Learning from Andersen

Thanks are due former Federal Reserve Chairman Paul Volcker for putting it right on the line: "Do we want reform, or do we not?"

Mr. Volcker heads a panel that's probing the operations of Arthur Andersen, the big accounting firm that signed off on Enron's convoluted books. His comment came in response to questions about what should come next for Andersen, but it applies to an array of current business and financial practices.

President Bush himself has chimed in, listing 10 steps to make corporate executives more accountable to shareholders. They included quarterly reports in plain English that the investing public can grasp, and closing loopholes that allow insider trading to be disclosed only after long delays.

The Bush plan also noted the need for stronger enforcement of accounting standards. That call is echoed in Volcker's work as company-appointed disciplinarian for Andersen. He wants a split between the firm's auditing function – its checking of corporate books – and its financial-consulting business. The intertwining of those lines of work pose conflicts of interest throughout the accounting industry.

Volcker's panel also wants less cozy relationships between auditors and corporations, faster rotation of accountants assigned to particular clients, and brakes on the revolving door between accounting firms and their big clients. All sound moves.

But perhaps Volcker's most penetrating recommendation is for greater emphasis on respecting the intent of accounting standards. The rules exist, and they may usefully be expanded, but nothing substitutes for people committed to abiding by them instead of figuring out ways around them.

One of the ironies of the current situation is that Andersen was for years considered a pillar of accounting ethics.

It now appears the company may not survive the legal charges facing it. It has chosen to plead not guilty to federal charges of obstruction of justice related to the shredding of Enron documents by its Houston office. That may keep a felony conviction off the company record for now, but damage to Andersen's reputation is already extensive. Major clients, and top employees, are deserting the firm.

These desertions, plus its liability to lawsuits by Enron shareholders and employees, will make it difficult for Andersen to survive and reclaim its earlier heritage. But reform in this crucial industry – whose work underpins public trust in American business – should continue, nonetheless. The recognition has to grow that there's no greater asset than a strong sense of ethics.

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