How did we get into this MESS? the auditing dilemma

Phi Kappa Phi Forum, Summer 2002 by Davis, Charles K

Forum on

Business

&

Economics

The collapse of ENRON is rattling a lot of cages, perhaps most notably within the auditing profession. With worldwide revenues for 2001 at $9.34 billion, Arthur Andersen has always been one of the most highly respected public-accounting firms. But Andersen's apparent failure to audit ENRON effectively is deeply troubling, to put it mildly. The apparent conflicts of interest implied by Andersen's huge consulting contracts with many of its audit clients (including ENRON) and the obvious failure of government regulators to act in any meaningful way have been equally distressing. The plight of the audit profession is summed up in a recent issue of Business Week (1/28/02): "Can You Trust Anybody Anymore?" Auditing, on both practitioner and academic levels, has been a concern of mine for a long time. Having spent several years in one of the biggest accounting firms and having participated in many audit and consulting engagements with that firm, I am quite familiar with the attitudes and the culture of such organizations. My doctoral dissertation dealt with an aspect of information-systems auditing. I was a Certified InformationSystems Auditor (CISA) for many years and served as Director of Research at the international level for a premier information-systems auditing professional organization as well. The ENRON debacle and what it has exposed within the audit profession concerns everyone in the profession very much.

My assessment is that the validity of the audit process in large modern organizations has been systematically and seriously eroded by the intersection of two powerful forces: the established culture of the audit firms and the profound complexity and proliferation of information technology (IT) within the organizations that they audit. This intersection has given rise to fundamental problems in the ways that audits are conducted. Until ENRON, the audit profession has been able to keep these issues mostly below the surface. ENRON seems to have behaved badly for a long time, and Andersen may well have done the same, but the issues here are far broader than the possible failure of one or a few Andersen audit partners to control themselves, or their underlings, when faced with the ENRON situation. The Andersen-ENRON axis provides an excellent frame of reference within which to address more fundamental issues.

HIRING THE BEST, THE

BRIGHTEST, AND THE

INEXPERIENCED

If you want to understand the culture of the big auditing firms, look at their hiring and promotion practices. Primarily, they hire young, relatively inexperienced people who have been academically very successful. They generally prefer newly minted MBAs with about two years of business experience before getting the MBA degree. The large CPA firms that do the auditing for most of corporate America are very prestigious. These rich and sophisticated organizations are peopled by highly polished, smooth operators. Young potential employees are most often dazzled by the fancy office environment and professional ambience. Add to this the widely held belief that a stint in one of these firms early in one's career is a highly desirable step up the corporate ladder, and it is not surprising that the CPA firms tend to get the best and the brightest new hires coming out of the best business schools. Of course, entry-level positions in other fields often pay much better than in public accounting, but salary can be less of a motivator for these kinds of new graduates when given the opportunity to join such firms.

Once hired, most employees stay only a few years and then move on. They do the accounting, consulting, and auditing grunt work while accumulating the professional experience required to get a CPA, or maybe CISA certification. In fact, that is how the whole system is set up: Work for a firm such as Andersen for a few years, get your CPA, and move on to ENRON into a corporate accounting career (for example). That is simply the usual way of things in public accounting; it is either up or out. And there is very little room at the top, where the firm's partners reside, so it is mostly out.

Now, let's recap this: Take personable, young, smart, but inexperienced people who are accustomed to succeeding and who want very much to continue succeeding; overwhelm them with what is to them a high-status position in a very prestigious firm. And put them into a competitive environment that places a premium on learning how to be a top professional in one's field. Work them hard and indoctrinate them into assimilating the firm's viewpoints, manners, and ways of conducting business. They will believe, mostly unquestioningly because they have only limited experience to draw upon, that what they are doing in their work is the proper way to do that kind of work. It surely must be, because the firm has always been so very successful, right? Not only that, but if a young auditor eventually begins to question observed practices (like shredding what one would think are important documents), there is an offsetting sense that working for any big audit firm is really only a stepping stone to a longer-term career somewhere else. From the perspective of this short-- timer mentality, there is no benefit in rocking the boat by raising difficult questions unnecessarily and risking upsetting anyone at the firm. After all, one may need a reference for the next job or the one after that.