First on the Alphabetical Listing of Hall of Fame Inductees
ARTHUR EDWARD ANDERSEN Hall of Fame Site --- http://fisher.osu.edu/acctmis/hall/members/andersen.html 

Last on the Alphabetical Listing of Hall of Fame Inductees
ARTHUR RAMER WYATT Hall of Fame Site --- http://fisher.osu.edu/acctmis/hall/members/wyatt.html 

At least from an alphabetical listing of inductees to the Accounting Hall of Fame, we have the Alpha and the Omega who were both executive partners and great leaders in the great public accounting firm once known as Arthur Andersen & Company and later shortened to Andersen.  Although these two executive partners served over different time frames, both served as models of integrity, skill, and professionalism.  I thought this made a nice introduction, although as soon as the caretakers at Ohio State University add Year 2002 inductee Steve Zeff (Rice University) to the Hall of Fame Website, the Omega will be passed on to Dr. Zeff in the alphabetized listing.

It is sad that we must today address the sickening downfall of that great firm that Arthur Andersen (founder) and Arthur Wyatt both served so faithfully long before its downfall in the Year 2002 after its spectacular rise to international fame and fortune across the years 1913 to 2002.  Although the firm still exists on paper, it is virtually reduced to Ground Zero and is no longer allowed to perform audits as a public accounting firm.

The implosion of Enron was the catalyst that caused the Andersen firm to explode, but Andersen's demise was probably inevitable as a result of the failure of its leading partners over the past ten years to defuse the bomb that was heating up following a succession of scandalous audits such as Waste Management, the Baptist Foundation, Sunbeam, and others in which its reputation was blackened and its litigation reserves were drained.  

The Enron scandal is being blamed for the fall of Andersen.  Indeed the shredding of Enron audit working papers and communications led to the conviction on grounds of obstructing justice.  But in many ways, subsequent scandals such as the unbelievably bad audit of World.com by Andersen are more revealing of the shoddy and possibly fraudulent audits by Andersen in recent years.  These are audits that are totally out of line with the high integrity and professional standards that our two Arthurs (Andersen and Wyatt) set for this accounting firm in earlier years.

What is even more sad is that the decline in integrity and professionalism in large auditing firms was the rule rather than the exception in all the big auditing firms over the past two decades.  Since the early 1990s, lawsuits have revealed a decline in professionalism and integrity that accompanied spectacular growth in revenues in all these firms.  The growth in billions of revenues made it possible to pay out numerous millions in lawsuit judgments.  Many of the audit and consulting scandals are documented at http://www.trinity.edu/rjensen/fraud.htm 

Every large public accounting firm was a bomb waiting to explode like Andersen exploded.  In fact, the explosion of Andersen may have been the only thing that awakened the other firms in time to save themselves from the culture change in public accounting that is revealed by Paul Volker.  

Efforts to date by public accounting firms, the SEC, and the AICPA have not stemmed the tide of public opinion and despair.

• What is so sad is that the "A" of accounting is now being worn like a Scarlet Letter A.  
  
• CPA now means "Current Prison Adventure."  
  
• Accountants seem unable to provide a product (Transparent, Timely, and True financial reports) that the public really wants.  
  
• Leading auditors firms and the AICPA lobbied intensely with Congress in an effort to stack the Public Company Accounting Oversight Board with politically correct appointments.  Media accusations of such lobbying ultimately led to the resignations of Harvey Pitt (Chairman of the SEC), Robert Herdman (Chief Accountant of the SEC), and William Webster (the Pitt/Herdman choice for Chairman of the new PCAOB).   The public now perceives the disgraceful lobbying efforts of leading accounting firms and the AICPA as clear evidence of hypocritical behavior in preaching virtue and practicing vice.
  
• Some leading audit firms like Andersen uncovered frauds but failed to place investor interests above their own interest in maintaining the flow of large audit fees.  Know examples include Waste Management and Enron.  Suspected examples of similar failures to protect investors are now in litigation for virtually all large auditing firms.  CPAs are losing the public opinion war from a public that demands action to speak louder than words.
  
• For many years FASB stacked the Emerging Issues Task Force (EITF) with auditors and preparers, but allowed no representatives drawn from investors and analysts.
  
• New compensation contracts with corporate executives reveal that no lesson has been learned about greed in the signing of new deals with ever-soaring salaries, options, and golden parachutes. 

What did we learn from the Enron and other recent scandals?

We learned that addicts cannot quit on their own!

