, tried Plan A: to engage, charm, and evaluate. Plan A, however, did not fare well, as Levitt's efforts to create a dialogue with the leaders of the firms and Barry Melancon, head of the American Institute of Certified Public Accountants (AICPA), fell flat.
"During my first years at the commission, I tried to develop a rational agenda with the firms, but their leadership was so inept," Levitt said. "Their inability to agree among themselves to just about anything --and if you could sit in a room with them, you'd see that -- made accomplishing anything just impossible. They'd say they want to help, and then when I called on them, they were not there. The trade association,so poorly led, so archaic in its cheerleader approach to the profession, had no concern about, or notion of, the profession's public interest responsibility."
Lynn Turner, in addition to being Levitt's chief accountant at the SEC, was his point man for the confrontation with the accounting industry. Turner, a former partner at Coopers & Lybrand, is today a business professor at Colorado State University. He believes that partners at the global accounting firms -- including most of the individuals with whom he and Levitt negotiated -- misplaced their priorities in the 1990s. "These guys want the government franchise that requires everyone to go to them for audits, but they don't want the responsibility that goes with it," Turner said. "They want to treat it like a business. They have to decide whether they want to be businesspeople or people with a responsibility to the public."
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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