Enron Revisted: Where Are We Today?

By Jeffrey R. Hoops

It was about this time two years ago that I was nominated to serve as your president-elect to eventually become your president. At the time we were in the middle of what has become known as the Enron crisis. The energy giant had declared bankruptcy and was effectively out of business. Arthur Andersen was under indictment and it too would soon be out of business. It would not be too long before WorldCom and a bunch of other high-profile companies would experience similar fates. Investors had lost confidence in the capital markets and in our profession’s ability to conduct meaningful audits.

This period turned out to be one of the worst times in our profession’s history. The profession frequently found itself on the hot seat of numerous Congressional inquiries that ultimately led to the Sarbanes-Oxley Act. Our state officials also were conducting hearings and considering regulatory and legislative action. The bad publicity at times seemed deserving and never-ending—we even were the butt of jokes on late-night talk shows. Coping with the Enron crisis has consumed much of my time as Society president, just as it did with my two most recent predecessors.

So, two years later, where are we? Are we a stronger profession? Have we done anything meaningful to regain the public’s respect?

Sarbanes-Oxley passed in July 2002. This act has had a profound impact on corporate governance and on the accounting profession. For starters, the role of the audit committee of a company’s board of directors has grown considerably. Audit committees are taking their increased responsibilities very seriously. Audit committee members are more engaged both with senior management and with the company’s independent auditors. They meet more often and have more extensive discussions about accounting, reporting, internal controls and the scope of services that the independent auditor performs.

Boards are looking harder to find qualified directors to serve on audit committees. More CPAs are being asked to serve. In fact, the American Institute of CPAs has a program in place to match qualified members with boards that need assistance. Some of our own members have been asked to serve both on boards and on audit committees.

There has been a renewed emphasis on audit quality. The annual audit at both large and small companies is no longer considered a commodity or a necessary evil. Internal auditors have new stature.

“Many publicly traded companies undertook attic-to-basement reviews and accepted the law as an opportunity to make sure their companies were sound,” Sarbanes-Oxley cosponsor Rep. Michael G. Oxley, chairman of the House Financial Services Committee, said.

You can expect even more emphasis on this type of activity as companies start reporting on the effectiveness of their internal controls.

At the same time, most accounting firms have undertaken extensive reviews of their audit methodologies and review procedures. The Public Company Accounting Oversight Board didn’t exist two years ago, but it is up and running at a brisk pace. One of the PCAOB’s first endeavors was to emphasize the “tone at the top” of both accounting firms and the companies they audit.

The AICPA also has established audit quality centers for firms that audit public companies, government organizations and employee benefit plans. There is more emphasis on detecting fraud and on establishing uniform international accounting and auditing standards. All of these activities have been undertaken with a real sense of urgency and importance.

At the New York state level, our legislators and regulators wisely decided to limit their actions until they could gauge the impact of federal activity. Now they are looking to achieve meaningful accounting-profession reform at the state level. The Society continues to work with the legislature and the state board of accountancy on this effort.

Beyond quality audits, there is a renewed interest in ethical behavior and practices. It’s hard to find a business publication or professional journal that has not recently run a series of articles on business and professional ethics. More companies are establishing enforceable codes of conduct.

The Society formed a task force on quality control and ethics. Its report will be considered by our board of directors in the spring. Both the Society and the AICPA have taken steps to improve the process for peer review and discipline, too.

All of this activity has created opportunities for accounting firms of all sizes. Many firms are seeing new opportunities to consult with large public companies on reporting, internal control, tax and other matters. Services that were routinely provided by the independent auditors are now subject to audit committee scrutiny and approval. Other service providers are increasingly being considered by public companies.

College enrollments in accounting programs are up. Part of this trend is undoubtedly due to the favorable job market for accounting majors, but accounting is now viewed as a career where you can make a difference.

The last two years have been tough, and our profession is in a much different place than it was. But it’s a better place, with renewed emphasis on ethics, integrity, good corporate governance and audit quality. Yes, we definitely are a stronger profession, and, yes, I think we are slowly regaining the public’s trust. There almost certainly will be more dark days ahead for our profession, but on balance I think we can be proud of what we have accomplished in the last two years. We can’t rest, though, because there is still much at stake and much work to be done.