We learned that corporate executives and accounting firms will not really change their ways unless investors themselves rise up in revolt by abstaining from corporate investing until executive compensation is more reasonable and a concerted effort is made for Transparent, Timely, and True financial reports.  

Bright light amidst this hypocrisy of reform

New York's Eliot Spitzer --- http://www.oag.state.ny.us/ 
The SEC would have not gone far investigating many recent spectacular frauds if Spitzer had not handed over the smoking guns.  This, in part, is due to hypocrisy in a government that that under funds the SEC enforcement budget while claiming to "get tough" on corporate corruption and security analyst frauds.

The Biggest Crime of All:  They Still Don't Get It 

"Wall Streets CEOs Still Get Fat Paychecks Despite Woes," by Susanne Craig, The Wall Street Journal, March 3, 2003

Chiefs' Packages Decline Overall Still, $10 Million or More Isn't Bad

Stock markets are down. Corporate public offerings are out. Investors are on the sidelines. And financial firms continue to cut staff.

 But there is still a bull market in one pocket of Wall Street -- the pay of securities-firm CEOs.

Amid one of the worst operating environments in years, Wall Street chief executives continue to pull down annual paychecks topping $10 million. Even though their pay is down overall, it is still turning heads in many quarters. Morgan Stanley's CEO Philip Purcell received a 2002 pay package of $11 million. Goldman Sachs Group Inc.'s Henry Paulson made $12.1 million and Lehman Brothers Holdings Inc.'s Richard Fuld took home a pay package valued at $12.5 million.

 

Citigroup Inc.'s Chief Executive Sanford I. Weill, whose banking firm has been dogged by regulatory probes this year, volunteered not to receive a cash or stock bonus for 2002 because the share price of the company, which owns Salomon Smith Barney, dropped 25% during the year.

But Citigroup's board granted Mr. Weill stock options for 2003 with an current estimated value of $17.9 million, more than the $17 million cash bonus Mr. Weill received in 2001. At Bear Stearns Cos., one of the few securities firms that actually saw its profit rise in 2002, CEO James Cayne saw his total compensation more than double to $19.6 million last year.

 

The still-hefty paychecks are drawing criticism as being out of whack with these tough economic times. On Wall Street, fees from the most profitable businesses -- such merger-and-acquisition advice and underwriting initial public offerings of stock -- have all but dried up.

"The problem is there is no strong indication the bear market is over and we are a long way from justifying these type of packages," says Mike Corasaniti, director of research at boutique investment firm Keefe, Bruyette & Woods Inc. and an adjunct professor in the business department of  Columbia University in New York .

 

"In good times boards justify the big pay packages by saying the executives are doing a great job and in bad times they justify the pay by saying they are managing in a difficult environment. No matter what, they seem to find a way to rationalize it."

Officials at the various firms declined to comment

Of course, a Wall Street CEO's pay is tied to performance. And the job hasn't been easy. But the tough decision to cut staff may have in fact boosted the pay packages of many top executives, as the cost-cutting measures kicked in. With the exception of a few firms, notably Credit Suisse Group's Credit Suisse First Boston, most Wall Street firms have actually been making money during the bear market. CSFB reported a loss for 2002 of $811 million, due to $813 million in charges to cover items ranging from 1,500 previously announced job cuts to a provision for civil-litigation costs.

Also see http://www.trinity.edu/rjensen//FraudConclusion.htm 

The bottom line:

I have a mental image of the role of an auditor. He’s a kind of umpire or referee, mandated to keep financial reporting within the established rules. Like all umpires, it’s not a popular or particularly well paid role relative to the stars of the game. The natural constituency, the investing public, like the fans at a ball park, is not consistently supportive when their individual interests are at stake. Matters of judgment are involved, and perfection in every decision can’t be expected. But when the “players”, with teams of lawyers and investment bankers, are in alliance to keep reported profits, and not so incidentally the value of fees and stock options on track, the pressures multiply. And if the auditing firm, the umpire, is itself conflicted, judgments almost inevitably will be shaded. 
Paul Volcker (See below)

"Volcker says "new Andersen" no longer possible," by Kevin Drawbaugh, CPAnet, May 17, 2002 --- http://www.cpanet.com/up/s0205.asp?ID=0572

WASHINGTON, May 17 (Reuters) - Former Federal Reserve Board Chairman Paul Volcker, who took charge of a rescue team at embattled accounting firm Andersen (ANDR), said on Friday that creating "a new Andersen" was no longer possible.

