Editor's note: FEI's leadership has maintained that Enron's collapse was largely a failure on the front line of management. Separately, many accounting experts believe that its implosion demonstrates that the auditing function is in serious straits and that changes are imperative.
Accounting problems didn't start with Enron Corp., and Arthur Andersen isn't the only Big Five accounting firm to have had egg on its face -- although, in the case of Andersen's auditing of the now-bankrupt Houston-based energy giant, the smallest of the giant international accounting firms is sporting a Texas-sized omelet.
The flood of allegations of fraud, conflicts-of-interest, Byzantine use of rules and footnotes and the startling revelations of document destruction that have attended Andersen's auditing of Enron has truly put the auditing function in the public eye as never before. To many longtime critics of the accounting industry, the Enron debacle is a sad reminder that audits are capable of hiding weaknesses and propping up companies over long periods -- sometimes with devastating results for employees, shareholders, bondholders, suppliers and other constituencies.
Enron's collapse is also the final piece of evidence to many that the private-sector mechanism for auditing public companies, big and small, is in dire need of an overhaul. The former chief accountant at the Securities and Exchange Commission reckons that auditing troubles have resulted in shareholder losses amounting to a whopping $200 billion in just the last few years.
Industry critics, including former SEC Chairman Arthur Levitt, have long been agitating for wholesale reforms, such as barring accounting firms from consulting for companies that they audit. But many of these critics contend that, even with the raft of investigations into Andersen's accounting practices by Congressional committees, the SEC and the Justice Department -- as well as the staggering array of shareholder lawsuits faced by the professional services firm and Enron itself -- the result will be only marginal change.
"If you're defining the system as requiring additional accounting rules and auditing standards, my answer is that we have more than enough of those," says Howard Schilit, president of the Center for Financial Research and Analysis, a Bethesda, Md.-based organization that provides research reports to institutional investors. "But if you're defining the system as the fundamental way that auditors approach...