UNACCOUNTABLE HOW THE ACCOUNTING PROFESSION FORFEITED A PUBLIC TRUST MIKE BREWSTER John Wiley & Sons, Inc. 00 brewster fm 3/14/03, 10:30 AM1 Black 00 brewster fm 3/14/03, 10:30 AM1 Black UNACCOUNTABLE HOW THE ACCOUNTING PROFESSION FORFEITED A PUBLIC TRUST MIKE BREWSTER John Wiley & Sons, Inc. 00 brewster fm 3/14/03, 10:30 AM1 Black Copyright © 2003 by Mike Brewster. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. 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For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Brewster, Mike. Unaccountable : how the accounting profession forfeited a public trust / Mike Brewster. p. cm. ISBN 0-471-42362-9 (cloth) 1. Accounting—Moral and ethical aspects. 2. Public interest. 3. Responsibility. I. Title. HF5625.15 .B74 2003 657'.09—dc21 2002156440 Printed in the United States of America. 10 9 8 7 6 5 4 3 2 1 00 brewster fm 3/14/03, 10:30 AM2 Black www.copyright.com. Requests to the Publisher for permission should be addressed to the For Bill, who made work fun 00 brewster fm 3/14/03, 10:30 AM3 Black iv 00 brewster fm 3/14/03, 10:30 AM4 Black v THE FIRST ACCOUNTANTS WO GOOD FRIENDS AND COLLEAGUES, PAUL ROGERS AND BILL Schwartzman, volunteered their time to read this manu- script. Their suggestions made the book much better. Robert Brewster, Michele Turk, and Amey Stone read parts of the manuscript and offered improvements. Many people recommended sources or otherwise smoothed the way for interviews, including Jennifer Scardino, Lanier Stone, Fran- ces Burke, Dana Hermanson, Lynn Turner, David Rogers, Denise Schmandt-Besserat, Jonathan Goldsmith, Sharon Roll, Courtney Rowe, Wayne Guay, Dwight Owsen, Will Shafer, and Seth Kaufman. I’d like to give special thanks to Jean Ashton, Bernie Crystal, and the rest of the staff at the Columbia University Rare Book and Manuscript Library. Their help with the Robert Montgomery and PricewaterhouseCoopers collections was invaluable. The staff of the Thomas J. Watson Library at Columbia University Business School were gracious and helpful beyond my expectations. My wife, Amey, not only made this book better, but also made the process fun, which was no small feat. After all, this book is about accounting. Susan Barry, my agent, provided the voice of reason exactly when needed, time and again. My thanks to Jeanne Glasser and Wiley for seeing the value in this topic. ACKNOWLEDGMENTS T 00 brewster fm 3/14/03, 10:30 AM5 Black vi Several excellent books about the history of accounting and au- diting greatly helped my understanding of the profession, including A History of Accountancy in the United States, by Gary John Previts and Barbara Dubis Merino; The Accounting Wars, by Mark Stevens; In the Public Interest, by Harvey Kapnick; and The Accounting Profession, Years of Trial: 1969–1980, by Wallace E. Olson. Much of the material for this book was based on approximately 45 interviews conducted between August 2002 and December 2002. All the people quoted directly, without a footnote, were interviewed by me. Several people interviewed asked not to be named or spoke to me only on background. My thanks to everyone who gave so gener- ously of his or her time. Information for this book was also gathered from primary documents, including historic accounting papers and records, congressional testimony, court filings, and annual reports. M. B. ACKNOWLEDGMENTS 00 brewster fm 3/14/03, 10:30 AM6 Black vii THE FIRST ACCOUNTANTS CONTENTS My Introduction to Accounting 1 C HAPTER 1 The First Accountants 21 C HAPTER 2 The Birth of an American Profession 41 C HAPTER 3 Accountants Earn a Public Trust 67 C HAPTER 4 The Quest for Growth 99 C HAPTER 5 Cracks in the Facade 123 C HAPTER 6 The End of the Audit 159 C HAPTER 7 The Fight of His Life 187 00 brewster fm 3/14/03, 10:30 AM7 Black viii CONTENTS CHAPTER 8 Enron and the Fall of Andersen 225 C HAPTER 9 Accounting 101 255 C HAPTER 10 The Future of Accounting 281 Notes 299 Bibliography 315 Index 317 00 brewster fm 3/14/03, 10:30 AM8 Black [...]