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. Last Updated: 07/27/2016

Dodgy Blame-Dodging

Arthur Andersen, Enron's accounting firm, went public last week with a campaign to free itself of accountability for whatever its Houston-based partners may have done to abet the cooking of Enron's books. At rallies in Houston, Washington and elsewhere, and in full-page advertisements in national newspapers, Andersen's 28,000 U.S. employees offer the defense that, in effect, they are innocent bystanders. It is unfair, they say, to punish the entire firm for the acts of a few miscreants.

The U.S. Justice Department, in an unprecedented indictment, has charged the whole firm with obstruction of justice for shredding documents related to the government's investigation of Enron. Last week Paul Volcker, the former chairman of the U.S. Federal Reserve whom Andersen has engaged to restore its credibility, offered to install a new board and management if the government would drop its case.

The government has yet to respond to Volcker's offer, and it remains to be seen whether it can make its case in court. What is certain is that if the argument put forth by Andersen's employees and its public relations consultants is accepted by the business community, it will undermine the credibility of the accounting profession and further erode investor confidence in the accuracy of certified financial statements.

The "I am Andersen" campaign is antithetical to the stated purpose and role of external auditing firms. When Big Five accounting firms compete for corporate clients, the essence of their sales pitch is their global reach and expertise. A corporation is not retaining the services of a single team of accountants, or even those of a regional office; it is engaging the capabilities of a worldwide professional organization.

Foremost among those capabilities is the expertise of firm-wide committees of experts who carefully review and interpret accounting standards and rulings from the U.S. Securities and Exchange Commission that are then applied to the accounts of every client. Moreover, large, established firms offer corporations the protection that comes from rigorous review processes and systems of control that monitor both the quality and the ethical integrity of the work of the many members of the partnership.

If Andersen's team of Enron auditors violated SEC rules, the firm cannot argue that this was simply an isolated incident. These events must have stemmed from faulty standards, flawed systems of review and control or simple human failure on the part of those who were supposed to be standing watch. Any or all of these explanations would be damaging to the reputation of the entire organization. Any or all of them would lead to the conclusion that not only are the individual accountants who audit Enron culpable, but the entire firm also bears responsibility for either managerial incompetence or ethical turpitude.

To argue otherwise, as Andersen is now doing, is tantamount to admitting that the signature of the firm that appears in corporate annual reports is worthless. In effect, it is offering the self-defeating defense that it does not stand behind the accuracy of its own work.

This is one step down the ethical ladder from Exxon's infamous attempt to unload full responsibility for the Exxon Valdez disaster on the captain of its ship (who doubtless bore the largest share of responsibility but not the entire burden). Andersen's two-step may even be more immoral than Exxon's. The very product of an accounting firm is its integrity, its solemn pledge that it has rigorously checked the facts and stands behind the accuracy of the financial statements being released.

The moral analysis behind the "I am Andersen" campaign is muddled, to say the least. Andersen partners seem to forget that they all shared in the profits from handsome fees they collected from Enron. Now they cry foul when they are all paying the price -- the threat of unemployment -- for their collective failure to keep a clean house. But when an organization makes a mistake, the market metes out its punishment, and in some cases that punishment is failure. If no such price is paid, then managers at other organizations have no incentive to be vigilant; nor are employees at all levels motivated to demand adherence to stated corporate values and standards of conduct.

Yes, innocent employees get hurt when the actions of those at the top of a company cause it to lose credibility. But it makes no sense to argue that it is "unfair" for Andersen's employees to have to pay the price for the ethical and managerial lapses of their superiors. Such is the nature of competitive capitalism.

In the end, the issue is one of organizational accountability. External auditors are the police force of the business world, protecting and serving the investing public. When a few bad cops betray the trust of citizens they are sworn to protect, the public does not let the departments in which they serve off the moral hook. Similarly, the public is holding the Catholic church accountable for failing to control the behavior of its "errant" priests.

By the same reasoning, we should not accept the argument that Andersen's troubles are due to the careless or even criminal acts of a few rogue accountants. For good or for ill, the reputation of an organization is made through the words and deeds of its members. That is the nature of accountability, and it is a lesson accountants, of all people, should understand.

James O'Toole, professor at the Center for Effective Organizations at the University of Southern California, contributed this comment to The New York Times.