In a letter to Sen. Paul Sarbanes, Volcker said he supports the Maryland Democrat's proposals for reforming the U.S. financial system to prevent future corporate disasters such as the collapse of Enron Corp. (ENRNQ).

"The sheer number and magnitude of breakdowns that have increasingly become the daily fare of the business press pose a clear and present danger to the effectiveness and efficiency of capital markets," Volcker said in the letter released to Reuters.

"FINALLY, A TIME FOR AUDITING REFORM" 
REMARKS BY PAUL A. VOLCKER  
AT THE CONFERENCE ON CREDIBLE FINANCIAL DISCLOSURES 
KELLOGG SCHOOL OF MANAGEMENT 
NORTHWESTERN UNIVERSITY 
EVANSTON, ILLINOIS 
JUNE 25, 2002
http://www.fei.org/download/Volker_Kellogg_Speech_6-25-02.pdf 

How ironic that we are meeting near Arthur Andersen Hall with the leadership of the Leonard Spacek Professor of Accounting. From all I have learned, the Andersen firm in general, and Leonard Spacek in particular, once represented the best in auditing. Literally emerging from the Northwestern faculty, Arthur Andersen represented rigor and discipline, focused on the central mission of attesting to the fairness and accuracy of the financial reports of its clients. 

The sad demise of that once great firm is, I think we must now all realize, not an idiosyncratic, one-off, event. The Enron affair is plainly symptomatic of a larger, systemic problem. The state of the accounting and auditing systems which we have so confidently set out as a standard for all the world is, in fact, deeply troubled.

The concerns extend far beyond the profession of auditing itself. There are important questions of corporate governance, which you will address in this conference, but which I can touch upon only tangentially in my comments. More fundamentally, I think we are seeing the bitter fruit of broader erosion of standards of business and market conduct related to the financial boom and bubble of the 1990’s. 

From one angle, we in the United States have been in a remarkable era of creative destruction, in one sense rough and tumble capitalism at its best bringing about productivity-transforming innovation in electronic technology and molecular biology. Optimistic visions of a new economic era set the stage for an explosion in financial values. The creation of paper wealth exceeded, so far as I can determine, anything before in human history in relative and absolute terms. 

Encouraged by ever imaginative investment bankers yearning for extraordinary fees, companies were bought and sold with great abandon at values largely accounted for as “intangible” or “good will”. Some of the best mathematical minds of the new generation turned to the sophisticated new profession of financial engineering, designing ever more complicated financial instruments. The rationale was risk management and exploiting market imperfections. But more and more it has become a game of circumventing accounting conventions and IRS regulations. 

Inadvertently or not, the result has been to load balance sheets and income statements with hard to understand and analyze numbers, or worse yet, to take risks off the balance sheet entirely. In the process, too often the rising stock market valuations were interpreted as evidence of special wisdom or competence, justifying executive compensation packages way beyond any earlier norms and relationships. 

It was an environment in which incentives for business management to keep reported revenues and earnings growing to meet expectations were amplified. What is now clear, is that insidiously, almost subconsciously, too many companies yielded to the temptation to stretch accounting rules to achieve that result.

I state all that to emphasize the pressures placed on the auditors in their basic function of attesting to financial statements. Moreover, accounting firms themselves were caught up in the environment – - to generate revenues, to participate in the new economy, to stretch their range of services. More and more they saw their future in consulting, where, in the spirit of the time, they felt their partners could “better leverage” their talent and raise their income. 

I have a mental image of the role of an auditor. He’s a kind of umpire or referee, mandated to keep financial reporting within the established rules. Like all umpires, it’s not a popular or particularly well paid role relative to the stars of the game. The natural constituency, the investing public, like the fans at a ball park, is not consistently supportive when their individual interests are at stake. Matters of judgment are involved, and perfection in every decision can’t be expected. But when the “players”, with teams of lawyers and investment bankers, are in alliance to keep reported profits, and not so incidentally the value of fees and stock options on track, the pressures multiply. And if the auditing firm, the umpire, is itself conflicted, judgments almost inevitably

Continued at http://www.fei.org/download/Volker_Kellogg_Speech_6-25-02.pdf 

"We're The Front Line For Shareholders,"  by Phil Livingston (President of Financial Executives International), January/February 2002 --- http://www.fei.org/magazine/articles/1-2-2002_president.cfm 

At FEI's recent financial reporting conference in New York, Paul Volcker gave the keynote address and declared that the accounting and auditing profession were in a "state of crisis." Earlier that morning, over breakfast, he lamented the daily bombardment of financial reporting failures in the press.

