The Death of the Accounting Industry?
Arthur Andersen would roll over in his grave if he were aware of the accounting techniques that his company employed to help Enron executives conceal the company's staggering losses. And he would most certainly begin to "spin" if he knew that his firm certified these financial statements that have cost so many so much.
How did a company like Arthur Andersen, that employed many of the best and brightest accountants in the industry, miss the boat in regard to its certification of these obviously fraudulent financial statements for Enron? Could it be attributed to the large fees that Arthur Andersen was being paid? An article written by Belverd E. Needles, Jr. of DePaul University and Marian Powers of Northwestern University, explains that though Enron's accounting activities complied with Generally Accepted Accounting Principles, its reports did not represent an accurate view of the company and its assets.
The article states that there are three criteria to presenting non-fraudulent financial statements: Technical Compliance, Economic Substance and Full Disclosure and Transparency. According to the article, "Enron did not meet the second criterion because its recording of transactions did not reflect the economic substance of the events that occurred." Enron recorded transactions in such a way that regardless of the actual outcome on the statements it would appear as a profitable exchange. "Enron did not meet the third criterion because the notes related to the SPEs [special-purpose entities] in Enron's financial statements were written so obtusely that they were not transparent to the reader," it said. There were hundreds of these SPEs that Enron used to hide the losses it was incurring and there was very little disclosure as to their purpose and use. There is no question that the executives of Enron committed fraudulent acts and the accountants at Arthur Andersen aided in doing so.
What factors allowed this to happen? Could it be that the role of the traditional auditor has changed into that of a consultant whose fee becomes dependent on the client's ability to sell its stock at a higher price? Once the accountants started down this path as consultants, they become so enamored with making money that the corporate greed of Enron executives consumed them. This greed coupled with the risk of exposure to the public and the SEC propagated more aggressive accounting and more deception that bound the directors of the company in a partnership of necessity, whereas turning back would be the downfall of all involved.
Has the line between aggressive accounting and fraud been blurred so far that there is no truth other than what these individuals create or is it possible to reconcile the state of the industry with a future of accurate and honest reporting? This question and many others must be answered or the accounting industry will die a slow death as the mistrust continues to grow and certification begins to lose its value to the American investor. Aside from the thousands of people who collectively lost millions of dollars, this behavior has left a bruise on the accounting industry that will not soon fade and those consequences may have permanently damaged the future of the industry. The number of students in college entering the profession continues to decline and if the auditing services they will provide continues to lose value, the demand for those who do choose accounting will continue to shrink.
One possible remedy to this problem is to prevent auditors from assuming the role of consultant for publicly traded companies. If these relationships are allowed to continue there will be no preventing the creation of future "Enrons" and consequently the death of the accounting industry.
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