Restoring Public Confidence in the Accounting Profession
Making Accountants Accountable

The accounting and auditing profession has lost its soul and urgently needs to remember its original purpose: to deliver fair financial statements. Academics and business leaders at IESE’s 13th International Symposium on Ethics, Business and Society reflected on the industry and the role of regulation, the danger of greed and the best path towards reform.

Hollywood actor Michael Douglas won an Oscar for his role in “Wall Street” as Gordon Gekko, the cutthroat corporate shark who famously said that “greed is good.” The film, now considered a classic, epitomized ’80s excess. Now, two decades later, there are no prizes being given out for greed, and Enron, Andersen, WorldCom, Parmalat and a host of other companies have come to represent a corporate world gone amok. The spotlight is now focused on the role of accountants and the ethical context in which capital markets operate.

Against this backdrop, leading academics and senior business executives from 19 countries gathered at IESE Business School in Barcelona on May 7 and 8, 2004 to discuss how companies can maintain high legal, social and ethical standards in the wake of the accounting and auditing scandals that have shaken the international business community in recent years.

Delegates to the 13th International Symposium on Ethics, Business and Society agreed that greater controls are needed, but they differed as to where reform is needed most.

Marc J. Epstein delivered the opening lecture, “Drivers and Measures of Success in Sustainability, Ethics and Accountability.” A distinguished research professor of management at Rice University in Houston, Texas (which happens to be where Enron in based), Epstein said that the recent headline-grabbing scandals involving everyone from Shell to Enron owed less to bad people than to bad systems. “I see lots of good senior managers who say they care about doing the right thing, but they just can’t seem to get it done. Why do they find it so hard?”
The answer: ineffective management systems and structures that prevent ethics and accountability from becoming institutionalized within the organization. Elaborating on ideas from his award-winning book, Counting What Counts: Turning Corporate Accountability to Competitive Advantage, Epstein suggested that there needs to be a radical improvement in corporate governance and the use of non-financial performance measures to better serve customers and communities.

More often than not, he said, board members are handpicked by the CEO, who dictates the business agenda, which he then expects to be rubberstamped by his cronies. What’s needed, argued Epstein, is a complete change of culture, in which board members are selected for their independence, diligence, competence and ethics. The board should determine its own agenda, openly challenge the CEO and should be as accountable as other staff members for the decisions taken.

In a subsequent panel discussion titled “Current Situation and Trends in Accounting: Standards, Regulations and Ethical Codes,” Marilyn A. Pendergast introduced the revised Code of Ethics for Professional Accountants, which will be finalized by the end of 2004. Pendergast chairs the Ethics Committee of the International Federation of Accountants (IFAC), a membership organization of 156 national professional bodies from 114 countries, representing over 2 million accountants.

The new code of ethics is designed to harmonize accounting standards worldwide. The code establishes five fundamental principles of ethics for professional accountants: integrity, objectivity, professional competence and due care, professional behavior and confidentiality. It also provides a framework to assist accountants in identifying, evaluating and responding to threats to compliance with the principles.

“I believe the revised code of ethics will serve the profession and the public interest well and is an important step in restoring credibility in the financial reporting process,” said Pendergast.

Pendergast’s fellow panelist, David W. Young, offered a different point of view when he posed the question, “Can We Enter the Age of the Truly Independent Auditor?” He answered facetiously by saying that the words “independent auditor” had become an oxymoron akin to “military intelligence.”

Young, a professor of accounting and control at Boston University’s School of Management and a visiting professor at IESE, challenged Pendergast’s faith in the new code to clean up corruption. He doubted her assertion that, “Integrity, honesty and truth telling are the baseline for conduct for all accountants. All people of good will strive to live in this way.”

Young was a bit more bleak about the human condition: “When people are tempted, they will yield to temptation. If we don’t remove temptation from the auditor, the situation will only get worse over the next five years, once the heat of the current scandals is off.”

“When a company’s audit firm is paid multi-million dollar engagement fees, plus multi-million dollar fees for other professional services, the outside entity’s independence becomes questionable,” said Young. The solution, he said, was for a separate regulatory agency to employ the auditors.

Pendergast and other panelists, particularly José Luís Lopez Combarros, president of ICAC, the Spanish regulatory body for accounting and auditing, felt that Young’s assessment was “excessively harsh” and that his proposal was perhaps unworkable in some settings.

On the second day of the symposium, two world experts in ethics and accounting shared their thoughts on dubious accounting practices.

Ronald F. Duska, the Charles F. Lamont Post Chair of Ethics and the Professions at American College, spoke about “Ethics in Accounting and Auditing after Enron.”

Prof. Duska, who researches and studies the social responsibilities and ethical challenges facing business, agreed with Young’s earlier point that it is an “unusual arrangement” for accounting firms to be paid by their clients. “It poses an ethical dilemma for public accountants,” he said. Indeed, it was the close relationship between Andersen and Enron that contributed to their undoing.

He reminded auditors that they have a two-fold responsibility: to attest to the fairness of financial statements, and to act as a skeptical watchdog in order to detect errors, irregularities or fraud. “A good deal of ethical mischief is the result of people losing their focus or vision and forgetting what they were about, what their role was,” said Duska.

When considering cases such as Enron or Global Crossing – a lesser known but just as scandalous a case, which Duska detailed in his address – one finds the same problem: a loss of ethical direction, replaced by a feverish drive to accumulate wealth for its own sake as the sole purpose.

“A company begs for trouble when wealth accumulation becomes the primary goal,” said Duska. “With no overriding principle or guide to check one’s direction or to suggest any limits, the only deterrent to the accumulator is the sanction of the law, which leads to more energy being spent trying to find loopholes to allow for that accumulation.”

Duska called for the industry to rediscover its “ennobling purpose” and thus reclaim its “soul.” Sharing the platform with Duska was Baruch Lev, director of the Vincent C. Ross Institute of Accounting Research and the Philip Bardes Professor of Accounting and Finance at New York University’s Stern School of Business. He has been recognized as one of the top 100 most influential people in the accounting profession. He recently testified several times before U.S. Congress in relation to Enron and other accounting and auditing issues.

Lev felt the discussions about corporate corruption were in danger of taking a “myopic view” – ascribing everything to greed and seeing the only remedy as yet more regulation.

“Greed is only one of several reasons for financial report manipulation,” he said, pointing out several other factors, including an antiquated, inflexible accounting system that sometimes does not reflect current economic realities, and downright innocent mistakes.
Lev felt that not every remedy must resort to further regulation, as the law can be a blunt instrument. The greatest scandal of Enron’s executives was not their greed, he said, but how they managed to still follow the letter of the law yet manipulate it to their own ends. Laws and regulations can be twisted and are, at best, only partially effective in curbing unethical behavior.

“Financial information can be truthful (i.e., consistent with generally accepted accounting regulations), yet largely irrelevant,” he said. Lev explained that he chose the title of his address, “Truth AND Relevance in Financial Reporting,” for a very good reason: “While integrity (truthfulness) received considerable public attention after the recent revelation of corporate scandals, the relevance of information was essentially ignored. Yet the two cannot be separated.”
Though each participant offered a different view on what it will take to restore public confidence in the accounting profession, most agreed that we have to look beyond the legal issues to address the human behavior at the heart of business accounting. The speakers also agreed that this is a worldwide problem, not confined to the U.S. Though American corporations have tended to dominate the headlines, there are instantly recognizable accounting sleights of hand elsewhere.

Marilyn Pendergast’s words rang true: “It’s not easy being an accountant at this time. But it must be done.” In recent years, accounting has become a dirty job and it is the profession’s challenge clean up its work and its image.