Did you miss the column by Ed Ketz? Click to read Part One and Part Two.

I am a retired CPA who started her career at Arthur Andersen & Co. and subsequently taught accounting and tax at the University of Central Oklahoma. My husband, Dan K. Morrison, is a retired Andersen tax partner. My paper,  published in the academic accounting journal, Critical Perspectives on Accounting, Vol. 15/3, pp. 335-375,  explores the publicly available evidence regarding Enron and Andersen, as well as the actions of politicians and financial institutions through November 12, 2003 (the date through which I conducted my research).

Professor Ketz states that in the 1990s all of the large accounting firms decided to "under-audit," choosing to accept greater audit risk and therefore performing less analysis and fewer tests. Further, he states that "the drive to higher consulting fees forced the firms to price audits at razor-thin margins so they tried to control audit costs." What documentation does Professor Ketz have to support these allegations?

It is a fact that auditors have been subject to an ever-tightening vise. On one hand, in an effort to increase productivity, companies have become extremely cost conscious about audits. On the other hand, class action lawsuits have multiplied exponentially against accounting firms, who are regarded as deep pockets. Regardless of the merits of the case, accounting firms have historically settled, paying blackmail rather than risk extinction.

In order to mitigate risk in our increasingly litigious society, accounting firms have dedicated more time and effort to analyzing business risks within each client's operations in order to identify areas where more investigation was needed. Thus, instead of deliberately "under-auditing," they were specifically trying to allocate more time and attention to clients' high-risk areas rather than spend scarce resources on tests of relatively low-risk areas. While I cannot speak for other firms, Arthur Andersen's audit procedures required a comprehensive analysis evidenced by a detailed written memorandum of the business and reporting risks facing the audit client. Specific audit steps were then planned to address the various risks in the documented analysis.

A valid question for each audit is whether the auditor correctly analyzed the risks and determined the necessary steps to address these risks. This question can only be answered by an impartial examination of the audit steps taken, as detailed in the audit workpapers.

Professor Ketz' stated belief that there has been under-auditing and therefore guilt on the part of some Arthur Andersen partners is an assumption without basis in fact. How can anybody make a rational assessment regarding the quality of an audit without knowing what tests the auditors conducted? If there was "under-auditing," what precise steps were omitted that would have uncovered widespread fraud?

It is true that accounting firms' consulting business grew in the 1990s. It is also true that the audit market was extremely price conscious. However, it does not follow that auditors faced with ever-escalating litigation risks would intentionally "under-audit." To the contrary, auditors have become even more paranoid because they fear fraud above all else. In layperson's terms, defrauding an auditor is no different than framing the auditor.

The idea that a partner would risk his or her financial future by cutting corners on an audit flies in the face of both logic and training. Andersen partners frequently said they had less job security than anybody in the firm because if a mistake in judgment was made on his or her engagement, the partner was held responsible. Partners were brutally honest in assessing responsibility because one partner's mistake could bankrupt every partner. At Andersen, each partner received a miniscule percentage of the profits but shouldered 100 percent of the blame if something went wrong on his job. Andersen partners conducted themselves accordingly.

From their first day at Andersen, staff assistants are taught the importance of never signing off on work unless you have done a thorough job. Further, nobody is entitled to make you sign unless you feel right about it. That was consistently reinforced by example. Partners emphasized that refusal to sign by a knowledgeable, principled individual is the single best safeguard for both the client and the partners.

In public accounting, fees are charged for work performed. I was taught -- by word and example -- that once you accept the project, the question of fees is totally separate from the work performed. Our mission was to do superb work as efficiently as possible. If it took more time than expected, hopefully the client would pay the extra fees. If not, the fee arrangement for next year would be increased to reflect a more realistic estimate. If the client did not want to pay the fees to reimburse us for excellent work, then we would resign the client. But under no circumstances would a partner accept less than excellent work.

