Accounting and accountability.

Accounting and accountability.

Accounting and accountability.

Moneybox
Commentary about business and finance.
Dec. 18 2001 5:21 PM

Accounting and Accountability

It's been a rough time for the accountants and auditors at Arthur Andersen. While it remains unclear who knew what and when at Enron, it's very clear that there's almost no scenario that won't reflect pretty poorly on Andersen. Last week the firm got beat up on by a congressional committee, and at a certain point, you have to wonder if some of its clients aren't thinking about maybe signing on with an auditor who isn't so closely associated with allegations of lax standards.

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This got me thinking—after some prodding by one of my Slate colleagues—about the reputations of the other Big Five accounting firms. Let's say, for example, that you happen to run a major, publicly traded corporation, and you need an auditor. Let's say you want to pick one with a spotless record, one that hasn't signed off on the books of any big corporation that subsequently spiraled into financial turmoil amid nasty finger-pointing over accounting funny business. Or let's just say you're an investor who wants to make sure that the companies whose shares you've bought are being audited by a firm that has no association with stock-price collapses linked to questionable accounting. Following my usual procedure, I set out to conduct exhaustive due diligence. But it turned out that a simple Nexis search brought my quest to a rapid conclusion.

Andersen, obviously, was out. There's the Enron fiasco, of course, but that's not the only blemish on the firm's record. Mere months ago, the firm paid $110 million to settle a fraud lawsuit after being accused of signing off on assorted monkeying with the books at Sunbeam. Andersen paid millions more to settle charges that one of its then partners let slide recurring "accounting irregularities" in Waste Management Inc.'s financials. Investors with particularly long memories might recall way back in the 1990s—well before this sort of thing was fashionable—the remarkable trip from Nasdaq high flyer to Chapter 11 by the Boston Chicken fast-food chain. Andersen was the Chicken's accountant.

OK, then, how about Ernst & Young? Well, in February of 2000, Ernst & Young agreed to pay $335 million to settle a lawsuit filed by shareholders of Cendant who accused it of accounting negligence after shares in that company melted down. And a couple of years ago, Ernst & Young also coughed up about $23 million to settle charges relating to its allegedly sloppy auditing of a company called JWP Inc. According to the Washington Post, the federal judge presiding over that suit commented, "The 'watchdog' behaved more like a lapdog.' "

That doesn't sound very good; let's move on. How about Deloitte & Touche? According to a Forbes story from earlier this year, that firm was sued by erstwhile shareholders in Just for Feet, a shoe store chain that went bankrupt and has since been swallowed by a rival. The suit alleges—you'll never guess—that Just for Feet cooked its books and the auditors didn't stop them. Deloitte denied doing any such thing, but, again, it seems better to keep looking. (After all, in pretty much every instance cited here, the relevant accounting firm admitted no wrongdoing, even if it paid a multimillion dollar settlement.)

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Let's try KPMG. Actually, that firm was the outside auditor for Oxford Health Plans, whose stock blew up in spectacular fashion a few years back after accounting problems emerged that had apparently escaped KPMG's attention. That leaves the epic-named PricewaterhouseCoopers. Has it managed to avoid signing off on books that later proved less than perfect? Not quite. The same Forbes story cited above notes that Price Waterhouse (one of the mergees that formed the current company) was the auditor for First American, the U.S. subsidiary of BCCI. More recently, the post-merger firm was the auditor for Lucent during the period last year when it "misreported" $125 million in revenue, contributing to an SEC probe and the crumbling of Lucent's share price. Oh, well.

Admittedly, Andersen's recent record is far more embarrassing than those of its rivals. A new lawsuit accuses the firm of "knowingly participating in Enron's breaches of fiduciary duty." Its chief executive, Joseph Berardino, found himself last week being questioned by the House Committee on Financial Services, noting that he was on hand in part because "faith in our firm … has been shaken."

On the other hand, just a few days earlier, Berardino contributed a lengthy op-ed to the Wall Street Journal titled "Enron: A Wake-Up Call." There he argued that "it's time to rethink" complex accounting rules, that "we need to fix" the "broken financial-reporting model" and "focus on ways to improve" regulation and "accountability." He concluded: "Enron reminds us that the system can and must be improved. We are prepared to do our part." Gosh. Maybe I should reconsider and go with Andersen after all, after this reassuring burst of candor on the part of its head honcho. Sure, the Enron debacle actually seems more like the third, or fifth, or maybe 10th "wake-up call" for auditors—but hey, who's counting?