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The Tyranny of the Bottom Line
Ralph Estes’ voice is not being heard in Congress.
That probably says more about Congress than it says about Ralph Estes.
At last count, 11 Congressional committees were up and running, investigating the collapse of Enron and the role of the auditors.
A study released last week by the Center for Responsive Politics found that of the 248 Senators and House members serving on those 11 committees, 212 have received campaign contributions from Enron or its accounting firm, Arthur Andersen.
Under any other conditions, Estes might be a considered a top candidate to aid Congressional investigators.
He used to be an auditor at Arthur Andersen.
He was president of Accountants for the Public Interest.
He has written a number of pathbreaking books, including Auditor’s Report and Investor Behavior, Corporate Social Accounting, Accounting and Society, and most recently, Tyranny of the Bottom Line: Why Corporations Make Good People Do Bad Things.
He was on a short list to be chair of the Securities and Exchange Commission (SEC), but Arthur Levitt had raised $1 million for the Democrats, and Estes had raised zero for the Democrats, so Arthur Levitt became chair of the SEC.
But even Arthur Levitt, with all his institutional credentials, couldn’t overcome the accounting industry’s money and get through a mild reform that would have prohibited accounting firms from raking in millions in consultancy fees from audited corporate clients.
Levitt got kicked in the teeth by a bi-partisan group of members of Congress — many of whom are now posturing for cameras, using Enron and Arthur Andersen as a whipping boy for political advantage.
But Levitt’s was only a 10 percent solution to a structural problem that forces good people to do bad things.
If Congress were serious, they would consider the 100 percent solution being offered by Estes.
Estes says that Congress should prohibit corporations from hiring auditors.
If a corporation needs an audit, it would go to a newly created Corporate Accountability Commission, an independent agency of the U.S. government, which would assign it an auditor. The company would pay its fee to the Commission, which would pay the auditor.
The government would hire and fire the auditors.
Bank examiners, insurance examiners and other professionals are independent of those they audit or examine. Why not financial auditors?
“Even State Farm knows not to let me choose the damage assessor,” Estes says.
In addition to hiring the auditors, the Commission would regulate the industry.
We asked Estes his thoughts on the self-regulation proposal put forth last week by SEC chairman Harvey Pitt.
“Pitt reminds me of a mafia lawyer who is appointed Attorney General and is called upon to propose laws constraining the mafia,” Estes says. “You can count on what comes out being detailed, involving a lot of verbiage and not harming his friends at all. The applicability of this analogy is evident when we see the AICPA [the American Institute of Certified Public Accountants] effectively saying — yeah Harvey, right on, we like that one. Pitt was an attorney for each of the Big Five accounting firms and for the AICPA. What he is proposing is a modest tightening of the in-house industry self-regulation.”
Many of the top financial executives of Enron were former Arthur Andersen employees. And this movement from accounting industry to audited client is rampant within the industry.
Estes says that if you audit a client, you shouldn’t be able to go to work for them for at least five years.
“This may sound tough, but I don’t think it’s unreasonable for potential recruits to public accounting to recognize that moving to a client is simply not an available option,” he says. “Auditors should proudly view their work as professional and important, and be prepared to spend their entire careers in this work.”
Reflecting the dictums that “you manage what you measure” and “if you don’t count it, it doesn’t count,” the Commission would also require corporations to incorporate into their accounting system data on intangibles and externalities.
For example, when workers were injured, you wouldn’t merely report the cost of the in-house nurse and the insurance, but you would also report the cost to the worker of loss of the leg, offset by any benefits you might provide to the worker.
How would this new accounting system affect the bottom line? Instead of just one bottom line for financial investors, there would be many “bottom lines” — for employees, customers, financial investors, communities, and the greater society. (For more on Estes’ proposal, see www.stakeholderalliance.org.)
Estes hit the nail on the head when he titled his most recent book Tyranny of the Bottom Line: Why Corporations Make Good People Do Bad Things.
Now we learn that J. Clifford Baxter was found in a suburb of Houston, shot in the head, an apparent suicide.
Baxter was an Enron executive who in May 2001 reportedly challenged the company’s financial practices and resigned.
His colleague, Sherron Watkins, wrote in a memo to Enron CEO Ken Lay that “Cliff Baxter complained mightily to [then-CEO Jeff] Skilling and all who would listen about the inappropriateness of our transactions with LJM” — one of the partnerships where Enron parked off-the-books debts.
In the end, we are all victims of this tyranny of the bottom line.
To stop the bleeding, the political class needs to stop genuflecting and start listening to courageous professionals like Ralph Estes, who have much to teach about how to fix our system of unaccountable accounting.
Russell Mokhiber is editor of the Washington,