Auditors Face Scant Discipline; Review Process Lacks Resources, Coordination, Will

1、Auditors Face Scant DisciplineReview Process Lacks Resources, Coordination, WillBy David S. Hilzenrath Washington Post Staff Writer Thursday, December 6, 2001; Page A01 Second of two articlesJohn A. LaBarca was supposed to look out for the investors.Starting in the mid-1980s, he oversaw the outside

2、audits of JWP Inc., an obscure New York company that bought a string of businesses and transformed itself into a multibillion-dollar conglomerate. The job required LaBarca, a partner at the big accounting firm Ernst & Young LLP, to scrutinize the work of JWPs chief financial officer, Ernest W. Grend

3、i, a running buddy and former colleague.In 1992, a new president at JWP discovered rampant accounting manipulations, and the companys stock sank. When the numbers were corrected, the 1991 earnings were slashed from more than $60 million to less than $30 million. After hearing extensive evidence in a

4、 bondholders lawsuit, a federal judge criticized the seeming spinelessness of LaBarca.Time and again, Ernst & Young found the fraudulent accounting at JWP, but managed to get comfortable with it, Judge William C. Conner wrote in a 1997 opinion. The watchdog behaved more like a lap dog.Today, LaBarca

5、 is senior vice president of financial operations and acting controller at the media conglomerate AOL Time Warner Inc., where his duties include overseeing internal audits.The Securities and Exchange Commission filed and settled fraud charges against Grendi but took no action against LaBarca. Neithe

6、r did the American Institute of Certified Public Accountants (AICPA), a 340,000-member professional organization charged with disciplining its own, or the state of New York, which licensed LaBarca.LaBarca declined to discuss the JWP case but maintained during the trial that the accounting was perfec

7、tly within the guidelines.An Ernst & Young spokesman said the firm was confident it upheld a tradition of integrity, objectivity and trust. Grendi declined comment.A Washington Post analysis of hundreds of disciplinary cases since 1990 found that, when things go wrong, accountants face little public

8、 accountability.The deterrent effect thats necessary is just not there, said Douglas R. Carmichael, a professor of accountancy at the City University of New Yorks Baruch College. That makes investing like Russian roulette, he added.In theory, the system has several complementary layers of review. In

9、 practice, it is undermined by a lack of resources, coordination and will.The SEC can bar accountants from auditing publicly traded companies for unprofessional conduct. The agency, however, has the personnel to investigate only the most egregious examples of auditing abuse, officials say. It typica

10、lly settles its cases without an admission of wrongdoing, often years after the trouble surfaced.Between 1990 and the end of last year, the SEC sanctioned about 280 accountants, evenly divided between outside auditors and corporate financial officers, The Posts review found.The AICPA can expel an ac

11、countant from its ranks, whichcan prompt the accountants firm to reassign or fire him. The trade grouptook disciplinary action in fewer than a fifth of the cases in which the SEC imposed sanctions, The Post found. About one-third of the accountants the SEC sanctioned werent AICPA members and thus we

12、re beyond its reach.Even when the AICPA determined that accountants sanctioned by the SEC had committed violations, it closed the vast majority of ethics cases without disciplinary action or public disclosure. President Bill Clintons SEC chairman, Arthur Levitt Jr., a frequent critic of the industry

13、, said the AICPA seems unable to discipline its own members for violations of its own standards of professional conduct.The membership group works as a lobbying force for accountants and often battles SEC regulatory efforts.State regulators have the ultimate authority. They can take away an accounta

14、nts license. But some state authorities acknowledge that their efforts are hit-or-miss.We only find out about violations on the part of regulants licensees in two ways: One, somebody complains, or two, we get lucky, said David E. Dick,assistant director of Virginias Department of Professional and Oc

15、cupational Regulation, which until recently administered discipline for the states accountants.When the SEC settles without a court judgment or an admission of culpability, state authorities must build their case from scratch, said regulators in New York, where many corporate accountants are license

16、d.You could probably fault both state boards and the SEC for not having worked cooperatively enough with one another over the years, said Lynn E. Turner, who stepped down this summer as the SECs chief accountant. He added that the agency has tried harder over the past year and a half to share invest

17、igative records with state regulators.As of June, the state of New York had taken disciplinary action against about a third of the New York accountants The Post culled from 11 years of SEC professional-misconduct cases.While prosecutors occasionally file criminal charges against corporate officials

18、in financial fraud case, they hardly ever bring criminal cases against independent auditors, in part because the accounting rules are so complex. The AICPAs general counsel could recall only a handful of prosecutions.From my perspective, this was very hard stuff, said a federal prosecutor who invest

19、igated a major accounting fraud. The prospect of litigating a case against people who actually do this stuff for a living and at least in theory are the worlds experts . . . is a daunting prospect.Investor lawsuits sometimes lead to multimillion-dollar settlements. But they rarely shed light on the

