Unaccountable: how the accounting profession forfeited a public trust

Unaccountable: how the accounting profession forfeited a public trust

Mike Brewster

John Wiley & Sons, Hoboken, New Jersey

2003, 328 pages

In the corporate world, the past three years or so have witnessed the emergence of a strong international focus on corporate governance.

The several drivers of this concentration include the following: (1) certain dramatic corporate collapses in the US, such as Enron and WorldCom, and in other countries, such as HIH in Australia; (2) audit failure, most notably resulting in the demise of Arthur Andersen, and (3) the frequent reporting in the press, especially in the US, of instances of accounting irregularities found by corporate regulators, most notably by the US Securities and Exchange Commission (SEC).

The accounting profession was indeed heavily implicated in the corporate and audit scandals of the early 200Os. In the aftermath of upheaval, professional accountants are striving to deal effectively with an ever-growing mix of new rules on corporate governance, audit independence and financial reporting, among other prescriptions. The accounting profession, in effect, is being driven into a "compliance" era which, hopefully for the profession itself, will not result in it being described as presently in a twilight zone by future accounting historians. This "medicine" is being taken by a profession which, according to Mike Brewster, "forfeited a public trust". That is indeed a serious matter for any profession, especially when that reputation has been earned over many decades and centuries.

Brewster takes an historical perspective in seeking to explain how the accounting profession lost its perspective with costly reputational consequences. He sees little difference, if any, between the accounting profession in the US and the worldwide accounting profession. While a non-accounting author, Brewster writes with the benefit of experience in the accounting profession. He is a graduate of the Columbia University's Graduate School of Journalism and spent seven years as the communications director of KPMG. His interesting and easily read book is based on a range of sources, including approximately 45 interviews conducted between August and December 2002, personal experiences in "the industry" (that is, the accounting profession) as well as certain primary sources and some secondary sources. The short bibliography on page 315 is incomplete based on items found in the endnotes.

The book features 10 chapters which follow an introduction entitled "My Introduction to Accounting". In the introduction, Brewster provides two quotations for comparison purposes which are intended to portray differences in the way Price Waterhouse operated in 1909 and in 1993. In December 1909, George May, the firm's legendary founder, wrote the following in an internal memo to all of the firm's offices in the US (p.6):

The rate of client defalcations [cases of fraud] is unacceptable and review of inventory and vouchers by Price Waterhouse auditors is perfunctory and insufficient. This is bound in the long run to lead to an omission to discover some fraud which could have been discovered; or to the loss of credit for that discovery, which might have followed from the observance of the above precautions.

On the other hand, the following text was taken from a Price Waterhouse New York office weekly newsletter, issued in 1993, regarding the firm's audit of AlliedSignal (p.6; also see p. 177):

[Our] five managers took on the challenging assignment with tremendous enthusiasm. Their observations and recommendations went far beyond management's expectations. The results of their work resulted in immediate direct savings for AlliedSignal and will enhance the company's competitive position going forward. Their work led directly to an additional consulting project in another automotive sector division and has enhanced and deepened our relationship throughout the organization. In addition, we have been asked to expand this approach within AlliedSignal as well as to assist in training the internal audit department in the process.

These selected quotations elucidate a shift from an emphasis on the conduct of the audit itself to a concentration on business development during the audit.

In the introduction, Brewster also depicts a bias towards the on-going conduct of public audits by private accounting firms on stating: "Congress [in the US in the early 1930s], in fact, foolishly considered barring audits by private firms and, instead, hiring its own corps of government auditors" (p.9). This reader was left wondering whether the loss of public trust that Brewster was seeking to illuminate would have even been topical had Congress made a vastly different decision at that time. This section also features a quotation of Steve Zeff, "an eminent accounting historian" (p. 14), which indeed he is, on the notion of "client service". Zeff, who was presumably one of the study's 45 or so unidentified interviewees, was quoted as stating: "But what does that [client service] mean when these firms say that they are proud of the service they provide their clients? It means they are advocating for them to the point where the auditors are not independent anymore" (p. 14).