Just as brain surgeons and house painters do not tie their fees to the minimum wage, neither do CPAs. Fees are set by analyzing the level of performance expected by the client, the costs involved plus profit margin in delivering the service, and the value to the client. If the client is happy with the work performed at the price agreed to, there is no such thing as over-billing. The only way one can over-bill for a service is to bill for work not performed or for shoddy work, both of which are unacceptable.

Barbara Toffler asserts in her book, Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen, that there were ethical lapses at Andersen. This is astonishing. Ms. Toffler spent four years at Andersen and her career was terminated by mutual decision. I do not know Ms. Toffler or the individuals she describes. Is she merely a disgruntled former employee? Or is she trying to personally capitalize on the Enron debacle through writing an opportunistic and sensational book? How much of what she writes is true? I don't know. Just because Ms. Toffler makes statements does not mean they are true. I do know that nothing she describes sounds like the firm or the people I know. A now-retired partner told me that when he asked Ms. Toffler to address a national group of CEOs, she asked about "payback" and then refused the invitation.

Ms. Toffler has stated that she knowingly sold clients unnecessary work and she overcharged them because she was stressed at being unable to meet targets. If she sold unnecessary work or billed for work she did not perform or for shoddy work, that was her decision and no one's responsibility but her own. If she thought targets were unreasonable, it was her responsibility to either make her case for more realistic targets or accept the fact that she wasn't going to achieve her targets. This is what is expected of the newest staff on his or her first audit. Surely a person specializing in business ethics should demonstrate at least the same backbone as the newest staff assistant.

An objective measure of ethics can be found in examining actions taken after the Enron hysteria began. Ms. Toffler -- who had no background in auditing and no access to the facts regarding the Enron audit -- made assumptions, stated those assumptions as facts and then concluded that Andersen was guilty of wrongdoing. In contrast, Andersen immediately self-reported shredding of "documents" to the Justice Department and the Securities and Exchange Commission (SEC). Andersen waived attorney-client privilege in the ensuing investigation and trial. Andersen people, despite being viciously attacked, waited for facts to be examined before reaching conclusions, thereby avoiding unjust accusations. These actions are the hallmark of ethical behavior.

Ms. Toffler's book and speeches, undertaken to garner fame and fortune, smear tens of thousands of people she can't possibly know. In contrast, during and following the debacle, Andersen people have quietly sought to help wherever possible. When Andersen was under attack, retired partners volunteered by the hundreds to return to work for no pay for as long as it took to save the firm. Retirees visited the elderly in hospitals, nursing homes or at home to help them deal with the financial and emotional nightmare. When a mentor network was established to help Andersen people find jobs, volunteers stepped up from the ranks of retirees, alumni and all levels of the firm, from partner to secretary. Not one of these people asked about "payback." Integrity and ethics are defined by actions, not words -- especially not self-serving words.

Art Wyatt's speech ("Accounting Professionalism -- They Just Don't Get It") is the polar opposite of Toffler's book. Mr. Wyatt, who is an icon both at Andersen and within the profession, raises valid questions about the direction of the accounting profession. I agree with most of his conclusions; some I am not so sure about. For example, Mr. Wyatt believes that hiring non-accounting majors has been detrimental to the profession. That argument implies that those who are neither accounting majors nor CPAs lack ethics. I cannot agree to that.

Mr. Wyatt also questions hiring experienced personnel. If this had not become accepted at Andersen, Barbara Toffler would have undergone the years of extensive ethical training, both formal and informal, at Andersen and would surely have known that it is wrong to base conclusions on suppositions, rather than facts or to bill for unnecessary or shoddy work. On the other hand, if Andersen refused to hire experienced personnel, Andersen would not have had the benefit of Art Wyatt's experience. My own conclusion is that we must judge each person as an individual, knowing that no selection process will be perfect. But above all, any person working for a public accounting firm must be focused on the public interest.

In summary, Art Wyatt looks at the last 60 years in public accounting and reviews questions of judgment by the profession. My paper examines the facts in the public domain specifically regarding Andersen and Enron to see what ethical lapses, if any, were committed by Andersen. Ethical lapses were found, but none at Andersen.

