Ken,

Beth suggested that I forward a copy of this article to you.  I've highlighted some relevant points for your convenience.

Regards,
Billy

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ACCOUNTING IN CRISIS 
One Plus One Makes What? 
The accounting profession had a credibility problem before Enron. Now it has a crisis. 
FORTUNE
Monday, January 7, 2002 
Where were the auditors? People ask that question after every corporate collapse, and lately they've been asking it with disturbing frequency. At Waste Management, Sunbeam, Rite Aid, Xerox, and Lucent, major accounting firms either missed or ignored serious problems. The number of public companies that have corrected or restated earnings since 1998 has doubled to 233, according to a study by Big Five accounting firm Arthur Andersen. Now, following the stunning bankruptcy of Andersen's own client Enron, that question--where were the auditors?--has become a deafening refrain. "I believe that there is a crisis of confidence in my profession," Andersen CEO Joseph Berardino told a congressional committee investigating Enron's collapse in mid-December. "Real change will be required to regain the public trust." 
The full story of the Enron debacle--and what Andersen did or did not do in its audit--will take months to emerge. In the meantime, no one disagrees with Berardino's diagnosis that there's a crisis in accounting--even if his sudden emphasis on industrywide reform springs from a desire to deflect attention from Andersen's own culpability. But the kind of "real change" required is a matter of substantial debate. The government gave the franchise of auditing public companies' financial statements to the accounting industry after the 1929 stock market crash. In the decades since, the accountants have adroitly avoided significant government regulation by arguing that they can police themselves. Now, post-Enron, they're doing it again. The Big Five CEOs issued a rare joint statement outlining how they intend to strengthen financial reporting and auditing standards. "Self-regulation is right for investors, the profession, and the financial markets," the release concludes. 
But is it? Accounting's main self-regulatory body, the Public Oversight Board, is a monument to the profession's failures. The POB was created in the late 1970s, when Congress held hearings on a string of audit failures at public companies that had--much like the recent rash--shaken confidence in the major auditing firms. The POB, which has no enforcement power, investigates alleged audit failures and oversees a triennial review process in which the major accounting firms examine one another's procedures. And yet problems persist; arguably, they have grown more acute. "Is accounting self-regulation working? On the face of it, it is not," says Representative John Dingell, the powerful Michigan Democrat who has long sparred with the accounting profession. 
In their defense, the auditors note that current accounting methods, many of which were designed 70 years ago, are difficult to apply to today's complex financial transactions. And there is no way, they insist, to prevent sophisticated fraud. The American Institute of Certified Public Accountants (AICPA), the industry's professional association, points out that accountants examine the books of more than 15,000 public companies every year; they are accused of errors in just 0.1% of those audits. But oh, the price of those few failures. Lynn Turner, former chief accountant of the Securities and Exchange Commission, estimates that investors have lost more than $100 billion because of financial fraud and the accompanying earnings restatements since 1995. 
Perhaps the most glaring example of self-regulation's deficiency has been accountants' unwillingness to deal with conflicts of interest. Over the years, the major auditing firms have transformed themselves into "professional services" companies that derive an increasing portion of revenues and profits from consulting: selling computer systems, advising clients on tax shelters, and evaluating their business strategies. In 1999, according to the SEC, half of the Big Five's revenues came from consulting fees, vs. 13% in 1981. 
Auditing, meanwhile, has become a commodity. Firms have even been accused of using it as a loss leader, a way of getting in the door at a company to sell more-profitable consulting contracts. "Audit work is a marvelous marketing tool," says Lou Lowenstein, a professor emeritus of finance and law at Columbia University. "You are already there doing the audit. You say their internal controls are no good. Well, who are they going to call to fix it?" But this requires a firm to work for the public (auditing) and management (consulting). "You cannot serve them both," says former SEC commissioner Bevis Longstreth. 
This conflict may have played a role at Enron. Andersen received $25 million in auditing fees from Enron last year. That's money Andersen was paid both as Enron's outside auditor, certifying its financial statements, and as its internal auditor, making sure Enron had the right systems to keep its books and working to detect fraud and irregularities. This double duty alone raised a serious potential for conflict. Besides $25 million in accounting fees, Andersen was paid $23 million for consulting services. "If you are auditing your own creations, it is very difficult to criticize them," says Robert Willens, a Lehman Brothers tax expert who disapproves of the accounting profession's recent move into selling aggressive tax shelters. Andersen has not revealed the details of its work on Enron's highly controversial off-balance-sheet transactions, but the accounting firms have never believed consulting fees compromise their objectivity. "They have militantly refused to ever acknowledge the possibility of a problem," Longstreth says.