Pushing Accounting into the Info Age

Barry C. Melancon, head of the profession's trade group, talks about the far-reaching post-Enron changes that need to be made

Accountants have been remarkably silent since Enron's implosion, even as new questions arise daily about the role of auditor Arthur Andersen LLP in the debacle. How involved were Andersen's partners with Enron? Why did the firm give its O.K. to questionable transactions?

Now the industry has begun to speak up. On Jan. 31, BusinessWeek Associate Editor Nanette Byrnes and Washington Senior Correspondent Mike McNamee spoke with Barry C. Melancon, CEO of the industry's powerful trade group, the American Institute of Certified Public Accountants, on the Enron scandal's fallout for the accounting profession. Here are edited excerpts from their conversation:

Q: What's needed in the way of reform? Your group has traditionally insisted on self-regulation.


The profession is going to agree to limits on internal-audit outsourcing and information-technology accounting systems (see BW Online, 2/01/02, "An Abrupt About-Face by Accountants"). But we don't believe that doing that will decrease the likelihood of having another Enron in the future.

Q: Then why do it?


In order to get to the broader debate, we have to get this behind us. In the environment we're in, to be blunt, the way to do that is to say, "O.K., we'll step up to the plate on that particular issue." But the caveat is: Let's not just focus on that particular issue. What happens if there is another Enron in the future?

We need to move accounting from what we call an Industrial Age model to an Information Age model. Today, we're much more into intangibles and softer assets that probably need to be reflected in a different way in financial statements. That is one issue. Plus, we think continuous information flow gives a better picture to investors and is less likely to end in unanticipated results. If there is a silver lining in Enron, it is that we will get to this debate much sooner now. We want this debate.

Q: Would these changes produce better numbers, preventing another Enron?


Let's look at the real world today. We have earnings estimates. Then, quarterly, someone says what their actual earnings number is. Miss it by a penny, Wall Street reacts. There's a presumption that there is some precise, to-the-penny number that reports the results of a company. In fact, there isn't a precise number. The company's results really are within a range of numbers.

In a continuous-flow model, whatever the reasons are that cause a company to meet, exceed, or not meet a particular estimate would be communicated throughout the quarter. That's probably better for the general public as investors.

Q: This week, a number of companies were hit hard when even minor accounting questions were raised about their books. Is there a crisis of confidence in auditing?


There's a crisis we're dealing with as a profession. Our part of that -- and we're not the only part of that -- is to do the things necessary and appropriate to help [restore] that confidence in the market place.

Q: Securities & Exchange Commission Chairman Harvey Pitt is proposing a new, self-regulatory body for accountants. But the Public Oversight Board, a five-member group not directly tied to the Big Five accounting firms, recently resigned in protest over Pitt's proposal, saying that it won't be independent enough of the profession. What do you think?


I don't care what [Public Oversight Board Chairman Charles] Bowsher said. The board proposed by the SEC would be more independent. That's just the fact.

Q: Does accepting these changes mean that the system wasn't adequate?


We believe philosophically that all processes, including the audit process, need to evolve and get better. American business is built on that. Unfortunately, we don't have a system that tells you how many Enrons were avoided because of the audit process, how much efficiency is in the market because of the audit process, how many times the line in the sand was drawn by a certified public accountant. That said, the SEC chairman thinks we need to change this process, we need to make it better. We said O.K. We're going to a more advanced step, a higher order.

Q: Harvey Pitt worked on behalf of the AICPA and Big Five firms before he became chairman of the SEC. That has raised questions about whether he's capable of being tough enough on you now. What's your view?


Here's a person who some might say isn't hard enough on the profession. But he has gotten us to say we agree to a change that is unprecedented in 100 years.

Q: You're giving him credit. But what about this major meltdown that has contributed to getting you to the table?


Even if you go back to his pre-Enron speeches, Harvey was a big advocate of change. [Now] he's calling on the profession to make some changes.

Q: One change your group hasn't backed is periodic rotation of audit firms. Couldn't that ensure that no one audit client becomes so important to an auditor, as Enron was to the Houston office of Andersen, that it becomes hard to challenge that client and risk that income?


[As an accountant], the more I understand about a business, the better able I am to be critical in an audit. The civil liability [for] a firm in a situation like we now have [at Enron] is [already] pretty great.

Q: There has been talk that Andersen may have to merge with another firm to survive, or even that it may go out of business. If there's a Big Four after this instead of a Big Five, is that a tragedy?


I don't know any more about [such talk] than you do. I think that meeting the demands of the marketplace and [giving] confidence [to companies and investors] is the most important thing to our profession. There are 17,000 public-company audits going on right now. And the ability to do those audits and to meet the expectations of the SEC is very critical right now.

Edited by Douglas Harbrecht

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