LEONA HELMSLEY is not the only one to have a tarnished reputation as a result of her trial and conviction for tax fraud late last month. As the prosecutor, James De Vita, pointed out to the jury, a number of accounting firms ended up with red faces as well.
``Ladies and gentlemen, if you learned anything in this case, you learned that the accounting profession has real problems,'' said Mr. De Vita in his closing statement.
Those problems may now get a public airing. In an interview, Rep. Ron Wyden (D) of Oregon says he plans to ask the staff of the Subcommittee on Oversight and Investigations to look into the case. Representative Wyden has had an interest in accounting issues and how the government should monitor the profession.
Wyden says the Helmsley case ``certainly raises the questions to me that may make this the textbook case of what needs to be done in terms of regulatory oversight if in fact there were things that the auditor should have done and management did not do it.''
Robert Sack, the former chief accountant in the enforcement division of the Securities and Exchange Commission, says the profession should begin an ethics investigation into the accounting firms involved.
``Even if the court did not name the accountants as unindicted co-conspirators, it does not clear them of ethical questions,'' says Mr. Sack, who teaches at the Darden School of Business at the University of Virginia.
Officials at the American Institute of Certified Public Accountants had no comment on the Helmsley case. In response to Wyden's comments, however, Philip Chenok, president of the AICPA, said the profession maintains ``a highly effective'' self-regulatory process. ``We are prepared to respond to congressional inquiries about the effectiveness of that process as we have in past years,'' said Mr. Chenok in a statement.
What is certain to come under close scrutiny is the behavior of Ernst & Whinney (now Ernst & Young), one of the ``big eight'' accounting firms.
Ernst & Whinney was responsible for auditing the books of the Harley Hotels, a subsidiary of the Helmsley empire. An intern working for the firm discovered that the Helmsleys were charging personal expenses to the hotel chain.
The accountants went to the treasurer of the Harley chain and told him to change the procedure, making the Helmsleys' expenses into IOUs owed to the hotel. The Helmsleys ignored Ernst & Whinney. Prosecutor De Vita proclaimed at the trial, ``What did they (Ernst & Whinney) do? Nothing.''
At the trial, the accountants defended themselves by noting that the amount of money involved was not material to the financial statements. In other words, it would not make much, if any, difference to the Harley Hotels profits. Asked for a comment, Ernst & Whinney spokesman Morton Myerson says, ``As a matter of policy we don't comment on client matters.''
But Abraham Briloff, a professor emeritus at Baruch College and a noted expert on accounting ethics, says the critical factor was the ``nature of the differential,'' because it ``demonstrates a reckless irresponsibility'' by management. Anyone reading those financial statements needs to know this information.
Mr. Sack says Ernst & Whinney should have debated whether to resign the account after discovering that the client ignored its instructions. ``They have to make a judgment on the integrity of management,'' he says. Ernst & Whinney continues to represent the Harley Hotels. Considering Mrs. Helmsley's guilty verdict, Sack says, ``It shows their (Ernest & Whinney's) judgment about integrity was wrong.''
It is exactly this area that is likely to draw the most fire from congressional investigators. In 1986, Wyden pressed the industry to make changes. The accounting profession assured him, however, it could police itself and accountants would resign from private accounts where they found fraud. Now Wyden says, ``I feel very strongly that a system needs to be devised so when an auditor believes it found material irregularities which are brought to the attention of management which won't deal with them, then they have to go to the regulators.''
The other accountants in the Helmsley trial did not look much better than Ernst & Whinney.
The Helmsleys' defense hired Touche Ross to recalculate Mrs. Helmsley's tax liability three years after the indictment. Touche Ross showed Helmsley had overpaid her taxes because of a mistake in figuring out depreciation on a Helmsley partnership. However, the government forced Gerald Padwe, national tax director of the firm, to admit Touche Ross had not looked at all the Helmsleys' partnerships, nor calculated Mrs. Helmsley's additional income that resulted from his recalculations.
The New York-based firm of Eisner & Lubin was responsible for doing the Helmsleys' taxes. De Vita noted, ``We are not submitting that Eisner & Lubin is a paragon of accounting wherewithal.'' An Eisner & Lubin accountant, Gerald Marsden, noting the errors in the tax return, proclaimed it was ``too much trouble'' to amend the tax returns.