Accounting at a Crossroad

CPA Journal, The, Dec 2005 by Flegm, Eugene H

Preserving an Independent Profession

The following is adapted from the author's presentation at the Academy of Accounting Historians/Accounting Hall of Fame Conference at Ohio State University, held on October 6 and 7, 2005, and is used with permission of the author, the Academy, and the Accounting Hall of Fame. It is based in part on the author's work done in conjunction with the republication of his book Accounting: How to Meet the Challenges of Relevance and Regulation (Studies in the Development of Accounting Thought, vol. 7, Elsevier, Ltd., Oxford, U.K., 2004; the book was reviewed in the October 2005 CPA Journal).

The accounting profession, broadly defined to include both private and public CPAs, has been going through a terrible time. At the start of this century, top-management frauds at major corporations, including Enron, WorldCom, Parmalat, Tyco, HealthSouth, Qwest, and Global Crossing, resulted in the loss of pensions and jobs for thousands of employees; the dissolution of a major public accounting firm; the discovery of widespread manipulation of mutual fund accounts for personal gain or privileged customers; and the fining (by New York State Attorney General Eliot Spitzer) of 10 major investment banks $1.4 billion for their part in hyping high-tech stocks during the infamous stock market bubble of the late 1990s, the collapse of which resulted in the loss of billions.

Frank Partnoy, a professor at the University of San Diego School of Law, tells the story in his book Infectious Greed: Haw Deceit and Risk Corrupted the Financial Markets (Henry Holt & Company, 2003) of the financial shenanigans of the 1980s and 1990s-beginning with the speculation in currency options; the $3.6 billion bailout of Long-Term Capital Management in 1998; and culminating with the collapses of Enron, Global Crossing, and WorldCom. Partnoy describes a culture of greed that reached epidemic proportions before it crashed, the root cause of which I believe to be the decline in ethical behavior in our society. Moreover, accounting standards setters introduced into this climate changes in the measurement base that facilitated mismanagement of earnings by unscrupulous executives. This was exacerbated by the CPA profession's focus on fees instead of audits. Some observers have also pointed to the general lack of ethics in MBA programs during this period. Dennis Gioia, a professor of organizational behavior in the department of management and organization of Pennsylvania State University, referenced this in a speech to the Academy of Management in 2002, noting that the call of stock price on Wall Street is very strong and quite seductive. He concluded that, "We are training and turning out a very skilled group of people from our programs. But we shouldn't be surprised if some cynical observers conclude that we are also turning out some very skilled criminals."

Congress contributed to the problem by underfunding regulatory agencies, principally the sec, thus preventing it from having the people to dig into problem areas in the manner of the bank investigations performed by Eliot Spitzer (see "The Investigation," by John Cassady, The New Yorker, April 7, 2003). Furthermore, many corporate boards and audit committees performed their duties perfunctorily at best. Finally, this environment existed in the short-term speculative culture of the stock market. All of this, plus the movement to a fair-value measurement base, has resulted in the profession's finding itself at a point in time when the very existence of the independent public accounting sector of the profession is in doubt.

Ethics in the Real World

Everyone likes to work and live with people that have a positive attitude. In medicine, sports, business, and just living, it is better to have a positive outlook. Doctors will tell you that if you think your illness is hopeless, there is a good chance it is. In sports, great stories are made by teams that looked beaten, but a coach rallied and changed the players' attitudes and made them winners. It is true also in business and life that if you think you will fail, you probably will. One's attitude, however, must be tempered by facts, and certainly a Pollyanna view is to be avoided.

Earning a Iiving involves basic conflicts that we must recognize when we look at how we can forestall repeats of the egregious frauds we've experienced recently. Every organization, be it a Boy Scout troop, sports team, social club, business, and certainly a military unit, strives for a bonding, a feeling of the Three Musketeers: "All for one and one for all." That bonding is sought by every organizational leader, and although it is generally a good thing, it can be, and was, abused-badly-in the recent financial frauds.

Carrie Johnson wrote of this in a March 20, 2005, Washington Post column. She noted that the sheer number of subordinates facing criminal charges belies the myth that a small group of devious executives carried out these recent frauds. She noted that it seemed apparent that many workers in these companies vowed loyalty not to ethical practices or even to the company, but to charismatic leaders who came to personify their businesses. Why do basically honest people keep their mouths shut during a fraud? Why do they obey instructions they know are wrong? Because since the time they were in kindergarten they had been told, "Don't be a tatdetale." They learn to "go along to get along." And there is the bonding: the loyalty to one's family, team, group, employer, and country.