20、performance of individual auditors because accounting firms generally get court records sealed and settle before trial, limiting public scrutiny. The accounting firms say they discipline those who violate professional standards, including removing them from audits or terminating their employment.Bar

21、ry Melancon, president of the AICPA, said you cannot look at discipline alone when assessing accountability in the accounting profession. The professions emphasis is on preventing rather than punishing mistakes, he added. Thus, it invests heavily in quality-control efforts, such as periodic peer rev

22、iews of the paperwork accounting firms generate during audits.In disciplinary cases, the AICPAs goal is to rehabilitate accountants, not to expel them, officials said. While it may feel good and it may give somebody something to write about when somebody is disciplined, the most important thing is w

23、hether or not this profession does a good job doing audits or not, Melancon said.The AICPA puts its investigations on hold until SEC enforcement actions and other litigation have run their course, which can take several years. Acknowledging one of the systems historic weaknesses, the AICPA this year

24、 began requiring accounting firms to, at a minimum, supervise senior auditors work more closely while they are the subject of a pending AICPA ethics case.The professions self-disciplinary process . . . taken as a whole, is reasonably effective in protecting investor interests, the accounting firm Ar

25、thur Andersen LLP said in a statement. As with any system, it can be improved.A Critic of the SECNo one has been more critical of the SECs slow-moving enforcement process than the agencys new chairman, Harvey L. Pitt, a lawyer with long experience defending clients against the SEC.If you bring a cas

26、e six years after a company goes down the tubes, after all of the money has been squandered and dissipated, you are not helping investors, Pitt said.Pitt is offering leniency in return for prompt cooperation and restitution. He said that could mean forgoing enforcement action in rare cases. But he a

27、lso said, as violations warrant, we are going to be every bit as tough as the SEC has ever been, and maybe even tougher.SEC penalties for unprofessional conduct include temporarily or permanently barring someone from auditing companies whose shares trade on stock markets.Negotiated settlements remai

28、n central to Pitts enforcement strategy. There are not enough lawyers in the country for us to hire if we have to litigate all of our cases, he said.Richard Walker, the SECs director of enforcement untilearlier this year, said before he left that about 70 SECaccountants were working on about 250 enf

29、orcement cases involving accounting and financial reporting, and the agency lacked the capacity to pursue every violation.We just simply dont have the resources to do that, so we have to be selective and . . . choose cases that have the greatest importance, Walker said.But even when the agency focus

30、es on a high-priority case, its actions can send mixed signals. In June the SEC alleged thata former managing partner of Arthur Andersen allowed persistentmisstatements in Waste Management Inc.s financial reports to go uncorrected,but the agency took no action against him.The accounting firm and thr

31、ee lower-ranking Andersen personnel settled SECfraud charges, without admitting wrongdoing. The firm agreed to pay $7 million; the individual accountants, a total of $120,000.Walker said the SEC took no action against the former managing partner, who wasnt identified by name, because the agency didn

32、t think he had the requisite state of mind or knowledge.Asked for comment, an Andersen spokesman replied, The record speaks for itself.With or without an admission of wrongdoing, an SEC enforcement action for professional misconduct is the closest thing as you get to a death penalty in the accountin

33、g profession, said Charles D. Niemeier, chief accountant in the SECs enforcement division.If the person is a partner in a Big Five firm, theyre gone, and most major companies would not hire a person in any key position who has an SEC enforcement action on their record, Niemeier said.That wasnt the c

34、ase after the SEC ordered Thomas J. Scanlon, a Price Waterhouse LLP partner, to cease and desist from violating securities laws in 1999. The agency found that he knew a W.R. Grace & Co. subsidiaryhad manipulated numbers but failed to insist on proper disclosure.PricewaterhouseCoopers, as the firm is

35、 now known, said the SEC action speaks for itself.The order essentially meant that you dont admit you did anything wrong but you agree that you will not do it again, as Scanlon put it in an interview. Until early this year, Scanlon, now retired, remained the lead PricewaterhouseCoopers partner on th

36、e W.R. Grace audit.Self-RegulatorThe accounting profession has long championed its ability to regulate itself, from setting auditing standards to reviewing how well accounting firms follow those requirements. The AICPA, with an ethics division and various oversight committees, stands at the center o

37、f that effort.As early as the 1970s, that effort was under fire. A congressional reportin 1977 called for stronger government oversight of accounting, citing an alarming lack of independence and . . . dedication to public protection.The report also noted that the AICPA cleared former Nixon administr

38、ation official Maurice H. Stans of professional ethics charges after he pleaded guilty to criminal charges in the Watergate scandal. Stans had been president of the AICPA and senior partner of a major accounting firm.The same year anAICPA advisory commission called on the trade group to conduct the

