All Eyes on Accountants

By George Russell

Just about the only time the accounting profession traditionally steps into the spotlight is around April 15 or when representatives of Price Waterhouse, which tallies the Academy Awards votes, put in their annual appearance at the Oscar presentations. But as this year's income tax deadline loomed, accountants were getting much more than their historic share of publicity, and a lot of it was bad. After a spectacular string of corporate failures and financial scandals in recent years, the industry that is supposed to audit company books and sniff out chicanery is under pressure from all directions.

Record numbers of outraged shareholders and creditors of bankrupt firms are dragging accountants into court, demanding to know why the auditors gave no warning of impending disaster. In all, the accounting profession faces an estimated 2,000 liability suits that ask for about $10 billion in worldwide damages. At the same time, the Securities and Exchange Commission, which initiated 14 misconduct cases against accounting firms last year, has stepped up its scrutiny of the business.

More travails lie ahead. Last week a subcommittee of the House Energy & Commerce Committee began to hold hearings on the conduct of accounting firms. Democratic Representative Doug Barnard Jr. of Georgia, chairman of a subcommittee of the House Government Operations Committee, has gone a step further. He lambasted a variety of federal regulators by letter for their performance in overseeing accountants responsible for auditing the books of U.S. banks and thrift institutions. Admits Philip Chenok, president of the American Institute of Certified Public Accountants, the profession's self- regulating watchdog: "These are very difficult times."

The troubles are spread unevenly across a profession so diffuse that no completely accurate membership count exists. The Public Accounting Report, a leading trade journal, estimates that there are upwards of 34,000 accounting firms in the U.S., ranging from one-person shops to partnerships employing hundreds of C.P.A.s. But the problems afflicting the industry have adhered most dramatically to the so-called Big Eight of the profession: the firms that audit more than 90% of the financial statements of the FORTUNE 500 largest industrial corporations and rake in nearly 40% of the accounting industry's annual revenues of about $10 billion.*

Since 1980 the Big Eight have coughed up more than $180 million to settle liability lawsuits. The industry's No. 1 firm, Chicago-based Arthur Andersen, alone has paid out nearly $140 million. Says Joseph Connor, chairman and senior partner of New York City-based Price Waterhouse, which has made settlement payments of $3.5 million: "What we're facing is a liability crisis and a credibility crisis."

At issue is who should be held most accountable for detecting and disclosing management fraud. The debate has heated up since the 1982 failure of Oklahoma's Penn Square Bank and the subsequent near collapse of Continental Illinois Bank of Chicago. Litigants are asking at least $400 million from Peat Marwick for its alleged failure to predict the Penn Square debacle. Then came the 1985 furor over E.S.M., the Fort Lauderdale Government-securities firm, amid a scandal that involved massive fraud. E.S.M.'s auditor, Chicago-based Grant Thornton (formerly Alexander Grant), has reportedly since been slapped with some $1 billion in legal claims for allegedly failing to expose the malfeasance.

Melvyn Weiss, a Manhattan lawyer who has spearheaded many of the liability suits, contends that the accounting profession "is suffering for its own failure to deliver on its promise to protect society from fraud." Agrees Price Water

house's Connor: "We've failed in our public duty. We should sound the alarm when a company is on the brink of disaster." Besides, he adds, "the courts are holding us responsible whether we like it or not."

Other C.P.A.s dissent roundly from that fatalism. "It's wrong to confuse a business failure with an auditing failure," argues William Gladstone, chairman of New York City-based Arthur Young. "Auditors don't manage companies." To Gladstone and many others in the profession, the kind of foolproof auditing that some critics demand is prohibitively expensive for clients and, at times, beyond the purview of C.P.A.s. Accounting executives contend that corporate auditors must be hypercautious in issuing statements that could affect the survival of individual corporations. Asks a Big Eight C.P.A.: "What company has not gone through a bad patch, yet survived to make profits?"

But plenty of companies have collapsed, leading to a very human desire on the part of investors to recover their money in any way possible. Says Harris Amhowitz, general counsel at Coopers & Lybrand: "When a company fails, accountants are usually the only solvent party left standing."

While fighting off lawsuits from the outside, accountants are also facing increasingly intense competition within their industry. Reason: merger mania has shrunk the pool of potential clients for major accounting firms. As a result, the genteel rules that once governed C.P.A. competition have gone by the boards. Says Jerome Lipman, head of his own Chicago accounting firm: "In the past, the theory was that if you had your green eyeshade on and worked at your desk, you'd get more business. That's not true anymore. You have to aggressively go after it now." Client stealing has become more common. So has diversification of the accounting product line: only 60% of accounting- firm revenues today come from classical auditing, with much of the rest coming from such areas as tax planning (23%) and management consultant work (16%).

One bright spot for accountants is Washington's continuing effort to revamp the U.S. tax code. Says Arthur Bowman, editor of the Public Accounting Report: "Every time Congress simplifies things, everybody needs more help in figuring out their taxes." If tax reform passes, accountants may have something to cheer about in an otherwise gloomy situation.

FOOTNOTE: *The eight: Arthur Andersen (1985 revenues: $1.2 billion), Peat, Marwick, Mitchell ($1 billion), Ernst & Whinney ($809 million), Coopers & Lybrand ($779 million), Price Waterhouse ($645 million), Arthur Young ($545 million), Deloitte Haskins & Sells ($528 million), Touche Ross ($513 million).

With reporting by Thomas McCarroll/New York and Christopher Redman/Washington