In contrast, at Arthur Andersen, there were mistakes in judgment. Andersen partner David Duncan failed to follow firm-wide directives to ensure that audit workpapers were fully organized and all trash thrown out by the end of the audit. When he heard that senior partners were coming to review the audit workpapers, he worried that the files were in a mess and he personally threw out some duplicate copies of old memos, old magazines and requests for charitable contributions. Mr. Duncan's failure to ensure that files were cleaned up by the end of the audit and his decision to do so later both represent failures in judgment. I believe he did so innocently because at the time, the SEC had not issued a subpoena and, in fact, according to the appeal of the Andersen verdict, there may have been no SEC investigation of Andersen to obstruct. When he threw out the trash, David Duncan could have known nothing about any fraud because the first fraud discovered -- the Chewco fraud -- was uncovered weeks after he threw out the trash.

Let's look at a risk analysis of the special purpose entities (SPEs). As long as the banks were honest, there could have been no fraud. If the banks involved were local banks owned by the relatives of top Enron officers, one would be extremely suspicious. However, these were all supposedly reputable international financial institutions whose confirmations and representation letters are a crucial lynchpin for the auditing system. Once such an institution issues a confirmation or representation letter, there is no additional audit step that can be taken because none exists. Until the Enron fraud, the word of a major bank was considered the gold standard. Dishonesty in these banks destroys the entire audit system.

At the time of the most recent audit in early 2001 (for Enron's 2000 financial year), as rumors later surfaced in the latter half of 2001 and even when the SEC began investigating Enron's SPEs in October 2001, any reputable and ethical auditors would have reviewed the various banks' confirmations and representation letters and fully accepted them. It was thought that banks of this stature would not participate in fraud. In hindsight, the Andersen auditors were wrong in trusting the word of the banks. But this was neither a mistake in judgment nor an ethical lapse.

How did the banks disguise the loans? They signed agreements with Enron officers that documented either sales of assets or investments in the SPEs, knowing these agreements would be subject to audit. However, the banks accepted Enron officers' oral promises of repayment (which, as the banks well knew, would not be subject to audit), documenting in their own files that Enron would not get its desired accounting from Andersen if the promises to repay were known. The banks apparently showed the transactions as loans on their own books and included them in their loan ratio reports, all without any written loan agreement. The banks still claim that Enron owes them repayment for these supposed "sales" or "equity investments."

Why did Andersen partner David Duncan plead guilty? Let's look at what he knew by late January 2002. Mr. Duncan knew that politicians -- both Democrat and Republican and at both the state and federal levels -- had raked in Enron cash and lobbied the SEC to exempt Enron from investor protection laws that would have prevented the fraud. Mr. Duncan knew that the frauds were committed within the Enron SPEs, none of which were audited by Andersen. and he knew the government should have known it. Mr. Duncan knew that the frauds were aided and abetted by a host of supposedly reputable banks, none of which were audited by Andersen, and again, he knew the government should have known it. Mr. Duncan also knew that the government had given Andersen no notice that Andersen might be under inquiry when he threw out the trash.

Despite these facts, it was evident that the government was determined to destroy tens of thousands of Andersen people who had nothing to do with Enron. How can one blame Mr. Duncan for believing that he had no chance of a fair trial? If he were convicted of fraud, he might face 80 years in prison for throwing out duplicate copies of old memos, old magazines and requests for charitable contributions. It is interesting to note that Andersen people, who suffered irreparable harm due to Mr. Duncan's plea, are more understanding of his dilemma than the public at large.

