When Accountants Switch Sides

Is it time for the SEC to prohibit corporations from offering jobs to their external auditors?

Following the collapse of Enron in October, scores of lawmakers and regulators started looking into the tangled relationship between Enron and the company’s lead audit team from accountancy Arthur Andersen. In a number of cases, the inquiries have focused on Andersen’s role as both independent auditor for Enron and a provider of consulting services to the Houston trading company. The premise of some of the inquiries: Andersen auditors may not have been overly eager to put the kibosh on fee-generating deals proposed by Andersen consultants.

The $62 billion bankruptcy in Texas has led many legislators to call for new rules prohibiting corporations from buying consulting services from their independent audit firms. But in the rush to wall off accountants from consultants, lawmakers and regulators appear to be ignoring another possible conflict of interest between auditors and their customers. The conflict? Auditors sometimes find themselves working with clients who used to work for them.

CFOs know the scenario only too well. A management team hires an independent audit firm. Over the course of a year, that audit team works closely with members of the company’s management team, going over the books and such. In turn, the company’s management team gets to know — and feel comfortable with — members of that audit team. Eventually, the company’s management offers a member of that audit team a job — usually on the company’s finance staff. Often, the original accounting firm stays on as the company’s independent auditor. Says Ed Durkin, director of specialty programs at the United Brotherhood of Carpenters and Joiners of America, “It’s very common to have senior people within the corporations who were formerly employed at the audit firms that the companies still use.”

This cozy relationship, critics charge, can lead to trouble. Case in point: Richard Causey, former chief accounting officer at Enron, who joined the company after working as a senior manager at Arthur Andersen in Houston. While at Andersen, Causey worked on the Enron account.

Admittedly, it’s difficult to assess what role (if any) Causey played in Enron’s descent into bankruptcy. He was, however, chief accounting officer at the company, and as such, was probably responsible for keeping close track of Enron’s books. In that job, it seems likely he would have worked with Andersen employees in developing and implementing accounting procedures, policies and strategies at Enron. But in a report released in February, a special investigative committee of Enron’s board of directors seemed less than thrilled with some of Causey’s decisions: “[Causey] presided over and participated in a series of accounting judgements that, based on the accounting advice we have received, went well beyond the aggressive.”

The chief accounting officer’s connection to Enron’s auditor was not lost on members of the committee. In its report, the committee noted, “The fact that these judgements were, in most if not all cases, made with the concurrence of Andersen is a significant, though not entirely exonerating, fact.”

Take My Auditor, Please!

While cause-and-effect is hard to prove, it’s easy to see how an audit team might be less than objective when dealing with a colleague-turned-client.

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