BETRAYED BY THOSE WE TRUST MOST
by: Cary Christian
Few things in life are as
devastating as being betrayed by people we trust above everyone else. It
generally takes a very long time to build trust in the first place. We
almost grudgingly grant our trust to people only after they have passed
numerous milestones in the relationship with no setbacks. Once trust is
built, it remains tenuous. What has taken years to build can be destroyed in
Trust can be built and exists not only between people, but between people
and organizations. Granted, this type of trust is not normally as
devastating when broken as those bonds between two people. But there are
times when we must rely so heavily on an organization to protect us that the
effects of a breach in trust may become enormous.
Tonight I am thinking specifically of the debacle surrounding Arthur
Andersen's failed audits of Enron and the subsequent charges of obstruction
of justice stemming from the shredding of documents by employees of
Andersen. You may think this has little to do with you and little relevance
to the normal subject matter of this newsletter. PLEASE DON'T STOP
READING YET! These incidents can and will affect your life and
your business in many ways.
THE ROLE OF AUDITORS IN OUR SOCIETY
Since the events leading up to the Great Depression, auditors have played an
extremely important role in American business. The Great Depression
could have been avoided had companies been subject to the stringent audit
and reporting requirements today's companies must comply with. For the most
part these rules and regulations have prevented our having another Great
Depression by supplying strict accounting rules that must be followed and
providing that a company's financial statements must be audited by an
independent auditing firm.
However, these rules and regulations depend on the independent auditor being
truly independent and having integrity beyond any doubt. The rules are so
strict regarding independence that even the mere appearance of a lack of
independence is dealt with rather severely. Why then would an auditor
participate with a client in falsifying or in publishing misleading
THE EROSION OF INDEPENDENCE
Almost all public companies are audited by one of five huge, multinational
accounting firms, Andersen being one. These accounting firms not only
provide auditing services; they provide tax consultation and preparation
services, business consulting services, and systems implementation services
as well. Most of the income generated by these giant entities come from the
services other than auditing. In fact, it is quite common that audit fees
will be reduced to obtain the audit and get a foot in the door in order to
sell these other lucrative
services to the client.
A recent article in a Detroit newspaper dealt with the flood of public
companies announcing they were in the market to replace Andersen as their
auditors. Several companies were cited as examples along with the fees paid
to Andersen for various services.
One example that was fairly representative quoted Andersen's fees as being
$2.8 million for the audit and $5.3 million for tax and consulting fees.
This relationship between audit and other services fees highlights the real
problem: losing the audit usually means losing all the other services
revenue, so the firm cannot afford to lose the audit under any
circumstances! This is the absolute source of the erosion of independence.
WHAT CAN BE DONE?
It seems almost too simple to suggest that independent auditors should not
be allowed to provide any other services to audit clients. But maybe the
simple solution will work best for everyone.
For decades, many have suggested that auditing firms should be required to
divest themselves of their tax and consulting divisions. In fact, Andersen
did separate from its computer consulting division many years ago. The
consulting division became Accenture. Then Andersen promptly created a new
consulting division to compete with Accenture!
Accounting firms have fought this battle many times before. They are
going to provide consulting services one way or the other, so let them. Just
don't let them provide them to their audit clients.
Another alternative is to let a governmental agency assign auditors on a
rotating basis to all public companies to prevent the auditors from becoming
too close to any one audit client.
WHY MUST SOMETHING BE DONE?
Do you own stock? If not, do you hope to someday? Enron seemed to be an
incredibly strong company worthy of your investment in their stock. What if
you had bought it? You would have lost every penny.
What about the other companies in your current or future portfolio? Do they
have similar problems that are being covered up by the auditors? How safe
are your investments?
Makes you wonder, doesn't it? That is the cost of a loss of trust. It might
make you pull out of the market altogether. If enough of you pull out, what
happens to the market? You get the picture. Our markets are based on trust.
Once the trust is gone, we'll be watching our businesses fail left and right
because they can no longer raise capital.
HOW COULD THIS HAVE HAPPENED?
Imagine you are an audit partner with Andersen or a similar accounting firm.
One of your clients is worth about $10 million in total annual fees to the
firm. This client is pressuring you to work with them on revenue recognition
or some other accounting principle to prop up their earnings until their
situation improves. They point out to you that the literature
could be interpreted in their favor. And chances are, it could. It's
difficult to make everything black and white when it comes to accounting for
transactions across industry lines. What are you going to do? Play hard ball
and possibly lose a $10 million client or work with them as much as you can?
It's a difficult situation to find yourself in. It is my opinion that we
should restructure the way audits are performed so that no one ever has to
be faced with this type of decision again.
I don't know how many people were on the Enron audit team, or how many
actually participated in making audit reporting decisions that were faulty,
but chances are the blame can be laid at the feet of only two or three
people. Look at what has happened because of the actions of so few:
o Enron employees and shareholders lost their entire investments. Many Enron
employees lost everything they had!
o Our ability to trust the financial statements of public companies has
taken a body blow.
o Andersen will probably cease to exist. Most all of the partners will make
deals and go to other firms, taking their remaining clients with them. The
tens of thousands of employees below partner level will be scrambling to
find employment. The little guy will get hurt, just like at Enron. A
multi-billion dollar company bites the dust because of the actions of two or
WHAT CAN YOU LEARN FROM THIS?
If you invest now, or plan to in the future, do yourself a big favor: learn
how to read a financial statement. Don't depend on your broker. Learn to
ferret out the risk factors in a company on your own. It's not as hard as
you might think. Remember that the application of accounting principles
requires the exercise of judgment on the part of the auditor. Issues are not
black and white. Learn how to form your own opinion before you invest your
Don't think of these issues as being someone else's problem. This type
of issue affects us all in one way or another. If our markets suffer because
of this, all of our businesses are hurt. Stay informed and be active
in voicing your opinions.
WHY DID I CHOOSE TO WRITE THIS EDITORIAL?
I want to thank those of you who read this article. It matters a great deal
to me. You see, I spent the first eleven years of my career at Andersen in
tax and systems consulting (NOT in the audit division). The training I
received during that portion of my career has been indispensable. It makes
me both sad and angry to watch as this unfolds. What I wish for those within
Andersen who allowed this to happen cannot be printed here.
Many people that I respect a great deal have been hurt by this even though
they've never done anything wrong. The vast majority of the people at
Andersen are hard-working people just like us whose character is above
reproach. They are victims also.
Copyright (c) 2002