I agree with his assessment. The causes and contributing factors are numerous, but one thing is clear: We as financial executives need to do better, be stronger and take the lead in restoring the credibility of financial reporting and preserving the capital markets.

If you didn't already know it and believe it deeply, recent cases prove the value of a financial management team that is ethical, credible and clear in its communications. A loss of confidence in that team can be a fatal blow, not just to the individuals, but to the company or institution that entrusts its assets to their stewardship. I think the FEI Code of Ethical Conduct says it best, and it is worth reprinting the opening section here. The full code (signed by all FEI members) can be found here.

. . .

So how did the profession reach the state Volcker describes as a crisis?

• The market pressure for corporate performance has increased dramatically over the last 10 years. That pressure has produced better results for shareholders, but also a higher fatality rate as management teams pressed too hard at the margin.
• The standard-setters floundered in the issue de jour quagmire, writing hugely complicated standards that were unintelligible and irrelevant to the bigger problems.
• The SEC fiddled while the dot-com bubble burst. Deriding and undermining management teams and the auditors, the past administration made a joke of financial restatements.
• We've had no vision for the future of financial reporting. Annual reports, 10Ks and 10Qs are obsolete. Bloomberg and Yahoo! Finance have replaced the horse-and-buggy vehicles with summary financial information linked to breaking news.
• We've had no vision for the future of accounting. Today's mixed model is criticized one day for recognizing unrealized fair value contractual gains and alternatively for not recognizing the fair value of financial instruments.
• The auditors dropped their required skeptical attitude and embraced business partnering philosophies. Adding value and justifying the audit fees became the mandate. Management teams and audit committees promoted this, too.
• Audit committees have not kept up with the challenges of the assignment. True financial reporting experts are needed on these committees, not the general management expertise required by the stock exchange rules.

From the Chicago Tribune, February 19, 2002  --- http://www.smartpros.com/x33006.xml 

International Standards Needed, Volcker Says

WASHINGTON, Feb. 19, 2002 (Knight-Ridder / Tribune News Service) — Enron Corp.'s collapse was a symptom of a financial recklessness that spread during the 1990s economic boom as investors and corporate executives pursued profits at all costs, former Federal Reserve Chairman Paul Volcker told a Senate committee Thursday.

Volcker -- chairman of the new oversight panel created by Enron's auditor, the Andersen accounting firm, to examine its role in the financial disaster -- told the Senate Banking Committee he hoped the debacle would accelerate current efforts to achieve international accounting standards. Such standards could reassure investors around the world that publicly traded companies met certain standards regardless of where such companies were based, he said.

"In the midst of the great prosperity and boom of the 1990s, there has been a certain erosion of professional, managerial and ethical standards and safeguards," Volcker said.

"The pressure on management to meet market expectations, to keep earnings rising quarter by quarter or year by year, to measure success by one 'bottom line' has led, consciously or not, to compromises at the expense of the public interest in full, accurate and timely financial reporting," he added.

But the 74-year-old economist also blamed the new complexity of corporate finance for contributing the problem. "The fact is," Volcker said "the accounting profession has been hard-pressed to keep up with the growing complexity of business and finance, with its mind-bending complications of abstruse derivatives, seemingly endless varieties of securitizations and multiplying, off-balance-sheet entities. (Continued in the article.)

Title:  Final Accounting: Ambition, Greed and the Fall of Arthur Andersen 
Authors:  Barbara Ley Toffler, Jennifer Reingold
ISBN: 0767913825 
Format: Hardcover, 288pp Pub. 
Date: March 2003 
Publisher: Broadway Books

Book Review from http://www.amazon.com/exec/obidos/tg/stores/detail/-/books/0767913825/reviews/002-8190976-4846465#07679138253200 

Book Description A withering exposé of the unethical practices that triggered the indictment and collapse of the legendary accounting firm.

Arthur Andersen's conviction on obstruction of justice charges related to the Enron debacle spelled the abrupt end of the 88-year-old accounting firm. Until recently, the venerable firm had been regarded as the accounting profession's conscience. In Final Accounting, Barbara Ley Toffler, former Andersen partner-in-charge of Andersen's Ethics & Responsible Business Practices consulting services, reveals that the symptoms of Andersen's fatal disease were evident long before Enron. Drawing on her expertise as a social scientist and her experience as an Andersen insider, Toffler chronicles how a culture of arrogance and greed infected her company and led to enormous lapses in judgment among her peers. Final Accounting exposes the slow deterioration of values that led not only to Enron but also to the earlier financial scandals of other Andersen clients, including Sunbeam and Waste Management, and illustrates the practices that paved the way for the accounting fiascos at WorldCom and other major companies.

