Depreciated
Did You Hear the One
About the Accountant?
It’s Not Very Funny
How Decade of Greed Undid The Proud Respectability Of a Very Old Profession


By IANTHE JEANNE Di GAN
Stuff Reporter of THE W.XLL STm-F:T .JOT’RNAL

During 25 years at Ernst & Young’s office in Buffalo, N.Y., auditor C. Anthony Rider put his imprimatur on thousands of pristine financial statements. But that wasn t enough.

A few years ago, Mr. Rider says, Ernst & Young set a quota for him: $3 million more a year in revenue from clients whose
books he policed. He joined more than 2,000 fellow partners in rigorous training on how to sell consulting services on law, insurance, financial planning, mergers, technology, partnerships — “anything under the sun,” the 50-year-old Accountant says.

“It was like telling a reporter to sell subscriptions,” he says. “I couldn’t do it, if I knew my clients didn’t really need it.”
In 1999, his $300,000 salary was cut 10%. Then, in early 2000, Mr. Rider was fired. I
I was never told explicitly why, he says.

Ernst & Young won’t comment on Mr. Rider’s case. “Our partners’ compensation is based on how well the firm does in any given year and how well the partners serve their individual clients within specialty areas,” says spokesman les Zuke.

Mr. Rider’s experience is essential to understanding how accountant morphed from “watchdogs to lapdogs,” as the evolution was described during recent congressional hearings on the role of Arthur Andersen in the failure of Enron Corp. Yesterday, Arthur Andersen was bracing for the government to file criminal obstruction charges against it today as potential suitors’ interest in a merger waned.

Long before Andersen’s document-shredding became headline news, accountants, the pinstriped paragons of rectitude and respectability, found themselves coming under pressure from many directions to alter their centuries-old practices as their milieu changed. Over the past two decades, innovations in computer technology rendered many of the old-fashioned auditor’s functions obsolete, prodding accountants to find other ways to bring in revenue. Companies’ desire to produce ever-rosier results for an ever-larger and savvier shareholding public compelled accountants to find ways to put the best possible spin on clients’ financial reports.

And then there was simple greed. The industry had already shown it was susceptible. In the early 1970s, a prominent accountant was linked to the Watergate scandal. The next decade, the savings-and-loan crisis raised questions about how accountants could have let things get so bad.

In recent years, partners’ pay largely determined by hourly
    billing rates, fell way behind that of accountants’ investment-banking brethren, enriched by the rise of the stock-market culture of the ‘8Os and ‘90s. Hiring consultants and having people such as Mr. Rider sell their services to audit clients was a way to narrow the gap.

It did, and it didn’t. The Big Five accounting firms — PricewaterhouseCoopers, Deloitte & Touche, Ernst & Young. Arthur Andersen and KPMG—collectively doubled their revenue in less than a decade, to $26.1 billion last year, according to Public Accounting Report newsletter. But most of that increase derived from the consulting services and went to consultants and hard-sell accountants, not to the likes of Mr. Rider.

And ultimately, as the Enron debacle became news to vie with war and recession, the ancient profession sacrificed the public confidence that underpinned its reputation. Now, accountants wallow at the bottom among professions in public-opinion polls they topped 20 years ago. The business is drawing fewer top students, more government scrutiny and bad jokes. “We just got a message from Saddam Hussein,” President George W. Bush chortled recently. “The good news is that he’s willing to have his nuclear, biological, and chemical weapons counted. The bad news is he wants Arthur Andersen to do it.”

Jokes aside, the fate of a crucial component of capitalism is at stake. No company can go public without the blessing of an auditor. Half of American households are
invested in stocks and often scrutinizing the books of public companies. That the conscience of capitalism could fall into such ill repute strikes some as a broader symbol of declining ethics. “This is an outgrowth of the 1960s anything-goes attitude,” says 72-year-old Eugene Flegm, retired general auditor of General Motors Corp. “Add to that free-wheeling spirit all the greed, and you have a recipe for disaster.”

The industry was formed as a vessel of trust, originating more than 10,000 years ago with stone counters in Jericho. In ancient Sumerian cities of the land that is now Iraq, bookkeepers documented wealth by pressing the ends of sticks into damp clay tablets that hardened into permanent records.

