Over the last year, the news has been filled with tales of business gone awry. Enron was the first in the current wave. Now we've found out that Global Crossing, Qwest, Harken Energy, Reliant Resources, Worldcom, Halliburton, Merck, Waste Management, Vivendi, Xerox, Tyco, El Paso, Rite-Aid, Computer Associates, Nvidia, Kmart, Adelphia Communications, and Network Associates have all undergone investigation for accounting fraud in the past year. In addition, the accounting firms Arthur Anderson and KPMG have been revealed to be less than thorough with some of their audits of corporate books. Merrill Lynch avoided prosecution by New York State for lying to investors over the health of companies it recommended by basically promising not to do it again.
Surprised at the number of companies I listed above? So was I.
Re-hashing the particulars of each case adds little to the discussion at this point. Neither does restating the amounts of money involved. It's all a blur at this point. We've become numb. So when I do a search on the New York Times web site for accounting inquiries, I come up with each of these companies. I read about each and every one of them as the news broke. But I lost track somewhere along the line.
Lately, although the news continues to be filled with revelations about new accounting frauds, we have started to see various proposals to clean up the system. I've heard of preventing audit firms from consulting for their audit clients. Some have proposed preventing executives from selling stock acquired via options for an extended period of time. Other have proposed requiring more independent directors and all independent directors on audit committees.
I think all of these proposals, even if enacted, will fail. Here's why. None of them address the problem of company management being in charge of their own reviews. Management controls the numbers. Yep. It's as if I wrote my own performance review. Auditing lately works as if someone merely checked the spelling in my review.
My own personal proposal is that accounting at a company be performed by independent accountants selected by someone outside management. Not the kind of accountants that decide how much to budget for each department. Instead, I am talking about the business of recording the sales, marking down expenses, accounting for purchases, etc. All of the recording should be done by someone independent. Not only do they need to be selected independently, they need to be paid independently. Currently, auditors are paid by companies themselves, controlled by the executives who are not really beholden to shareholders. Instead, the exchanges or the S.E.C. need to establish funds for paying auditors. Corporations should pay into the fund based on objective criteria, such as their revenue, market value, profit, or cash flow. This will separate the accounting from management, and perhaps return shareholder trust to the numbers.
I also like the idea because company management is being paid to manage. They are not being paid for accounting. This can free up their time to focus more on business strategy.
Then again, I may be completely clueless.