Andersen Raises the Stakes with Audit Reforms

At a news conference on March 29, 2002, Paul Volcker, chairman of Andersen's oversight board, announced the firm's partners have agreed to back his reform plan. The firm's willingness to develop a role model of audit reforms adds yet another plank to what some see as an already convincing platform of reasons why the charges against the firm should be dropped. The firm still faces a political maze, but there are reasons for optimism.

A Political Maze

A key obstacle to getting the charges dropped is the lack of a clear course of action through the political maze. Mr. Volcker said he will try to reopen talks with the Department of Justice (DOJ). This seems logical. The DOJ has repeatedly said it wants Andersen to take full responsibility for its actions, and Andersen is clearly taking responsibility for reforming itself. But legal experts caution the DOJ may be thinking more narrowly in terms of a guilty plea. That is not likely to happen, since Andersen's partners are convinced of the firm's innocence.

Then too, audit reforms, like many of the other reasons for dismissal, may involve broader public policy issues than the DOJ's more limited legal jurisdiction. The potential loss of jobs by innocent workers, together with the client losses that leave the firm with fewer resources to settle investor claims, are compelling enough reasons for some. Andersen employees have been making so many calls the DOJ had to set up a hot line to take messages. But some supporters fear the messages are falling on the wrong ears and time is running out.

In what has been likened to a half court shot at the buzzer, former UCLA Coach John Wooden urged President Bush to intervene. "Mr. President, time is running out," wrote Mr. Wooden, "and this is a matter of principle and principled people need to act." The letter from Coach Wooden, who became an American icon because of his emphasis on character and his 88-game winning streak, was reprinted in the Wall Street Journal.

Reasons for Optimism

Whether or not they agree with all the specifics of the plan, some accountants are no doubt hoping the partners' support of Mr. Volcker's plan will also lead to a very rational and viable alternative to more radical legislative proposals. This may be a long shot, but it is not impossible. At least three key factors argue for its success:

1. The legal merits of the DOJ's shredding case are tenuous in part because the DOJ took an unusual approach. In an editorial published on March 27, 2002, the Wall Street Journal said experts rate DOJ's chances of success at 50-50 for winning a lawsuit over the alleged obstruction of justice.

2. By pushing ahead with substantive audit reforms, Andersen is helping to restore public confidence in both the firm and the profession. Much of the damage suffered by the firm to date seems to have been caused by misinformed media (who assumed an acknowledgement of shredding was proof of a crime) and Andersen bashers (who think Andersen deserves to die for one reason or another.) On Vault.com, one poster attempted to cut short the debate by categorizing the reasons and assigning numbers to them. If Mr. Volcker's reform plan helps address the other factors, then the DOJ and others in government can concentrate on carefully weighing the 50-50 odds of losing a case with so much at stake.

3. Mr. Volcker's reform plan may not be all that draconian. Other than a separation of audit and consulting services, the plan does not involve any of the reforms to which so many auditors are so adamantly opposed, such as mandatory rotation of audit firms or strict rules to address the "revolving door" through which auditors are hired by their audit clients. Then too, although the plan calls for separating audit from consulting, the two partnerships can still be linked together by contracts. The test of separation seems to rest more squarely on the nature of the firm's compensation plan -- much like the reform that Securities and Exchange Commission (SEC) Chairman Pitt proposed in his Senate testimony.

Keep in mind that Andersen's auditors didn't like the idea of separating audit and consulting at first any more than other auditors do. If Andersen can find a way to make it work, maybe it will work for other firms as well. Again, it's a long shot, but it might well result in fewer unintended consequences than a system designed by lawmakers who were never partners in a public accounting firm.

-Rosemary Schlank

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