Ex-Andersen CEO Speaks Out on Audit Fees, Reforms
On June 4, 2002, as defense attorneys called their final witness in the Andersen trial, former Andersen Chief Executive Officer (CEO) Joseph Berandino spoke out at the Commonwealth Club in Palo Alto on why auditors should not bear the whole burden of disasters such as the Enron debacle.
In his first public appearance since his resignation in March, Mr. Berardino said he was "amazed" at the low auditing fees former Andersen clients have negotiated with their new auditors. He noted that company managers may believe that saving money on auditing services serves the interest of their shareholders. But "this is shortsighted." He said the profession must take steps to change its pricing structure in the wake of Enron and other events.
Just as important, he said "the process of giving investors financial information to make decisions is broken, and all the change in the world won't fix it, if we continue to place the entire burden on the accounting profession." Instead, his remarks seemed to direct more blame on a systemic failure of the financial reporting process to adddress the growing divergence between accounting and analysis.
Describing current accounting as "a game of rules, loopholes and legalisms," Mr. Berardino said it has led to the acceptance of too many different versions of reporting. These include the accounting standard known as generally accepted accounting principles (GAAP), a different set of "pro forma" statements, and the sets of data that financial analysts use to create their models. "We can't expect to have meaningful conversations that benefit investors," he explained, "when we're keeping three sets of books and constantly talking past each other."
The reforms suggested by Mr. Berardino include more clearly defined performance indicators, more balanced information on business risks, and a grading system for the quality of financial reporting. All these steps would help reduce the "near mythical status" that earnings per share now holds. This in turn would reduce the pressure on company management to hit the mark, and "that means less pressure to accept aggressive accounting," he explained.