EthicsBite™

Each of these firms had achieved the highest reputation for integrity and quality by placing their responsibility to the investing public ahead of all else. Then their corporate cultures changed.

For those of us who were a part of Arthur Andersen in the 1960s and 1970s, there was no question that the firm considered its reputation to be its principal asset. An asset to be safeguarded at all cost. Reputation was everything and reputation brought in the revenue. The foundations of that reputation were competence, independence and objectivity, all found by no coincidence in the ethical standards for CPAs. The people we served were not our clients; they were the investing public who relied upon competent and independent audit opinions; opinions that were signed “Arthur Andersen & Company.”

The firm invested greatly in achieving and maintaining those qualities throughout its organization. We were masters at training our personnel, developing and enforcing firm wide standards of practice across the globe and maintaining discipline in the use of those standards through a mechanism of internal quality assurance reviews of every audit, tax and consulting engagement combined with frequent and specific personnel reviews at all levels.

But we overlooked one key and fundamental element of maintaining a corporate culture that applies to all organizations, one that Standard & Poor’s may also have missed. We altered the values that generated real rewards and recognition for upward movement in the organization. Over time we collectively allowed the importance of independence and objectivity to slip and the importance of revenue generation by individuals to rise. Serving the investing public remained in our literature, but generating more revenue for the partners became the most important value within the partnership.

Had the partners ever sat down at an annual meeting and openly proposed that this be done it most likely would have been booed down. It was not really a conscious decision, nor do I believe that we ever actually viewed rewarding individual revenue production as something likely to be in conflict with our reputation and our integrity. (A prior generation of partners most definitely did.) But slowly over time the focus on admission to and advancement within the partnership shifted. Reputation did not drive revenue; individuals did. Service to investors was not the primary overriding importance; renewing audit contracts and deriving consulting and tax opportunities was.

So when a Chicago Headquarters partner with a well established reputation for audit and accounting expertise came down to Houston to provide the quality assurance review for the Enron audit, his disagreements with the treatment of certain off balance sheet partnerships resulted in his quick dismissal by the firm’s client. The client had no say in the selection of quality assurance partners in the old days. The firm’s top management would not have acquiesced to a clean opinion after such client actions. The threat of loss of consulting revenue from the client would not have swayed the objections presented in the audit opinion. This time they did.

Floyd Norris’s story in The New York Times draws potential parallels between the corporate culture issues underlying Andersen’s demise and those that are appearing to surface as the government brings its civil case against Standard & Poor’s. In the case of Andersen, damage to our economy was contained. In the case of the CDO s of the type that S&P and others rated, the damage was global and a near worldwide meltdown.

Corporate culture is the key to ethical behavior in any organization. But can a company of such importance police itself? Enron led to the Sarbanes-Oxley Act, which among other things established a new oversight agency, the Public Company Accounting Oversight Board (PCAOB), for a profession that had previously been proudly self-regulating. It is time to do the same for the ratings industry.  They are there to serve the public and the public should have the oversight.