I am saddened by the increasingly more ominous news concerning the Enron situation. It seems to be an embodiment of “Two wrongs don’t make a right.” A good friend is part of the Andersen executive corps (not corpse, I hope). Please pray for him. Undoubtedly, this case will join the ranks of the top-10 all time worst business failures. There have been positive developments from these debacles, though. The “roaring ‘20’s” followed by the “crash of ‘29” produced the SEC and the required financial disclosures that we take for granted today. The McKesson/Robbins case caused confirmation of receivables and observation of inventory to be added to Generally Accepted Auditing Standards. The Equity Funding case spawned the development of EDP-auditing.
Some good should come from this situation, too. For decades accountants have argued about what services could be sold to one client. I have always agreed (with what I was taught at Arthur Andersen & Co. in the 1960’s) that an auditor’s “independence” (together with his analytical skills) is the basis for the value of his “opinion.” “Independence” is the capacity to represent 3rd party (outside the client) interests. Appearance is even more important than fact. Even though I doubt that someone who can be bought for the price of lunch is worth having, multi-million dollar consulting engagements to audit clients do raise questions. In the “old days” big firms protected themselves by assigning personnel to do the audit who didn’t know the consultants. “We” were told to ignore the firm connection and report problems, if there were any. This process worked for decades apparently because “nothing went wrong.” Well, now something has, and the critics (including me) are saying, “I told you so.”
In my opinion, small accounting firms are even bigger offenders on the “independence” issue than big ones. Though the stakes are smaller to the general public, they are no less important to lenders, creditors, absentee owners and employees of these smaller company clients. I believe (and state so in my web site article, “We Sell Alliance”) that accounting firms who become “trusted advisors” for their clients should not do audits for those companies. CPA’s must be told that they will sacrifice their “independence” if they assume that “trusted advisor” roll. Until bankers, especially, in this environment are willing to demand a change, though, there will probably be more “accidents looking for places to happen.”