BDO Seidman And The Accountants' Revenge

That's silly–accountants don't use pocket protectors, not for years. They use PDAs, just like the investment bankers. But the case of BDO Seidman versus Judge William Webster does raise an important point, one that has been lost since Enron started making headlines and Arthur Andersen started being vilified: The books and records accountants audit are written first by the clients.

Auditors play an important role in making sure–for the benefit of the public–that those books have been prepared in accordance with generally accepted accounting principles (GAAP) and that the numbers are accurate. But that role is secondary. Primary responsibility is born by the company preparing those books in the first instance. The BDO Seidman case is the accountants' revenge.

The case arises from the hiring of William Webster, former FBI director, by the U.S. Securities and Exchange Commission to head a newly created accounting oversight board. That simple process blew up when it became known that Webster sat on the board of directors' audit committee of an outfit called U.S. Technologies (otc: USXX – news – people ), now essentially defunct, that lately billed itself as an Internet incubator. Pitt says he told former SEC Chairman Harvey Pitt about his role at the company and that there were questions, including fraud charges, concerning the veracity of U.S. Technology's books. Pitt never informed his fellow commissioners (he says he investigated the issue and found nothing to worry about). Pitt's failure–the last in a series of bungles–led to his forced resignation on election night, Nov. 5.

The Pitt-Webster matter has opened the door to an airing of grievances by BDO Seidman, the nation's sixth-largest accounting firm, which had been U.S. Technology's auditor. Yesterday, in the context of a federal lawsuit, it released documents indicating that Webster knew more than he had let on about the problems inside the company.

The documents support BDO Seidman's contention that it warned of “material weakness in the company's internal controls” before it was dismissed. Webster, by contrast, says he didn't recall the auditors voicing such concerns and that they were fired because they were too slow and too expensive.

The BDO-Webster battle is a sideshow to the Webster hiring, which is a sideshow to Pitt's tenure at the SEC, which is a sideshow to the main event of what to do about crooked companies. But this sideshow four times removed brings us back to the beginning, which is Enron.

To date – and this is amazing – the only person or entity actually tried for its role in the Enron affair has been accounting firm Arthur Andersen. (Two lesser Enron executives have pleaded guilty to various charges and Andrew Fastow, former CFO, has been indicted.) Pitt's SEC still has not roused itself to bring civil charges against Andersen's client, Enron, or against its top executives, Kenneth Lay and Jeffrey Skilling. It still has time to act, though–the wheels of justice moves slowly and all that. But the evidence of fraud at Enron is massive, and the question remains: What's the holdup?

Arthur Andersen deserved to be found guilty. The evidence that it shred documents was just a part of what it did wrong in its association with the Houston-based energy trader. But it should have been tried last–or at least down the line–after the real culprits had been rounded up.

After all, David Duncan, the Andersen partner, earned perhaps $1 million a year for representing Enron. Lay and Skilling earned tens of millions. That's fair enough. But responsibility should at least be roughly in line with the cash.

Certified public accountants play a unique role. Their first responsibility is to the public, investors and creditors, not to their client. The problems all stem from the chain of responsibility being confused.

Andersen shredded documents. It was likely protecting itself. But the secrets the auditors were hiding were principally Enron's. Andersen was auditing Enron; Enron was not auditing Andersen.

Now comes BDO Seidman, avatar of the accounting class, with its own documents, unshredded. Here is how it works, BDO is saying: When we told them their accounts could not be trusted, they didn't listen, they didn't change and they fired us! The world is now waiting to hear Webster's response. It has been waiting a lot longer to hear from Ken Lay.

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