... relationship forged with a company, they might easily have an inside track to various projects throughout the client’s operations and administration The auditor saw the company’s finances across all lines of business, became well acquainted with the management team, and had front-row seats to operational problems at warehouses or farflung locations Parlaying this advantage, the largest accounting firms, through... of accounting WHISTLING PAST THE GRAVEYARD IN SAN ANTONIO In August 2002, I headed to San Antonio, site of that year’s annual meeting of the American Accounting Association (AAA), a group made up mostly of academic accountants I arrived at the conference on Wednesday—before the heavy hitters—when the younger academic set signed up for continuing education courses and browsed the various trade show... Black 3/13/03, 9:28 AM CHAPTER 1 THE FIRST ACCOUNTANTS 01 brewster 21 Black 3/13/03, 9:29 AM U NACCOUNTABLE L IKE ANY GOOD ARCHEOLOGIST, DR DENISE SCHMANDT-BESSERAT loves raw data After all, data—looked at the right way— contains the truth Schmandt-Besserat, the world’s leading expert on ancient accountants, has spent the past 35 years traveling the Middle East, gathering information from tiny clay... independent anymore.” Auditors have been paid by their clients since the inception of the CPA designation, making the notion of complete independence of auditors a fantasy The Sarbanes-Oxley Act will not alter the fundamental power dynamic between the company management team and the accounting firm partner so desperate to show how energetic, helpful, and smart his or her team is As Jon Madonna said, “If Andersen... of their past fraud-detection role He advocates fraud training for all auditors “Auditors are smart people, they are well-trained, they are good at what they do,” said Wells “But right now they are neophytes when it comes to fraud They are trained to understand how a system works; they are not trained in how that system can be abused.” Indeed, more and more, shareholders have been demanding that accountants... regulation of the accounting industry imposed by SarbanesOxley may send the profession into a downward spiral, attracting only nominally qualified professionals “My fear is that we are creating the IRS,” said Madonna The IRS auditor—that’s the type of person this profession is going to attract soon.” Wholesale changes in the way audits are done may be on the horizon if Sarbanes-Oxley doesn’t do the. .. exhibits As I wandered around the exhibits and tables of accounting literature, I was reminded that accounting is a profession of acronyms: Conference attendees talked about GAAP, GAAS, FASB, FMT, ROA, AICPA, IASB, LLC, LOB, to name just a few In fact, I recently found an entire book dedicated to accounting acronyms The International Dictionary of Accounting Acronyms Despite its more than 2,000 entries, the. .. 3/13/03, 9:29 AM U NACCOUNTABLE and Marvin Powell, a historian at Northern Illinois.3 SchmandtBesserat hasn’t always been warmly received, however, by colleagues who theorize that true accounting didn’t start until 4,000 years later than Schmandt-Besserat says The 1996 accounting encyclopedia The History of Accounting, for example, makes no mention of the tokens and says that “knotted cord may be the world’s... perverted” and where “earnings reports reflect the desires of management rather than the underlying financial performance of the company.”12 As Levitt pointed out, accountants could not have gone so far astray from tried-and-true auditing without the complicity of Wall Street analysts who demanded companies hit their quarterly estimates and corporate managers who wanted to paint the best face on earnings... thinking at the time that Levitt was right I also remember thinking that he didn’t have a chance of succeeding That, as they say, was then Since the collapse of Enron in late 2001, the accounting profession has forfeited what was nearly unconditional respect from the public It has lost its peer review system and the ability to self-regulate performance The profession watched as one of its own—Andersen— was . www.wiley.com. Library of Congress Cataloging-in-Publication Data: Brewster, Mike. Unaccountable : how the accounting profession forfeited a public trust / Mike Brewster. p. cm. ISBN 0-4 7 1-4 236 2-9 (cloth) 1. Accounting Moral. additional fees and perhaps cutting down on the hassle of dealing with internal auditors when doing the external audit work. THE ACCOUNTANT AND THE PUBLIC TRUST A zeal to safeguard the public trust began. with the management team, and had front-row seats to operational problems at warehouses or far- flung locations. Parlaying this advantage, the largest accounting firms, through sheer determination