Chapter 1 (The First Accountants) deals with the early accountants and addresses, among other things, "ancient" accounting with reference to tokens and knotted cords, Luca Paciolo's famous 1494 publication which illustrated doubleentry bookkeeping, as well as accounting by the first joint stock corporations and accounting in the colonies. Chapter 2 (The Birth of an American Profession) conveniently marks the advent of the American accounting profession as taking effect in 1897 on the adoption of the CPA designation by the New York State Legislature despite the literature which portrays the profession as existing well before the formation of professional accounting associations which, even in the US, preceded the timing of the recognition of the CPA qualification. Chapter 3 (Accountants Earn a Public Trust) fondly recalls the founders or early participants in the American profession such as George May, Arthur Andersen, Robert Montgomery and Arthur Bowman who, among others, "created the public trust that has today been squandered" (p. 69).

Chapter 4 (The Quest for Growth) portrays a profession on the rise during the 1950s and 1960s with the expansion of the US economy and the country's emergence as "the world's greatest industrial power" (p. 100). This era is identified as the "dawn of consulting" while the prominent role of Arthur Andersen in this movement is addressed. Chapter 5 (Cracks in the Faade) explores the 197Os slowdown in the US brought about by "inflation and stagflation" (p. 130) and an emerging trend for professional accountants to face lawsuits, especially in view of "their hefty insurance coverage" (p. 130). Price competition between the major accounting firms also intensified from the 1970s. Chapter 6 (The End of the Audit) continues to emphasise the ever-increasing importance of consulting services for major accounting firms. Accounting firms became masterful at using the audit for spotting business opportunities and in leveraging the audit relationship to add value to clients through the performance of often lucrative consulting services work. As the share of fees from consulting work began to exceed the fees derived from audit work, the consultants intensified their fight for control over the firms. Audit price competition also led to a reduction in the time devoted to earn increasingly skimpy audit fees.

Chapter 7 (The Fight of His Life) examines the work of Arthur Levitt, as former chairman of the SEC, in seeking to re-direct the main focus of the major accounting firms onto the provision of independent auditing services. Levitt had become concerned at prominent airport lounge advertisements of the major accounting firms which, as "multiservice conglomerates" (p. 195), did not say "anything about auditing" (p. 188). Chapter 8 (Enron and the Fall of Andersen) addresses the collapse of Enron and the demise of Arthur Andersen. Much has already been written by others on these related debacles. Chapter 9 (Accounting 101) deals with the aftermath of the calamities and, among other things, discusses the demise of WorldCom and the Sarbanes-Oxley machinations. The crystal ball is adopted in the final chapter, Chapter 10 (The Future of Accounting), which should indeed be read by tomorrow's accounting historians.

This contribution draws very little indeed on the accounting history literature itself. It also appears to be written without any reference to the literature on the sociology of the professions or to the literature on critical accounting. Apart from the insights that were gleaned by Brewster in interviews, only a small number of authoritative works seem to constitute the basis of the author's understanding of the history of accounting. The apparent "classics" that were drawn upon are identified as follows: Chatfield and Vangermeersch (1996), The History of Accounting: An International Encyclopaedia and Previts and Merino (1998), A History of Accountancy in the United States: The Cultural Significance of Accounting. Other references include official-style histories of accounting associations and firms, including the following: May (1936), Twenty-Five Years of Accounting Responsibility, 1911-1936; Olson (1982), The Accounting Profession, Years of Trial: 1969-1980 and Behind the Figures: Addresses and Articles by Arthur Andersen, 1913-1941 that was self-published in 1970.

Brewster tells an interesting story of what happens when people do not perform their main job properly. The book does not reflect extensive research or wide investigation and yet it is likely to be more widely read than any single work on accounting history that is presently available. Perhaps a broader question has yet to be properly addressed. Does extensive research and wide investigation by auditors, accounting historians and other investigators provide adequate commercial returns?

AUTHOR_AFFILIATION

Garry D. Carnegie

Melbourne University Private