The recent indictments of Enron officers, Jeffrey Skilling and Richard Causey, include seven counts of defrauding Andersen. Counts 24 and 25 read, "While agreeing that they were 'responsible for the fair presentation of the financial statements', Skilling and Causey falsely represented to Enron's accountants [Andersen] that, among other things, (a) the statements and representations made in Enron's financial statements were true; (b) Enron properly recorded and disclosed in its financial statements all agreements to repurchase assets previously sold; (c) Enron properly recorded or disclosed in its financial statements guarantees, whether written or oral, under which Enron was contingently liable; (d) Enron's unaudited quarterly financial data fairly summarized, among other things, the operating revenues, net income and per share data based upon that income for each quarter; (e) there was no material fraud or any other irregularities that, although not material, involved management or other employees who had a significant role in Enron's system of internal control, or fraud involving other employees that could have a material effect on the financial statements; (f) all related party transactions, including sales and guarantees (both oral and written), were properly recorded and disclosed; and (g) Enron made available to the accountants all financial records and related data; well knowing that these statements were false."

The indictment against Skilling and Causey tells us two vital facts: (1) Andersen auditors were asking the right questions; and (2) after having vilified Andersen over its accounting and demonized the firm for supposedly having gotten too close to Enron, the government has now concluded that Andersen was an innocent victim that was defrauded.

Professor Ketz echoes former SEC Chief Accountant Lynn Turner in listing the controversial audits of Sunbeam, Waste Management, Baptist Foundation of Arizona, Global Crossing, Qwest and Worldcom. It is indeed a disturbing list. However, everything in the public domain regarding Sunbeam and Waste Management is the SEC's version of events and there are generally two sides to any story. In all the other cases, the problem was collusion to defraud the auditors, which is a problem that is epidemic in today's society. Neither Professor Ketz nor Lynn Turner nor myself and certainly not Barbara Toffler has access to these audit workpapers. Therefore none of us has basis for an informed judgment on the adequacy of these audits.

My own opinion is that certain industries, including technology and telecoms, experienced the biggest bubble in the 1990s and were therefore more prone to commit fraud in order to keep share prices high. These are information industries which present more difficult audit challenges than manufacturing industries. Unfortunately, Andersen had many technology and telecom clients. It should be noted that the indictments of various telecom officers and employees have included charges of defrauding Andersen.

Regarding KPMG's audit of the SPEs where the fraud occurred, I maintain that KPMG's audit workpapers should be examined. However, until that is done, we have no basis to conclude on the quality of KPMG's audit. It is reasonable to assume that Enron officers who lied to Andersen would probably lie to KPMG.

The question remains: What did the banks' auditors know and when did they know it? What did the bank examiners know? If auditors had examined any of the disguised loans, they surely would have noted the phony "sales" or "investment" contracts and the lack of a loan agreement for transactions booked as loans. Further, according to the Bankruptcy Examiner's Report, there was widespread documentation of the fraud in the banks' loan committee reports. If the banks' auditors or the bank examiners knew anything, what did they do about it?

Why did Andersen not note KPMG's responsibility in the Enron audit opinion? Probably for two reasons: (1) KPMG is a well-respected firm; and (2) the only risk of fraud in the SPEs would be if supposedly reputable international banks abetted the fraud. No rational person thought that possible.

Professor Ketz maintains that Andersen should have forced consolidation of the SPEs, despite the facts that consolidation (based on representations made to and facts known by Andersen) was diametrically opposed to generally accepted accounting principles (GAAP) and would have required an opinion exception. Another approach might have been for Andersen to resign from all clients with SPEs, just as Andersen resigned from railroads when railroad GAAP was wrong. However, there were a finite number of railroads subject to the bad GAAP, whereas banks and law firms were aggressively marketing SPEs to an unlimited number of clients.

Parties favoring non-consolidation of SPEs include law firms and banks (including those complicit in the Enron frauds) that reap huge fees from SPEs, the Final Four accounting firms (the auditors of those banks) and the SEC. In contrast, Andersen lobbied for mandatory consolidation of SPEs. Now Andersen is gone, having been executed without due process for what appears to have been a good audit.

Who is left to urge reform?

See also:

• Andersen's Ethics Consultant Say Company Rotted from Within
• Wyatt's Call to Return to Professionalism
• The Andersen Verdict: Questions Worth Asking