Chronicling the inner workings of Andersen at the height of its success, Toffler reveals "the making of an Android," the peculiar process of employee indoctrination into the Andersen culture; how Androids—both accountants and consultants--lived the mantra "keep the client happy"; and how internal infighting and "billing your brains out" rather than quality work became the all-important goals. Toffler was in a position to know when something was wrong. In her earlier role as ethics consultant, she worked with over 60 major companies and was an internationally renowned expert at spotting and correcting ethical lapses. Toffler traces the roots of Andersen's ethical missteps, and shows the gradual decay of a once-proud culture.

Uniquely qualified to discuss the personalities and principles behind one of the greatest shake-ups in United States history, Toffler delivers a chilling report with important ramifications for CEOs and individual investors alike.

From the Back Cover "The sad demise of the once proud and disciplined firm of Arthur Andersen is an object lesson in how 'infectious greed' and conflicts of interest can bring down the best. Final Accounting should be required reading in every business school, beginning with the dean and the faculty that set the tone and culture.” -Paul Volker, former Chairman of the Federal Reserve Board

“This exciting tale chronicles how greed and competitive frenzy destroyed Arthur Andersen--a firm long recognized for independence and integrity. It details a culture that, in the 1990s, led to unethical and anti-social behavior by executives of many of America's most respected companies. The lessons of this book are important for everyone, particularly for a new breed of corporate leaders anxious to restore public confidence.” -Arthur Levitt, Jr., former chairman of the Securities and Exchange Commission

“This may be the most important analysis coming out of the corporate disasters of 2001 and 2002. Barbara Toffler is trained to understand corporate ‘cultures’ and ‘business ethics’ (not an oxymoron). She clearly lays out how a high performance, manically driven and once most respected auditing firm was corrupted by the excesses of consulting and an arrogant culture. One can hope that the leaders of all professional service firms, and indeed all corporate leaders, will read and reflect on the meaning of this book.” -John H. Biggs, Former Chairman and Chief Executive Officer of TIAA CREF

“The book exposes the pervasive hypocrisy that drives many professional service firms to put profits above professionalism. Greed and hubris molded Arthur Andersen into a modern-day corporate junkie ... a monster whose self-destructive behavior resulted in its own demise." -Tom Rodenhauser, founder and president of Consulting Information Services, LLC

"An intriguing tale that adds another important dimension to the now pervasive national corporate governance conversation. -Charles M. Elson, Edgar S. Woolard, Jr., Professor of Corporate Governance, University of Delaware

“You could not ask for a better guide to the fall of Arthur Andersen than an expert on organizational behavior and business ethics who actually worked there. Sympathetic but resolutely objective, Toffler was enough of an insider to see what went on but enough of an outsider to keep her perspective clear. This is a tragic tale of epic proportions that shows that even institutions founded on integrity and transparency will lose everything unless they have internal controls that require everyone in the organization to work together, challenge unethical practices, and commit only to profitability that is sustainable over the long term. One way to begin is by reading this book. –Nell Minow, Editor, The Corporate Library

About the Author Formerly the Partner-in-Charge of Ethics and Responsible Business Practices consulting services for Arthur Andersen, BARBARA LEY TOFFLER was on the faculty of the Harvard Business School and now teaches at Columbia University's Business School. She is considered one of the nation's leading experts on management ethics, and has written extensively on the subject and has consulted to over sixty Fortune 500 companies. She lives in the New York area. Winner of a Deadline Club award for Best Business Reporting, JENNIFER REINGOLD has served as management editor at Business Week and senior writer at Fast Company. She writes for national publications such as The New York Times, Inc and Worth and co-authored the Business Week Guide to the Best Business Schools (McGraw-Hill, 1999).

Also see the review at  http://www.nytimes.com/2003/02/23/business/yourmoney/23VALU.html

The FASB is looking for your advice on whether to dim the bright lines in accounting standards and move to a "principles-based" approach that leaves financial reporting choices much more in the hands of professional judgment of management and their auditors --- http://www.fasb.org/proposals/principles-based_approach.pdf 

The main arguments for principles-based standards are that they will be less complex and will lead to less game playing (such as when firms purchase19.99% of the equity in another company rather than 20% in order to avoid the equity method of accounting under FAS 115 and 124.)  But, in my viewpoint, principles-based standards are a disaster.

