Cry for accounting reforms not new

Bloomberg News Service

NEW YORK — The Senate subcommittee pulled no punches when it wrote about accountants.

Former Arthur Andersen auditor David Duncan, center, flanked by his attorneys, Robert Giuffra, left, and Vince DiBlasi, was sworn in last month at a House oversight and investigations subcommittee hearing on Enron. Duncan invoked his Fifth Amendment privilege to avoid saying anything that could lead to his own prosecution. Advertiser library photo • Jan. 24, 2002

The words weren't written about Enron Corp.'s bankruptcy, the largest in U.S. history, or about the role of the energy trader's accountant, Arthur Andersen LLP. They were penned in 1976, after accounting failures at companies including Penn Central, then the biggest bankruptcy on record.

In the 1,760-page report, the committee, chaired by Montana Democrat Lee Metcalf, recommended the federal government set accounting and auditing standards, bar auditors from consulting for clients and force companies to rotate auditors every three years. None of the measures was adopted.

Now comes Enron, and some lawmakers and former regulators are making similar proposals. Democrats, including Sen. Jon Corzine of New Jersey and Rep. Edward Markey of Massachusetts, are pushing for legislation to prohibit firms from consulting for their auditing clients.

Former Securities and Exchange Commission Chairman Arthur Levitt has said Congress should create an independent oversight agency with subpoena power.

Although the accounting industry has yet to put its lobbying might to work, some political analysts and consumer advocates say it's only a matter of time.

"The accounting industry has successfully quashed every effort to subject themselves to rigorous oversight," said Barbara Roper, director of investor protection at the Consumer Federation of America. "It doesn't pay to bet against them."

The five big accountants have spent between $6.7 million and $8.5 million on lobbying fees each year since 1997, according to the Center for Responsive Politics in Washington.

The accounting industry gave $14.6 million to federal candidates in the last election, according to the center. It was led by Ernst & Young LLP at almost $2.6 million, Deloitte & Touche LLP at almost $1.9 million and PricewaterhouseCoopers at about $1.8 million. So far, the industry has contributed about $3.6 million toward congressional elections in November.

Deloitte & Touche joined the other four biggest accounting firms in taking steps to try to show that new legislation isn't necessary, analysts said.

Deloitte said it will no longer do consulting work for companies it audits; Arthur Andersen said it will stop doing technology consulting and internal audits for auditing clients. PricewaterhouseCoopers LLC said last week it will sell its consulting business in an initial public offering. KPMG LLP and Ernst & Young said they also will curb some of their consulting businesses, although they have yet to provide details.

"Perhaps they think by sacrificing this, they will avoid something more stringent," said Baruch Lev, a professor of accounting and finance at New York University's business school.

The first intense criticism of the accounting industry from lawmakers came in the 1970s after a number of well-publicized bankruptcies and frauds led them to question whether auditors were doing their job.

In 1975, the SEC issued an enforcement action against Peat Marwick (now part of KPMG), demanding that it take on no new clients for six months because it had failed to uncover fraud at five companies since 1970. It was the first time the commission had censured an entire firm, and it was a signal to lawmakers that the industry needed regulation.

The eight biggest accounting firms were then making about 11 percent of their revenue from consulting. Perhaps Peat Marwick would have uncovered the false revenue at one of Penn Central's subsidiaries if it had not received $1 million in consulting fees, Metcalf and some of his colleagues said.

Still, the industry won out.

The accountants persuaded lawmakers they could regulate themselves, and the American Institute of Certified Public Accountants, a trade group that represents the industry, created the Public Oversight Board in 1978. Its sole purpose was to ensure that firms conducted high-quality audits.

To that end, the board instigated peer reviews, in which one firm would check up on how another did its work.

U.S. Rep. Henry Waxman, D-Calif., speaking before a Senate committee in 1978, called the board "toothless" — peer reviews were voluntary (they are now mandatory), and the five-member board was financed by the industry group. The board has never given a critical review of an audit.

The next attack on accounting firms came at the beginning of this decade, led by Levitt, then SEC chairman. Levitt said he was alarmed that in 1999, the four biggest firms were making between 40 percent and 52 percent of their net revenue from consulting.

He proposed prohibiting firms from offering technology consulting to their auditing clients. Levitt's rules also would have barred firms from conducting internal audits, designed to prepare financial statements, and then auditing those financial statements for public distribution.

Three of the five biggest accounting firms, Arthur Andersen, KPMG and Deloitte & Touche, joined up with the AICPA to lobby against the plan and enlisted sympathetic lawmakers to voice their disapproval.

Levitt got dozens of letters from lawmakers protesting the proposal. U.S. Rep. Billy Tauzin, R-La., now leading one of the House investigations into Enron's collapse, told Levitt that if the rules went through, he and other members of Congress would vote to cut the commission's budget.

Tauzin's threat worked.

The SEC's final rules stipulated only that companies had to disclose all fees paid to accountants, and that they could not conduct all of the internal audit if they were also the external auditor.