39、professions disciplinary actions in the sunshine, but the AICPA rejected that proposal, according to a history by its past president, Wallace E. Olson. In 1985Price Waterhouse, citing a crisis of confidence in the auditors effectiveness, broke ranks with other major firms and called for creation of

40、an SEC-supervised self-regulatory organization with credible disciplinary authority.Other big accounting firms were furious. They couldnt believe that Price Waterhouse was selling them out, that here was a firm ready to jump in bed with the enemy, said Wade S. Williams, a former lobbyist for the AIC

41、PA and Deloitte & Touche LLP. The proposal died.Most of the AICPAs ethics work is invisible to the public. When the group finds violations, it routinely resolves cases by issuing confidential letters directing accountants to take corrective steps such as courses providing continuing professional edu

42、cation.Such private letters have outnumbered by 5 to 1 the suspension or expulsion of members, according to a 1999 AICPA memo to the SEC obtained through the Freedom of Information Act. The memo covered the most recent 108 cases that had been resolved by an AICPA disciplinary panel after SEC action.

43、 More extensive data the AICPA gave The Post showed the same pattern.The AICPA lacks the power to restrict an accountants practice. But, indirectly, its disciplinary actions can have consequences. If a firm continued to employ a partner expelled from the AICPA, the firm itself could face expulsion,

44、and that could disqualify it from auditing companies listed on the Nasdaq Stock Market and the American Stock Exchange, AICPA officials said.The Post analysis of AICPA data shows that about 60 percent of the more that 500 members expelled between 1990 and the end of 2000 were ousted automatically, i

45、n cases, for example, where they had already been convicted of a crime or stripped of a state license. In more than a quarter of the expulsion cases, members were ousted for refusing to cooperate with AICPA investigations or comply with its remedial orders.Only about a quarter of the AICPAs discipli

46、nary actions explicitly involved auditing. Others involved such unrelated offenses as failing to file personal tax returns or embezzling from clients.The main reason the AICPA refrains from disciplining accountants the SEC has punished is that it lacks the power to subpoena evidence, said Norman R.

47、Walker, former chairman of an AICPA disciplinary panel. Basically were confined to looking at the public record and the information that the member is able to provide and willing to provide, he said.Besides, AICPA officials added, when accountants settle SEC charges without admitting wrongdoing, the

48、 enforcement actions dont prove they did anything wrong. The SEC does not share confidential investigative files with the AICPA.The AICPA allows accountants to put off disciplinary proceedings while other litigation or regulatory actions are pending. The group postpones action because if we found so

49、mething, the plaintiff would use it against our member, said Richard I. Miller, the groups general counsel. We dont think that thats fair.The postponements have taken an average of nearly three years, and as long as a decade. It has then taken about a year and half, on average, to conclude a case, a

50、ccording to an AICPA memo to the SEC.An industry review panel led by a former Price Waterhouse chairman reported last year that the professions disciplinary system suffers from a number of limitations, adding that AICPA investigations typically commence and conclude long after the publics memory of

51、the matter has faded.The case of Samuel George Greenspan shows how long the processcan take.Greenspan was retained by ZZZZ Best Corp., a California carpet cleaner, to audit financial statements in the mid-1980s. Greenspan relied on a report by a prior auditor named Richard Evans, which ZZZZ Bests ma

52、nagement gave him, regulators alleged. But, according to the SEC, the report was a fabrication.Had Greenspan checked, he would have discovered that Evans didnt exist, the SEC said. Had he bothered to inspect the eight-story building described in the companys second-largest contract, he would have le

53、arned that it didnt exist, either, the SEC said. Greenspan never visited any of ZZZZ Bests 15 purported job sites, the agency alleged when it permanently barred him from auditing public companies in 1991.After Greenspans audit, ZZZZ Best sold stock, which plummeted when the company was exposed as be

54、ing rife with fraud.I wasnt hired to detect fraud, Greenspan said in an interview. I was hired to do an audit.Greenspan said he didnt have the funds to fight the SEC, but it may be of interest to you that I was also investigated by the American Institute of CPAs and I was exonerated completely. He p

55、rovided a copy of a 1998 letter in which the AICPA said it found no prima facie evidence that he violated its code of conduct and was closing its investigation.The states of New Jersey and New York, which licensed Greenspan, also said they have taken no disciplinary action against him.The disciplina

56、ry notices the AICPA issues to the public do not include the name of the accountants firm or the name of the company the accountant was auditing.A February 1998 report, for instance, listed the names of 15 individuals. It said a trial board had found them guilty of violating the rule that requires a

57、uditors to be independent from their clients. Then it concluded, without explanation: The hearing panel voted there should be no sanctions.Boards Ill-EquippedThe state licensing boards hold the most power over accountants, but many are ill-equipped to police the profession. There are a number of state boards that just dont have the financial resources to take on big firms, said Dennis Spackman, past chairman of the National Association of State Boards of Accountancy (NASBA).For the most part, th