Anybody that thinks that principles-based standards will reduce the chances for Enron-like scandals is also willing to vote that there will be total peace on earth without first destroying most of mankind.  Some naive theorists point to international IASB standards before the IASB (formerly IASC) started adding bright lines to newer standards.  But IASB standards tend to avoid controversial issues, and even if there are some newer principles-based standards on controversial issues, such standards will not do much to improve  transparency in financial reporting.  International standards have been a bad joke, because international accounting standards are rarely enforced.  Many major nations like Germany do not even have an infrastructure for enforcing any type of accountancy standards, including their own standards and/or IASB standards.  International standards are selectively followed and avoided at will, and virtually no pressure is brought to bear on corporations to follow all international standards.  In the U.S., pressure is much greater to follow FASB accounting standards, because the U.S. is a litigious society with plaintiff attorneys armed with the bright lines of accounting and auditing standards (although the AICPA has tended to avoid some badly needed bright lines in auditing standards).

Principles-based standards are favored by accounting firms and corporate auditing clients, because such standards will make it much more difficult for investors to sue for damages attributed to misleading financial reporting.  In these troubled times when accounting firms are trying to restore their reputations and corporations are trying to restore confidence among equity investors, each move toward principles-based standards is a step backwards.  This is a time to get tough with auditing and accounting standards.  Unfortunately, hopes of reform of auditing standards in the U.S. were badly dashed by recent evidence that corporations and large accounting firms virtually own the SEC and the AICPA.  I am referring in particular to how obvious it became that the Big 4 firms, with the help of the AICPA leadership, stacked the new Public Company Accounting Oversight Board.   Anybody who believes that SEC Chairman Harvey Pitt is "fiercely independent" is probably also in favor of principles-based standards.  The selection process was most certainly not in the best interest of investors.  Newsweek reported the following on October 24, 2002 --- http://www.msnbc.com/news/826101.asp?0si=- 

SEC Chairman Harvey Pitt was joined by fellow Republicans Cynthia Glassman and Paul Atkins in voting for Webster and the other four board members. Democrats Harvey Goldschmid and Roel Campos voted against Webster. And while the vote was officially for all five accounting board members, Campos added he was voting for all but Webster.

In an unusually rancorous SEC open meeting, Pitt rejected suggestions he had been swayed by the accounting industry to support Webster over Biggs, saying he was “fiercely independent” and “beholden to no one.” But Goldschmid criticized the selection process as inept. “Until this morning, for example, I was not informed as to which 5 individuals would be presented to this commission at this meeting. To my knowledge, none of the individuals have been properly vetted,” he said.

I think Goldschmid's statement is incorrect.  Chairman Pitt, with the aid of corporate lobbyists adamantly opposed to the appointment of John Biggs, carefully vetted the slate of candidates that he (Pitt) carefully selected to inhibit major reforms and bright lines in the best interest of investors.  It was typical smoke and mirror politics in Washington DC there there seemingly was a glimmer of hope for reform that when push came to shove was dashed by powerful lobbyists.

Book Recommendation: 
Title:  Take On the Street: What Wall Street and Corporate America Don't Want You to Know, 
Authors:  Arthur Levitt and Paula Dwyer (Arthor Levitt is the highly controversial former Chairman of the SEC)
Format: Hardcover, 288pp.  This is also available as a MS Reader eBook --- http://search.barnesandnoble.com/booksearch/ISBNinquiry.asp?userid=16UOF6F2PF&isbn=0375422358 
ISBN: 0375421785
Publisher: Pantheon Books
Pub. Date: October  2002
See http://search.barnesandnoble.com/booksearch/isbnInquiry.asp?userid=16UOF6F2PF&isbn=0375421785 

This is Levitt's no-holds-barred memoir of his turbulent tenure as chief overseer of the nation's financial markets. As working Americans poured billions into stocks and mutual funds, corporate America devised increasingly opaque strategies for hoarding most of the proceeds. Levitt reveals their tactics in plain language, then spells out how to intelligently invest in mutual funds and the stock market. With integrity and authority, Levitt gives us a bracing primer on the collapse of the system for overseeing our capital markets, and sage, essential advice on a discipline we often ignore to our peril - how not to lose money. http://www.amazon.com/exec/obidos/ASIN/0375421785/accountingweb 

