Back to accounting bedrock

When an auditor has signed off on a misleading financial statement, accountants call the consequences an "audit bust." I wish I could say I was surprised by the bust behind the Enron scandal and the other debacles that have unfolded. But any professor of accounting can cite many similar events in history.

Nervous investors, however, are behaving as if busts were a new phenomenon. Suspicion has infused the markets to such an extent that, for example, Barron's and Business Week have felt obliged to offer tips for detecting deception within financial statements.

One of the media's prime sources of such advice is Howard Shilit, author of the book "Accounting Shenanigans" and one of my best former students. He has become the leading practitioner of the emerging art of "forensic accounting."

While I am happy for Howard, something is seriously awry when the public is being advised to read annual reports with a checklist. Has the accounting profession failed to live up to its social contract? I think not.

Each year, accountants perform almost 17,000 audits of public companies registered with the Securities and Exchange Commission, with no allegations of wrongdoing.

Of course we should enact reforms – such as a new oversight board for auditors – but, as necessary as they are, reforms are likely to do little more than jab another finger in the dike. We already have laws to deal with managers who commit fraud.

Moreover, the reforms under discussion do not address the bedrock issue: the decline of professional ethics. Perhaps I am deluded by nostalgia, but I am certain that the Arthur Andersen of 40 years ago would not have surrendered its independence to Enron, no matter how high the consulting fees.

Early in my career I was inspired by the elders of the profession, who set the bar – and the tone – that made American accounting the gold standard for the rest of the world. The deans impressed upon us novices that, while accountants have a duty to their clients, they have a higher duty to society. That is what it means to be a public accountant.

It is not, primarily, regulations that keep the overwhelming majority of accountants and other professionals out of trouble. Rather, we are all governed and sustained by a culture, battered as it may be, that upholds respect for others, fair play, and truthfulness. If we as a people do not "own" this culture, if we don't have ethical expectations for ourselves and others, no body of law can possibly give us a livable society.

We can attempt, yet again, to draft more fail-safe rules to prevent more audit busts and, inevitably, watch the rules be subverted. Or, in addition, we can commit to educating, training, and screening a new generation of accountants who, through in-depth case study and probing discussion, have learned precisely where and how their predecessors have sold their independence. From Accounting 101 to the mentoring of new CPAs, it should be made plain: Ethics must be as compelling a factor in decisionmaking as economic analysis.

We must bring the best minds into our business schools to inspire students and awaken in them the realization that accounting, like law and medicine, is best practiced as a calling, not merely a business. And, before it becomes an oxymoron, we can make business ethics a weightier aspect of the management school curriculum.

At the same time we need to insist that professionals embrace the bedrock principles of ethical living. Lapses must be punished both legally and socially, wherever we find them, whether it be on the golf course or in the office.

Confidence in the integrity of markets is, in the widest sense, truly a matter of national security. Rogue managers have damaged the American market system as surely as if they had thrown a grenade into the US Treasury.

I do not mean to suggest that being ethical is a grim proposition. On the contrary, adhering to principles develops a healthy and elevating sense of autonomy, confidence, and pride.

New York City firefighters showed us on Sept. 11 what professionalism means. Their example helped us regain our patriotism and sense of community. From here it is easy to segue into serious talk about citizenship and social responsibility. Let the conversation begin.

• Philip M. Piaker, Distinguished Service Professor Emeritus at the School of Management, Binghamton University, is a former chairman of the New York State Board for Public Accountancy. Hal Smith is a writer.