“What would Luca Pacioli think?” asks Larry Crumbley, an accounting professor at Louisiana State University in Baton Rouge. Mr. Crumbley is referring to a Franciscan friar considered the father of accounting for his 1494 “Summa de Arithmetica, Geometria, Proportioni et Proportionalita” (“Everything About Arithmetic, Geometry and Proportion”). The treatise described double-entry bookkeeping—that for every credit entered into a ledger there must be a debit, a concept created by Florentine merchants and hailed by Goethe as “one of the most beautiful discoveries of the human spirit.”

Three traits shared by successful merchants, Mr. Pacioli wrote, were access to cash, a constantly updated accounting system and a good bookkeeper. His contemporary Christopher Columbus apparently knew that: On his voyage to the New World, he took a royal accountant to track his “swindle sheet when he started to figure the cost of gold and spices he would accumulate,” according to Alistair Cooke’s 1973 book “America.”

The craft changed little until the industrial revolution, when accounting advanced from pure record keeping to a means of survival. Josiah Wedgwood, Charles Darwin’s grandfather, kept his British pottery factory alive during the depression of 1772 through the innovation of cost accounting—calculating the costs of materials and labor for each step of the manufacturing process, and then setting prices to ensure enough margin to remain viable.

Across the Atlantic

By the mid- 19th century, “accompants,” as accountants were known, were flourishing in Britain. The Cooper brothers, whose name lives on in PriceWaterhouse Coopers, ran a Dickensian operation of screeching supervisors lording over clerks toiling long hours for scant pay. The industry followed European investments to the New World, and in 1887, 31 accountants formed the predecessor to the American Institute of Certified Public Accountants. A decade later, they created a standardized test, bestowing on a man named Frank Broaker the honor of becoming the first CPA.

In the early 1930s, after the financial scandals of the ‘20s and the corporate failures of the Great Depression, the industry sought to formalize consistency, transparency and trust in the profession. Already, in 1922, AICPA had banned its members from advertising, saying it wasn’t dignified. The group also forbade accountants to poach each other’s clients. The profession got its own governing board and a manual called Generally Accepted Accounting Practices—GAAP for short. The profession also
    won the responsibility for auditing public companies, though not without an intense congressional debate.

“Who audits you?” Rep. Alben Barkley of Kentucky asked Cal. Arthur Carter, managing partner of Deloitte predecessor
Haskins & Sells, in congressional hearings in 1933.

“Our conscience,” Col. Carter replied. Accountants had become moral guardians—an image reinforced in the public’s imagination in the 1930s, when Price Waterhouse was enlisted by the Academy of Motion Picture Arts and Sciences to count ballots for the Academy Awards.

“It was a gentleman’s profession,” says Rick Connor, managing partner of KPMG’s Denver office. “Full-time salespeople were unheard of.” In lieu of the hard sell, accountants networked at the country club and sat on the boards of nonprofit organizations and chambers of commerce.

Simpler Time

Recruiting was relatively simple. MBA programs had yet to blossom, so students seeking a business career often chose to seek accounting degrees. Accountants mainly scrutinized whether corporations were fairly representing their financial condition— a much simpler affair then, focusing on the assets and liabilities of the balance sheet. They also prepared tax returns.

“On April 15, everybody would have huge parties everywhere,” Mr. Flegm remembers. “It was all male, and we would stay out until 1 in the morning.”

Those who didn’t make it to partner moved to smaller firms or corporations. Generally, the top paid partner made no more than four times that of the lowest paid. And a partner stayed till retirement.

At the Big Eight firms—reduced to the Big Five through mergers in the 1990s—partners met for hours to discuss new auditing techniques and analyze case studies.

“Those were the golden years,” Mr. Rider says. He joined Ernst & Young—then Arthur Young—in 1973 for $11,000 a year, after graduating from the top of his class at a small Buffalo college. Eleven years later, he was made a partner.

In the 1970s, the federal government, amid questions about some companies’ accounting procedures, set up the Financial Accounting Standards Board to oversee accountants. But it soon also removed a lot of the restrictions that had prevented big firms from competing with each other. In the late 1970s, the Federal Trade Commission, concerned about anticompetitive practices, began pushing AICPA to allow accountants to advertise. By 1990, the group had lifted most restrictions on ads.

The business became cutthroat, the rules more complex, and scandals more frequent. During the Watergate hearings, accountants were grilled on why they let their clients make illegal contributions to the Nixon re-election campaign. A former head of AICPA, Maurice Stans, was accused of shuttling money himself from donors to the campaign fund. Mr. Stans was ultimately exonerated, “but the decline was set in motion,” Mr. Flegm says.