Internal Watchdogs Must Be More Than Pet Rocks
The first line of defense when an audit client attempts to defraud investors or gets caught up gambling with an organization's resources far beyond the policy guidelines of risk taking, is the internal line of defense commencing with the employees, internal auditors, top management, audit committees, and the boards of directors.  Somewhere along the way, boards of directors and audit committees became pawns of top management.  Top management itself focused more on investments, mergers, and mega-deal making than tending to the store.  Top management also focused on putting the "right" people into place on audit committees and boards of directors.  These were usually people who at best were wimps who saluted the CEO and at worst were knowingly part of the con games.  Recent revelations from Tyco reveal how a board member and a CEO could conspire to bilk investors out of millions and millions of dollars.  The Board of Directors at General Electric agreed to give Jack Welch millions upon millions in perks even after he retired, including lifetime use of corporate jets for pleasure trips and toothpaste and other toiletries.

The most successful watchdogs have been the low end of the feeding chain --- those lower paid clerks and accountants who eventually work grow so sick of the phony accounting taking place that they finally work up enough nerve to blow the whistle.  But by then, as in the case of Enron, their revelations are usually diverted or stonewalled until it becomes too late to protect investors.  For example, when Sherron Watkins blew the whistle on accounting so bad that it could bring down Enron, top management in both Enron and Andersen ran to their lawyers rather than face up to the bad situation and try to do everything possible to correct the bad accounting.

External Auditors Must Be Willing to Lose Clients in Efforts to Maintain Reputation and Professionalism
Auditors at best were merely lost in the complexities of the deal making and at worst they knowingly became part of conspiracies.  Professionalism of service gave way to risk analysis in terms of probabilities of getting caught for bad work and the cost (fines and litigation) versus the bottom line profits.  As consulting opportunities increased, auditors commenced to lose sight of the fundamentals of independence.  The profits were no longer in auditing.  Career success shifted to consultancy in place of the drudgery of substantive testing.  The audit business model itself was not conducive to placing high priced and experienced talent where it was desperately need in audits.  Firms instead placed new college graduates on assignments where they had neither the skills nor the experience to do competent work.  Network computers became complex vehicles in which the auditors only kicked on the tires to check on the internal controls and operating effectiveness.

The SEC Has Never Been and Will Never be Free and Independent of Rich and Powerful Lobbyists
Like virtually all regulatory agencies in Washington, the rich and powerful organizations being regulated manage to use wealth and political influence to control the agencies designed to regulate those rich and powerful organizations.  Agribusiness controls the FDA.  Power companies control the FPC.  Telecommunication giants control the FCC.  What agency gets tough prior to a media scandal that sets elected officials scurrying to put on a show of investigating the failures of the regulating agencies?

The bottom line is that government agencies cannot be relied upon to continuously play fair with the public when they are inside the jaws of the corporations they regulate.

The FASB Continues to be Micro-managed and Bogged Down in Due Process
Although FAS 133 on Accounting for Derivative Financial Instruments and Hedging Activities is the supreme example of FASB encumbered a rather simple goal with 538 paragraphs of technical jargon that virtually nobody understands, there are other FASB standards that are nearly as confusing, inconsistent, and ineffective as FAS 133.  The problem begins with due process in which a simple concept like booking derivatives at fair value and recording changes in that value as earnings gets encumbered with favors to companies to a point where earnings changes are buried on convoluted burial grounds such as the "Other Comprehensive Income" cemetery for cash flow hedges or the "firm commitment" offset for fair value hedges.  In the process, the FASB lost sight of the big picture that allowed Enron to bilk investors with bad accounting rules for "Special Purpose Entities."  In short, the FASB fiddled while investors burned.

Hartgraves and Benston state the following:

After more than 20 years since SPEs appeared on the scene, there remains a confusing, if not convoluted, set of guidelines regarding the consolidation of SPEs.
A.L. Hargraves and G.L. Benston, "The Evolving Accounting Standards for Special Purpose Entities and Consolidations," Accounting Horizons, September 2002, Page 245.

The Public Has Grown Numb to Tabloid Exposures
Enormous tabloid exposures like President Clinton's sexcapades and repeated exposes of audit failures have numbed the world to a point where guilty parties continue on the road to fortune in spite of tarnished images.  For example, most everybody except for Representative John Dingle merely yawned at the media revelations of violations of SEC independence rules for auditors.

