AS INVESTIGATIONS into the collapse of energy giant—Enron (billed as the biggest financial failure in US history) takes astonishing twists and turns, it becomes abundantly clear that everyone who had anything to do with the company’s management and monitoring, failed in their duties: management, credit rating agencies, banks, analysts, regulators and that ultimate watchdog of shareholders’ interest, the external auditor.

Arther Andersen—one of the world’s big five accounting firms—not only put their seal of auditors’ approval on Enron’s misleading accounts, but also scurried to shred evidence. As Enron hit the hidden iceberg of a billion dollars in losses and sank to the bottom of the sea, its stock price crumbled from $80 on September 2 to just 67 cents four months later. Investors lost their life’s savings and it cost the company’s 6,000 employees not just their jobs, but every cent of pension funds that those luckless people had invested in company’s own stock. It was the off-balance sheet financial vehicles that enabled Enron to conceal losses and post huge profits, when actually there were none.

Not surprisingly, most of the blame has been laid at the door of auditors— Arthur Anderson. The firm along with the other top four— PricewaterhouseCoopers; Deloitte & Touche; Ernst & Young and KPMG— control much of the world’s accounting empire. Andersen’s reputation as honest accountant has been permanently tarnished as a result of the Enron debacle. But the firm is not giving up on trying to limit the damage. At a congressional hearing on February 5 (Tuesday), Joseph Berardino, Andersen’s chief executive, urged lawmakers to change accounting regulations so as to allow auditors to grade the quality and risk of a company’s financial statements.

“Currently, firms can only give a ‘pass’ or ‘fail’ to financial data submitted by the company”, he argued. Andersen’s CEO went on to explain: “Some companies do the bare minimum to meet accounting requirements, while others are much more prudent in their accounting decisions and disclosures. There are some companies that are pushing the envelope and investors don’t know which one is which”, he said.

While no one would want to be the devil’s advocate, it has to be admitted that some of what Berardino said, makes sense. In Pakistan—as perhaps in the rest of the world—auditor’s report has to be either ‘clean’ or ‘qualified’. By issuing a clean report, auditor certifies that the financial statements reflect ‘true and fair view’ of the company’s affairs. And a ‘qualified’ report subjects such opinion to some observations of irregularity or inconsistency.

Anyone affiliated with the accounting profession in this country knows that managements of subsidiaries of multinational companies, large local firms, banks and those that depend on public confidence, would fight to the teeth to secure nothing but a ‘clean’ audit report from their auditors. For all the tall talk of their independence, so long as audit firms continue to be recommended by the board of directors and appointed by the shareholders (which again means the board since directors, almost invariably, hold the controlling stakes in companies), auditor must condescend to the management’s demands or else?— well there are always many others waiting in the wings to oblige in exchange for a fat fee.

But between the ‘clean’ auditors’ report and an intensely unacceptable ‘unqualified’ one, there could be varying shades of grey. Grading financial statements according to quality and risk, would enable investors and users of financial statements to determine the ‘extent’ to which those represent ‘true and fair view’.

It would be preposterous to assume that all of the clients could then bully all of the auditors, all of the time, to issue audit reports, that places them at the top of the grading table.

After at least three firms of chartered accountants admitted wrongdoing before the Securities and Exchange Commission of Pakistan (SECP) and paid the maximum fine of Rs 2,000 for gross negligence, it has been made mandatory for auditors to present all relevant information, including audit working papers to the Quality Control Review (QCR) Committee of the Institute of Chartered Accountants of Pakistan (ICAP). It doubtless would be impossible for the Institute to scrutinise the tons of paper work from hundreds of company audits, but the grading could enable it to make a selective review of companies found to be at the greatest risk. Grading could also go to facilitate all users of financial statements: investors, analysts, tax authorities, credit rating agencies and even the regulators in putting company accounts in proper perspective. But all that is subject, of course, to the condition that auditors are able to redeem their reputation as the guardians of shareholder interest—a belief so badly jeopardised by the Enron affair.

The accountancy profession has come under enormous pressure. Questions are being asked whether the ‘generally accepted accounting (auditing) standards’ ((GAAS), ‘International Accounting Standards’ (IAS) and International Financial Reporting Standards (IFRSs) should be made simpler for an ordinary investor to understand. At an accountancy seminar some years ago in Karachi, a speaker had remarked that an audit report should be like a bikini—short enough to be interesting but long enough to cover the subject! A cynic from the audience retorted: “Sure. Audit reports are like bikini, for what they reveal is interesting, but what they conceal is vital!”

But seriously, there are other debatable issues regarding accounting and auditing industry: Has self-regulation by the industry proved effective or is there a need for a tough outside regulator to oversee the members’ conduct? Does the auditor compromise his independence when he accepts consultancy jobs from audit clients—Andersen received $52 million from Enron last year, more than a half of it for consultancy business; and finally, should auditors be changed by rotation. Long term tenure of audit contracts is argued to be unhealthy for this fosters familiarity between company and auditors, diminishing the likelihood that hard questions will be asked.

For all the dozen congressional committees now engrossed deeply into the investigation of Enron debacle, it has yet to be determined if ‘illegality’ of any kind was involved. No one, however, has a shred of doubt that whatever happened was outright ‘immoral’.

Andersen—the world’s fifth largest accounting firm—could have failed in its duty to blow the whistle on Enron’s creative accounting and yet get away with it for having done nothing that was strictly speaking ‘illegal’ (The profession has long argued that it is not quite the job of an auditor to detect fraud). If that were to happen, which still is within the realm of possibility, considering also the clout that the profession enjoys in Washington DC, the worrying question on everybody’s mind would then be: Who will audit the auditor?