As the 1980s dawned, globalization and deregulation brought new challenges. To raise huge amounts of money, companies turned increasingly away from traditional bank loans and toward more complex, and often riskier, forms of financing. Executive pay became tied to performance, so clients had a personal stake in making sure their auditors squeezed out the best results they could.

“Auditors got an invitation to start playing with numbers,” says Baruch Lev, an accounting professor at New York University’s Stern School of Business. “Investors didn’t care about the balance sheet,” Mr. Lev adds. “They wanted profits and potential. This started the crazy earnings game.

The reliability of audited financial statements began to decline. According to an analysis by NYU’s Stern School and Financial Executives International, 158 companies restated earnings last year—triple the
number in the mid-1990s and compared with just three in 1981.

The symbolic final curtain came down on the old guard in 1985, when a Price Waterhouse partner became the last accountant to put in an appearance on stage at the Academy Awards—appearing in a skit with Robin Williams. Since then, the partners have continued to show up and mingle with the stellar audience, but they remain backstage.

In the late ‘80s, the savings-and-loan debacle prompted hundreds of lawsuits against the accountants for the failed institutions. In the early 1990s, the big firms paid out $1 billion to the government in penalties and fines.

In the wake of that, the big firms formed a coalition and began channeling more money than ever to Washington. According to the Center for Responsive Politics, the Big Five and the AICPA donated nearly $39 million through individuals, political action committees and soft-money contributions
from 1989 through 2001. And, with the help of -Harvey Pitt, now chairman of the Securities
and Exchange Commission, the group fought for the Private Securities Litigation
Reform Act, a 1995 measure that made it -more difficult for accountants to get sued in
cases of their clients’ malfeasance.

At the same time, the Big Five discovered consulting. “Accountants for years were seeing investment bankers getting large transaction-based fees,” Mr. Rider says. “They would say, ‘We’re smarter than those guys.’

Already, computers were making auditing services less valuable, so accounting firms began developing new sources of revenue. “Accounting firms started discounting their audit fees in exchange for consulting business,” says W. Steve Albrecht, associate dean at the Marriott School of Management at Brigham Young University.

Accounting became secondary to consulting. In 1989, consulting accounted for 21.6% of the big firms’ revenue; it now accounts for more than 40%. Arthur Andersen served as both consultant and auditor to Enron, booking $27 million in non-audit fees in 2000 and $25 million in audit fees.

Outsiders were brought in as consulting partners, sparking personality clashes. Pay differentials spawned; some partners ended up making 20 tines more than others. “We
have firms we work with where some partners are earning $3 million and others are making $90,000,” says Allan Koltin, a Chicago consultant to accounting firms.

Tougher Requirements

Salaries for new auditors grew slowly, turning away new talent. Others were put off after the AICPA, addressing the new complexities of the business, recommended that states require 150 semester hours—up from 120—for CPA training, making it more expensive and time consuming for students to earn an accounting degree. About 40 states have adopted the rule.

Mr. Rider says that after Ernst & Young set sales goals for partners and put them through sales training in 1995, he spent one-third of his time on ‘practice development.” “I sold professional services, increased my auditing revenues, even did some off-balance sheet partnerships,” he says. Once, he says, a client barked at him: “Are you my auditor or a salesperson?”

In the 1990s, many companies began out-sourcing their internal auditing to the big accounting firms — typically, the same firm they paid as external auditor. Mr. Rider says he resisted pushing this service at larger companies because he believed it made external auditors more lax. “If this work is being done by the same company for a flat fee,” he says, “they might try to cut costs rather than duplicating the efforts.”

New hires were sent through more marketing training than auditing courses. “I had to teach them on the job,” says Mr. Rider, who now works as chief financial officer for an aerospace company he used to audit. “This is our future army of auditors.”

In 1999, he says, his “revenue team” fell “woefully short” of its goal. His salary was cut, and in February 2000, he was dismissed. “I liked my clients, I liked what I did. I was a big shot in the local community—a seasoned partner at a top accounting firm,” he says. “The person who fired me, asked me, ‘you got any opportunities? Have you been looking around?’ I said, ‘Of course not.’ Why should I have? I looked at this as a vocation.”

Enjoy!

Abdoulie Cole

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