by Melissa Klein

The conviction on obstruction of justice charges of the once-mighty Andersen firm has drawn mixed reactions from industry observers and members of the accounting profession.

At a time when public scrutiny is high and confidence in the financial reporting system is low, the profession is contemplating its post-Andersen future and mulling reform.

While the June 15 decision rendering Andersen guilty of obstruction of justice in impeding a federal investigation into its audit of bankrupt energy provider Enron formally marked the end of the firm’s audit practice, observers within and outside of the profession agreed that the demise of the 89-year-old accounting behemoth - which generated revenue in 2001 of $9.3 billion - began long before the jurors ever set foot in the Houston courtroom. With most of its operations and employees gone, the firm’s prospects for survival looked grim even before the jurors began deliberations.

"The outcome of the case before the decision even came down was irrelevant," noted Dan L. Goldwasser, a partner with the New York law firm Vedder Price Kaufman & Kammholz.

"The unfortunate reality is that an appellate victory for Andersen might provide emotional satisfaction, but little else," agreed Michael Young, a partner with Willkie Farr & Gallagher, New York. "The prosecutors basically pulled the trigger when they indicted the firm."

According to industry consultant Allan Koltin of PDI in Chicago, Andersen’s fate was probably sealed long before the now infamous Oct. 12, 2001 email that sent Andersen’s shredding machine into overtime.

The email was sent to the firm’s Houston office by in-house attorney Nancy Temple reminding employees of the firm’s document-destruction policy.

"They were dead when the consent decree on Waste Management (a former Andersen audit client in which the firm was ordered to pay a $7 million fine) was signed because the Enron time bomb was already ticking," Koltin said. "They were already in it too deep to turn back. Everybody wants to blame the government, [or] the Justice Department. But at some point Andersen leadership has to look in the mirror and look at what they created or allowed to go on."

Harsh criticism and scrutiny of the firm after the December bankruptcy filing of its client, Enron Corp., quickly escalated with the unsealing March 14 of the Justice Department’s historic indictment and the ensuing exodus of both big name audit clients and the firm’s overseas practice units.

While Andersen said that it plans to appeal the conviction, the firm is transitioning its remaining clients to other firms prior to Aug. 31, when it will cease auditing publicly held clients.

Andersen officials did not return calls for comment.

Industry watchers’ reactions to the verdict differed in their assessment of the lessons that the profession will take away from the event.

While on its face, the Andersen case was about the destruction of documents, "Clearly, this conviction goes far beyond that," Goldwasser noted. "Andersen, from everything I’ve seen and read, was a culture out of control. They were so intent upon rebuilding themselves, they lost sight of their duties to the public."

Post-Andersen, "accounting firms have to go back to basics," Goldwasser said. "One lesson that tends to be lost on the large firms is that there’s no such thing as too big to fail in the accounting profession. The profession has to do a better job at policing its members. We’ve gone years without any meaningful discipline of the large firms, save what the SEC has done, and the SEC has limited resources. The idea of a new board to oversee the profession grows from the fact that the profession hasn’t done the job it should have."

According to accounting professor Doug Carmichael of New York’s Baruch College, the lesson for firms is "to start acting more like professionals and less like business people and view audit not only as value-add service for the client, but as one that is oriented toward the protection of investors."

"Keeping clients happy has become the predominate approach to auditing. That aspect of it absolutely has to change. That was apparent before Enron," said Carmichael. "A new risk and reward system that puts emphasis on quality audits to protect investors would be the starting point. That mission has been subordinate to keeping clients happy. Until that changes, there’s not much hope for real improvement."

"For public companies, the mechanism’s already there in the kind of disclosure required in form 8K when there’s an auditor change," Carmichael said.

While, just weeks ago, reform measures appeared dead in the water, the impetus for change revived in the week following the Andersen verdict, when the Senate Banking Committee approved a reform bill proposed by Sen. Paul Sarbanes, D-Md., that would create a new independent accounting oversight body and restrict the consulting services accountants can offer to audit clients.

In the same week, the SEC unveiled plans for a Public Accountability Board, to be comprised of six independent public members and three accounting professionals, to be established by the end of the year (see related story, p. 3).

"I believe the verdict has triggered a re-energized Congress to take action regarding the profession," said Ed Nusbaum, chief executive of Chicago-based Grant Thornton. "It seems to have sped up their actions and changed the mood in Congress on the need to oversee and regulate our profession."

"The profession cannot simply go back to business as usual. We have a need, a responsibility, to regain the public trust," said Nusbaum, who described the Andersen situation as "extraordinarily unfortunate."

In general, Nusbaum said he supported SEC chairman Harvey Pitt’s proposal. One thing Nusbaum would like to see in any reform measure is a focus on improving the audit process. "We think all the large firms should get together under the auspices of the [American Institute of CPAs] to study best practices and share audit approaches and, from that process, improve how all firms audit."

"Now is the time for change," Nusbaum added. "We’re at an incredible point in the history of the profession. We don’t have any choice but to change or do irreparable damage."

"I think all the firms, large and small, are very focused in their responsibilities on [the] quality of their work and the consequences of not being careful," said Robert Kueppers, a partner with Deloitte & Touche and chairman of the SEC Practice Section of the AICPA. "In the longer term, you worry about an unsettled environment preventing you from attracting the people you need at the entry level. Re-establishing stability, creating some certainty, around the future is paramount."

"Most of the lessons to be learned have already presented themselves. I think there’s a strong desire on the part of most all constituencies to move forward with something that will help to restore confidence," Kueppers said.

Young believes that the most significant consequence of Enron has already happened.

"The culture of financial reporting in America has changed. Enron has accomplished what [former SEC chairman Arthur] Levitt could not," Young said. "It changed the culture from one that was obsessively preoccupied with obtainment of quarterly results to one that now treasures accuracy in financial reporting."

"Everybody’s wondering whether there’s a new Enron out there and nobody’s more nervous than the accounting profession," Young added. "I expect the profession to rise to the occasion and to subject companies’ financial statements to exacting scrutiny. I also expect the profession to start increasing audit fees, which is exactly what it ought to do."

Nusbaum also expects to see an increase in audit fees. "There will be increased costs - higher insurance costs, firms will beef up their quality-control process. There’s no doubt that with increased costs will come increased fees."

Koltin, however, was skeptical about a lasting upsurge in audit prices. "While it sounds really good, in reality, free market society will never go away. Audit is a service companies don’t want, but have to have. Pricing may go up a little because firms won’t be cross selling certain lucrative consulting services that they used to, but that effect is already in play," said Koltin.

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