[corp-focus] Unaccountable Accounting

[Robert Weissman]

Unaccountable Accounting
By Russell Mokhiber and Robert Weissman

Ralph Estes' voice is not being heard in Congress.

That probably says more about Congress than it says about Ralph Estes.

At last count, 11 Congressional committees were up and running,
investigating the collapse of Enron and the role of the auditors.

A study released last week by the Center for Responsive Politics found
that of the 248 Senators and House members serving on those 11
committees, 212 have received campaign contributions from Enron or its
accounting firm, Arthur Andersen.

Under any other conditions, Estes might be a considered a top candidate
to aid Congressional investigators.

He used to be an auditor at Arthur Andersen.

He was president of Accountants for the Public Interest.

He has written a number of pathbreaking books, including Auditor's
Report and Investor Behavior, Corporate Social Accounting, Accounting
and Society, and most recently, Tyranny of the Bottom Line: Why
Corporations Make Good People Do Bad Things.

He was on a short list to be chair of the Securities and Exchange
Commission (SEC), but Arthur Levitt had raised $1 million for the
Democrats, and Estes had raised zero for the Democrats, so Arthur Levitt
became chair of the SEC.

But even Arthur Levitt, with all his institutional credentials, couldn't
overcome the accounting industry's money and get through a mild reform
that would have prohibited accounting firms from raking in millions in
consultancy fees from audited corporate clients.

Levitt got kicked in the teeth by a bi-partisan group of members of
Congress -- many of whom are now posturing for cameras, using Enron and
Arthur Andersen as a whipping boy for political advantage.

But Levitt's was only a 10 percent solution to a structural problem that
forces good people to do bad things.

If Congress were serious, they would consider the 100 percent solution
being offered by Estes.

Estes says that Congress should prohibit corporations from hiring
auditors.

If a corporation needs an audit, it would go to a newly created
Corporate Accountability Commission, an independent agency of the U.S.
government, which would assign it an auditor.  The company would pay its
fee to the Commission, which would pay the auditor.

The government would hire and fire the auditors.

Bank examiners, insurance examiners and other professionals are
independent of those they audit or examine. Why not financial auditors?

"Even State Farm knows not to let me choose the damage assessor," Estes
says.

In addition to hiring the auditors, the Commission would regulate the
industry.

We asked Estes his thoughts on the self-regulation proposal put forth
last week by SEC chairman Harvey Pitt.

"Pitt reminds me of a mafia lawyer who is appointed Attorney General and
is called upon to propose laws constraining the mafia," Estes says. "You
can count on what comes out being detailed, involving a lot of verbiage
and not harming his friends at all. The applicability of this analogy is
evident when we see the AICPA [the American Institute of Certified
Public Accountants] effectively saying -- yeah Harvey, right on, we like
that one. Pitt was an attorney for each of the Big Five accounting firms
and for the AICPA. What he is proposing is a modest tightening of the
in-house industry self-regulation."

Many of the top financial executives of Enron were former Arthur
Andersen employees. And this movement from accounting industry to
audited client is rampant within the industry.

Estes says that if you audit a client, you shouldn't be able to go to
work for them for at least five years.

"This may sound tough, but I don't think it's unreasonable for potential
recruits to public accounting to recognize that moving to a client is
simply not an available option," he says. "Auditors should proudly view
their work as professional and important, and be prepared to spend their
entire careers in this work."

Reflecting the dictums that "you manage what you measure" and "if you
don't count it, it doesn't count," the Commission would also require
corporations to incorporate into their accounting system data on
intangibles and externalities.

For example, when workers were injured, you wouldn't merely report the
cost of the in-house nurse and the insurance, but you would also report
the cost to the worker of loss of the leg, offset by any benefits you
might provide to the worker.

How would this new accounting system affect the bottom line?  Instead of
just one bottom line for financial investors, there would be many
"bottom lines" -- for employees, customers, financial investors,
communities, and the greater society. (For more on Estes' proposal, see
www.stakeholderalliance.org.)

Estes hit the nail on the head when he titled his most recent book
Tyranny of the Bottom Line: Why Corporations Make Good People Do Bad
Things.

Today we learn that J. Clifford Baxter was found in a suburb of Houston,
shot in the head, an apparent suicide.

Baxter was an Enron executive who in May 2001 reportedly challenged the
company's financial practices and resigned.

His colleague, Sherron Watkins, wrote in a memo to Enron CEO Ken Lay
that "Cliff Baxter complained mightily to [then-CEO Jeff] Skilling and
all who would listen about the inappropriateness of our transactions
with LJM" -- one of the partnerships where Enron parked off-the-books
debts.

In the end, we are all victims of this tyranny of the bottom line.

To stop the bleeding, the political class needs to stop genuflecting and
start listening to courageous professionals like Ralph Estes, who have
much to teach about how to fix our system of unaccountable accounting.


Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime
Reporter. Robert Weissman is editor of the Washington, D.C.-based
Multinational Monitor, http://www.essential.org/monitor. They are
co-authors of Corporate Predators: The Hunt for MegaProfits and the
Attack on Democracy (Monroe, Maine: Common Courage Press, 1999;
http://www.corporatepredators.org)

(c) Russell Mokhiber and Robert Weissman

This article is posted at:
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