TCS Daily

Bean-Counter as Scapegoat

By Benedikt Koehler - August 4, 2005 12:00 AM

All the media attention paid to Bernie Ebbers' conviction has given us a taste of what we can expect when the trial commences against the architects of the decline and fall of the Enron empire.

It would not be surprising if attorneys acting for the defendants would try to pass the buck to Enron's auditors, Arthur Andersen. After all, the auditors had an office of their own in Enron's headquarters and surely it was up to them to set warning lights blinking in case Enron might be going off the rails. Deflecting the blame from Enron to Andersen might be a good defensive ploy, especially since Andersen is no longer around to defend itself and give its side of the story.

To auditors, being set up as the fall guy every time something goes wrong is a familiar experience. There are two reasons for this. The first is that auditors owe their franchise to the government. When Franklin Roosevelt's New Dealers decided to fix the mess on Wall Street that brought about the crash of 1929, one of their measures was to require listed companies to have an independent audit. Auditors had been pushing for this measure and must have been delighted to see it go through. With the government underwriting your business, your commercial survival is assured.

Which brings us to the second reason why auditors are in the firing line.

There is no such thing as a free lunch, least of all in a business where credits and debits in the end always level. Once audits had become mandatory because they were deemed to be in the public interest, every time a company goes out of business aggrieved investors think they can vent their ire at more than just the managers who squandered their assets. Now they have a second target, the company's auditors. The prospect of pinning blame on auditors has a lot to recommend it. Defunct companies have no money left. Auditors, on the other hand, seem to have plenty.

Auditors by now must rue the day they decided to press for mandatory audits and got their way. Back in the 1930s the auditing profession had the reputation of being independent from its clients. That meant more than simply being a separate organization. It also meant that auditors performed checks and balances on managers, making sure they did not overstate profits or misappropriate assets. U.S. Supreme Court Chief Justice Warren Burger was the first to call auditors "public watchdogs."

That view echoes the traditional perception of auditors going all the way back to ancient Egypt. We get a good idea how auditors in antiquity approached their job from reading the letters of one of the Roman Emperor Trajan's top officials, Pliny. Back then the emperor's auditors were sent to flash points across the Roman Empire to root out corruption and sue officials who had been taking backhanders. Pliny had one of the high points of his career when he prosecuted an African proconsul named Marius Priscus, who had to disgorge his takings and was exiled. Judging from the tone of Pliny's letters, he enjoyed his job immensely.

Trajan promoted Pliny to top jobs, but it is unlikely Pliny would have lasted at Arthur Andersen. These days, the auditor's public mandate sits uneasily with the need to be an advisor to clients, proactively looking for ways to optimize tax positions.

Perhaps the time has come to review the need for mandatory reviews. Times have moved on since the 1930s, when auditors were the sole means to look into the Black Box of corporate accounts. Before the Securities and Exchange Act was passed, companies were free to decide for themselves how to present their accounts, indeed whether to publish very much at all. Nowadays information flows from press departments and reaches investors instantaneously, and investment bank analysts and rating agencies compete with each other to be first with breaking news.

Leaving the design of financial reports up to companies would be good news for auditors, too. Whereas today, accountants are held to comply with the uniformity of GAAP and GAAS, in a deregulated environment they could develop entirely new business models by devising alternative accounting standards.

For now, we have the specter of the Enron trial to look forward to and what are surely salacious details of corruption at the highest levels of corporate governance. Just look at Enron's tax shelters that were named Raptor. The pun can hardly be a coincidence. The word in Latin means robber or rapist. The Enron con job may have fooled some, but it would hardly have fooled Pliny.


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