The High Cost of Unaccountable Accounting; It's Time to Put the "Independent" Back in "Independent Audit."

By Shuger, Scott; Martel, Ned | The Washington Monthly, January 1990 | Go to article overview

The High Cost of Unaccountable Accounting; It's Time to Put the "Independent" Back in "Independent Audit."


Shuger, Scott, Martel, Ned, The Washington Monthly


The High Cost of Unaccountable Accounting

"You need an operation," says the doctor in the old Henny Youngman joke. "But doctor," says the patient, "I don't want an operation." "OK, then," says the doctor, "for the same price, I'll touch up your x-rays."

It's an old joke, yes, but for too many of the nation's accountants it's something else. It's a living.

There they were, the accountants from the prestigious Big Eight firm of Arthur Young and Company giving "unqualified" audits - that's professional jargon for EVERYTHING'S OK OVER HERE - to Charles Keating's Lincoln Savings and Loan. This was at the same time regional federal regulators had concluded that Lincoln was a "ticking time bomb." Soon after, the bomb exploded, bankrupting thousands of investors who - at least partly on the strength of the Arthur Young audits - had been lured into uninsured junk bonds. And leaving millions of taxpayers with a $2.5 billion bill to pay for the federally insured deposits that were lost. The only thing "unqualified" about Lincoln was the extent of the damage.

Was Arthur Young's role in the Lincoln fiasco simply a matter of making auditing mistakes? Well, according to Richard Breeden, chairman of the Securities and Exchange Commission (SEC), when the SEC began investigating these audits, Arthur Young wouldn't respond voluntarily to requests for information. Breeden says that even after issuing a subpoena, the SEC was given documents made partially unintelligible by Arthur Young stampings and was told by the firm that copyright considerations restricted their availability to investigators.

Shortly after the second favorable audit, Jack Atchison, the Arthur Young executive in charge of the Lincoln account, left for a job with Lincoln's parent company. The new job came with a much higher salary - just under $1 million a year.

The Atchison episode tells you everthing you need to know about the accounting profession's shortcomings. There are lots of ways to cook the books, and accountants are too willing to make use of them because if they do they can be on the receiving end of a very grateful client. And because if they don't, they might blow the account. Your client probably doesn't want an operation, but you want your client - so you touch up his x-rays.

As the Lincoln case shows on a gargantuan scale, this accounting mentality isn't some little vocational quirk - it's a menace to us all. Many accountants seem to have forgotten that. According to The Wall Street Journal, Janice Vincent, regional director for the company that Arthur Young was later folded into, defended the Lincoln audits by stating that accounting firms aren't auditing to determine the safety and soundness of the firm, but only to see if they've complied with generally accepted accounting principles. Well, if those generally accepted principles are worthless, what good is that?

Bert Ely, a financial consultant, got it right when he told The New York Times, "Accountants and auditors are not supposed to be advocates for their clients. …

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