An Abrupt About-Face by Accountants
Under fire for their role in the Enron Corp. scandal, accountants have decided to defuse the hottest issue facing their profession: They'll no longer oppose efforts to bar auditors from doing consulting for the companies whose books they check.
Barry C. Melancon, president of the American Institute of Certified Public Accountants (AICPA), told BusinessWeek Online on Jan. 31 that his group wants to "put this issue behind us" so that accountants, Congress, and the Securities & Exchange Commission can "get to the broader debate...on what's needed to prevent future Enrons." That's why Melancon now says the AICPA will not oppose legislation aimed at banning accountants from designing computer systems or from conducting reviews of operations, known as internal audits, for their auditing clients.
It's a strategic retreat for the AICPA. The group fought tooth-and-nail against former SEC Chairman Arthur Levitt Jr.'s effort in 2000 to split auditing from consulting -- and the accountants largely won. But the cascade of information about Enron's close ties to its auditor, Arthur Andersen LLP, has elevated "auditor independence" to a front-page issue and inspired several bills in Congress to force Big Five accounting firms to separate the functions.
Even the accounting profession's strongest allies on Capitol Hill are backing away from the stances they took during the 2000 battle. Faced with a certain loss, the AICPA apparently decided to save its ammunition for other Enron-related struggles -- such as whether lawmakers will toughen the plan for auditor discipline that the AICPA has worked out with current SEC Chairman Harvey L. Pitt.
In 2000, Enron paid Andersen $25 million in audit fees and $27 million for other services, including tax preparation and internal auditing. But disclosures mandated by the SEC show that some companies pay their Big Five auditors consulting fees that can run to as much as 30 times audit fees -- something that casts a long shadow of doubt over the issue of whether auditors can be truly independent if that would mean risking their firms' lucrative business relationships.
The AICPA, says Melancon, still believes that consulting doesn't compromise auditors' independence -- and that independence wasn't a crucial issue at Enron. "We don't believe that [separating auditing and consulting] will decrease the likelihood of another Enron in the future," he says. "But to get to the broader debate, we have to get this behind us. So we'll step up to the plate on this question."
That broader debate, Melancon says, concerns changing the corporate financial-reporting system so that investors get more frequent and timely information. The AICPA wants to break Wall Street's focus on the quarterly earnings per share, which causes "cliff-like reactions" when companies miss the Street's estimates by "a penny or two a share," Melancon says. More timely information, combined with better reporting on intangible assets like brands, patents, and customer loyalty, can help move accounting "from the Industrial Age to the Information Age," he says.
Pitt, too, has nominated an overhaul of corporate reporting as his No. 1 priority. That goal has been pushed aside for now by the explosive Enron scandal and questions about how Andersen missed $588 million in losses in Enron's controversial partnership deals. But the Enron debacle eventually will accelerate changes in corporate reporting and disclosure, Melancon says: "If there is a silver lining to Enron, it's that we will get to this debate sooner than we would have without Enron."
Shortly after Melancon's Jan. 31 interview with BusinessWeek Online, Stephen Butler, chairman of Big Five accounting firm KPMG, announced that his firm would support a ban on auditors doing computer or internal-audit work for their audit clients. Industry sources suggest that Andersen, Enron's beleaguered auditor, will adopt that position by Feb. 4, when Andersen CEO Joseph F. Berardino next appears before a House committee. Other Big Five firms could not be reached immediately for comment.
FORCED TO ROTATE?
On Capitol Hill, accounting lobbyists remain nervous about a bill proposed by Senators Chris Dodd (D-Conn.) and Jon Corzine (D-N.J.). In addition to mandating a split between auditing and consulting, the measure also proposes limits on how long an accounting firm can audit any company -- an idea the AICPA will continue to fight. "The highest incidence of audit failures is in the first couple years of the audit," Melancon says. Auditors shouldn't be forced to rotate, he says, because "the more I understand about a business, the better I'll be able to be critical in an audit."
With the policy change now adopted by the AICPA, accountants hope to shape legislation that no longer puts them in the firing line.
By Mike McNamee in Washington and Nanette Byrnes in New York
Edited by Douglas Harbrecht