Capitalism is probably less threatened today by enormous financial scandals, because individual investors have lost a great deal of power and influence.  Their fortunes are tied up in enormous pension and savings funds that are controlled by a much smaller set of managers and insiders who are less likely to panic and bring down the entire system.  I'm not arguing that the shift in power from millions of individual investors to hundreds of fund managers is necessarily a good thing in general.  However, in the case of enormous financial scandals and plunging stock prices, the large funds held in trust serve as a buffer to panic.  Nor am I claiming that fund managers are not upset over abuses of privilege and power by corporate executives and truly dirty and rotten investment bankers.  In the present crisis, we are seeing some of those powerful fund managers bringing a great deal of pressure upon companies to clean up their accounting systems and their governing boards.

The one thing to be learned from history is that integrity and efficiency of capital markets, like prices themselves, are subject to upward and downward movements along trend lines.  There will be swings upward in integrity followed by drops leading to future scandals and media feeding on the carcasses of dead corporations and accounting firms.

Capitalism would probably never rise again if some alternative economic system ever moved in to bring more prosperity in its wake.  Unfortunately, virtually all the alternatives pale in terms of the progress the Western world has made in eliminating despair, ignorance, poverty, and lethargy among people fortunate enough to live in an economy where the laws of capitalism are enforced.

The two major ingredients of recovery of capital markets at the present time are as follows based upon a long history of corporate and accounting scandals:

1. It is imperative for lawmakers to convince the public that securities laws will be enforced (even if this is not always the case, enforcement should be the rule rather than the exception.)
   
   
2. Genuine progress toward a return to fairness and ethics is imperative for accountants, securities dealers, bankers, investment bankers, and other professionals whose reputations have been dragged through the mud.  Reforms must be effective, and the tone at the top in these professions must be real in contrast to mere lip service and hollow promises.

Opportunities for deceiving auditors are no less today than before Enron imploded and Andersen exploded.  Opportunities for off-balance sheet financing are no less today than two years ago.  Opportunities for managing earnings and inflating reported revenues still abound.  We are no better at reporting intangible assets and liabilities today than we were ten years ago.  As we speak, accountants and lawyers are busy inventing new contracts to circumvent the new rules created because of Enron.   See http://www.trinity.edu/rjensen/FraudConclusion.htm

The new independence rules probably create more problems than they solve.  Increasingly, auditing will be done by machines that audit machines --- the so called auditbots that audit the transactions bots.  The hope was once that consulting and systems opportunities would maintain the attractiveness of accountancy as a profession.  Accountancy must find alternatives other than auditing or it will steadily decrease in attractiveness as a career.  

My conclusion is that we have not learned much overcoming systemic problems in accounting and auditing in the wake of the Enron scandal.  The exploding of Andersen almost overnight did, however,  shake our top CPA leaders who are now bent on restoring confidence in auditors and their attestation professionalism.  Mostly good will come from this, but changes must be more than hype.  Restored confidence will sink even lower in each succeeding wave of scandals and deceptions.

We have added layers of oversight for auditors, but virtually nothing has been done to thwart white-collar crime at its source.  In general, financial statement audits are not performed to detect or thwart white-collar crime.  Going after the auditors is only a very small step against white-collar crime.  The following would be more effective:

• Eliminate cash liquidity in the world economy.  All flows of money should be traced much like debit and credit card settlements can be traced today.  Until money laundering is eliminated, crime trails will always be easy to conceal.
  
  
•  Focus more on cleaning up the professions of security analysis and investment banking.  Most of the legislation has focused on the auditors rather than the source of most of the recent scandals in an industry that is rotten to the core.  See http://www.trinity.edu/rjensen/fraud.htm#Cleland 
  
  
• Make it far more difficult to siphon money with the help and power of U.S. Representatives, Senators, and Executive Branch officers.  This was a ploy used repeatedly by Enron in deregulating energy pricing and in trying to use political influence in tying cooperation with U.S. business firms to U.S. AID payments.  Thus far, I've seen no legislation to stop that from happening repeatedly in future years.  
  
  

• Pass serious legislation to promote and reward whistle blowing.  There has been no such legislation in the past year.  
  
  
• Take the country club atmosphere out of Federal prisons.  Make convicted white collar crime serve unpleasant lock ups for durations proportionate with the amount of damage caused and do no let the culprits like Mike Milken return to a life of luxury after the sentences are served.
  
  
• Make it virtually impossible to flee to places like Switzerland and thumb a nose at U.S. law enforcement.  This is essentially what convicted felon Mark Rich did before buying a pardon from former U.S. President Bill Clinton who pardoned Rich in the dark of night while moving out of the White House.  See http://brian.carnell.com/articles/2001/02/000040.html 
  
  The tone at the top determines the melody!  Stop CEO Rents!