ARCHIVE:: MAY 2002 :: CAREERS

No Taste for Accounting
In a Quest for More Revenue, the Auditing Profession Lost the Public's Trust

By Ianthe Jeanne Dugan
Staff Reporter of The Wall Street Journal

The Enron/Arthur Andersen fiasco of the past year has put the accounting industry in the harshest of spotlights. But the slow erosion of the profession's reputation for integrity has actually been under way for some time.

Long before Arthur Andersen's document-shredding became news, accountants found themselves coming under pressure from many directions to alter their centuries-old practices. Over the past two decades, innovations in computer technology rendered many of the old-fashioned auditor's functions obsolete, prodding accountants to find other ways to bring in revenue. Companies' desire to produce ever-rosier results for an ever-larger and savvier shareholding public compelled accountants to find ways to put the best possible spin on clients' financial reports.

And then there was simple greed. The industry had already shown it was susceptible. In the early 1970s, a prominent accountant was linked to the Watergate scandal. The next decade, the savings-and-loan crisis raised questions about how accountants could have let things get so bad.

In recent years, auditors at the big accounting firms have had to play second fiddle to growing armies of consultants and salespeople who market the firms' other professional services. The Big Five firms-PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young, Arthur Andersen and KPMG-collectively doubled their revenue in less than a decade, to $26.1 billion last year. Most of that increase derived from consulting.

Ultimately, the accounting profession sacrificed the public confidence that underpinned its reputation. Now, accountants wallow at the bottom among professions in public-opinion polls they topped 20 years ago. The business is drawing fewer top students, more government scrutiny and bad jokes.

Recipe for Disaster

All humor aside, the fate of a crucial component of capitalism is now at stake. No company can go public without the blessing of an auditor. Half of American households are invested in stocks and often scrutinize the books of public companies.

The accounting industry started building its reputation for trust in the early 1930s, after the financial scandals of the '20s and the corporate failures of the Great Depression. Already, in 1922, the American Institute of Certified Public Accountants had banned its members from advertising, saying it wasn't dignified. The group also forbade accountants to poach each other's clients. The profession got its own governing board and a manual called Generally Accepted Accounting Practices-GAAP for short. The profession also won the responsibility for auditing publicly traded companies.

Recruiting was relatively simple. M.B.A. programs had yet to blossom, so students seeking a business career often chose accounting degrees. Accountants mainly scrutinized whether corporations were fairly representing their financial condition-a much simpler affair then, focusing on the assets and liabilities of the balance sheet. They also prepared tax returns.

In the 1970s, the federal government, amid questions about some companies' accounting procedures, set up the Financial Accounting Standards Board to oversee accountants. But it soon also removed a lot of the restrictions that had prevented big firms from competing with each other. In the late 1970s, the Federal Trade Commission, concerned about anticompetitive practices, began pushing the AICPA to allow accountants to advertise. By 1990, the group had lifted most restrictions on ads.

The business became cutthroat, the rules more complex, and scandals more frequent. As the 1980s dawned, globalization and deregulation brought new challenges. To raise money, companies turned to more-complex forms of financing. Executive pay became tied to corporate performance, so clients had a personal stake in making sure their auditors squeezed out the best results they could. The reliability of audited financial statements began to decline.

"Auditors got an invitation to start playing with numbers," says Baruch Lev, an accounting professor at New York University's Stern School of Business. "Investors didn't care about the balance sheet. They wanted profits and potential."

At the same time, computers were making auditing services less valuable, so accounting firms began developing new sources of revenue, like management consulting, and pressuring auditors to market those services. This undermined the auditor's role as an independent reviewer of company books. C. Anthony Rider, who was an auditor at Ernst & Young's Buffalo, N.Y., office for 25 years, says that a few years ago, he and more than 2,000 other partners took training on how to sell lucrative consulting services on law, insurance, financial planning, technology, partnerships-"anything under the sun." (Mr. Rider is now chief financial officer of an aerospace firm that was a former client.)

As firms brought in more outsiders as consulting partners, they sparked personality clashes and pay disparities. Some partners ended up making 20 times more than others.

Meanwhile, salaries for new auditors grew slowly, turning away new talent. Others were put off after the AICPA, addressing the new complexities of the business, recommended that states require 150 credit hours-up from 120-for CPA training, making it tougher for students to become certified. About 40 states have adopted the rule.

Turning Point?

The recent scandal at Andersen has only made it more difficult to attract young people to accounting. Yet it could also prove to be a turning point for the industry.

With the Enron debacle raising new concerns about future recruitment, academics nationwide are striving to restore faith in accountants. They are heeding the legal and ethical questions raised by Enron's fall, which will shape the accounting reforms that are likely to be demanded by investors. After all, professors say, it is today's accounting students who will implement those reforms.

"As strange as it sounds, thanks to Enron, accounting has become very much a discipline on the forefront," says Paul R. Brown, chairman of the department of accounting, taxation and business law at the Stern School.

For one thing, it has made accounting students more vigilant about the industry's potential for ethical abuses, professors say. The more they learn about the Enron ordeal, the stronger their interest in exploring problems in the current accounting system.

"I'm currently beginning an independent study on the ethical dilemmas faced in the accounting field," says Luke Corbitt, a senior accounting student at University of San Diego. "I'm planning on interviews with both partners and personnel at Andersen."

Mr. Corbitt, who is also a member of the university's accounting society, says his study will be presented at a national student seminar to be held in August. This year's theme: "Ethical conduct in the business workplace."

-- Lingling Wei contributed to this article