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As Arthur Andersen scrambles to retain its client base and re-establish its credibility, the firm's management may want to spend a few moments revisiting their calculation of the present value of the $25 million it received from Enron for consulting services. At the foundational level, commonsense corporate finance would tell us that a good investment is one that is worth more tomorrow than it is today. Is the present value of $25 million in corporate consulting fees from Enron worth more than the potential revenues of $100 billion over the next eight to 10 years?

The answer to this question may not depend on how well Andersen executives can explain the opportunity costs and calculated risks contained in their strategic corporate goals. SEC Chairman Harvey Pitt testified before the House Financial Services Subcommittee and offered that it is unclear whether Arthur Andersen's actions involving Enron were illegal, unethical, or just incompetent. In fact, the SEC hesitates to go after accounting firms who are viewed as simply negligent in their work. According to Pitt, the definitions of negligence and illegal actions are ambiguous in the current regulatory environment. It may be that throughout the tumult with Enron, the fine line between illegal, unethical, and incompetent has been blurred completely.

Perhaps an examination of the reality of strategic dissonance in corporate life can offer some insight into the Anderson/Enron debacle. Strategic dissonance occurs when there is a difference between an organization's policies and the actions that it takes. At Arthur Andersen, strategic dissonance may be the result of corporate policies conflicting with the actions taken or it may be the result of corporate values conflicting with the moral lapses of judgments made by executives. I offer three possible points of examination where the firm's actions may have deviated from policies, or where moral lapses in judgments may have occurred.

First, were the actions of the Arthur Anderson's auditing team illegal? Is it possible that $25 million in consulting fees could buy the silence of an entire team of “independent” auditors and consultants? If such an event did indeed occur, then it is quite clear that sound moral reasoning evaporated. In such a case, the next issue is whether the number of staff involved was one or hundreds. Members of the House Financial Services Committee seem to think that a level of fraudulent activity by hundreds would be difficult to prove, although such a possibility does exist. The management of Arthur Andersen took swift action to head off such allegations by dismissing David Duncan, the Andersen executive who served as engagement partner on the Enron audit. They have also placed three additional partners on administrative leave, pending the completion of the investigation. Arthur Andersen is seeking to limit its liability by taking these aggressive actions and by making public the fact that employees disposed of a “significant number of electronic and paper documents.” Company spokespersons were careful to state that the destruction of these documents is a clear violation of corporate policy, and the files were destroyed based on instructions from Mr. Duncan.

Another possible point of examination is the idea that all CPAs at the firm are simply incompetent. Is it reasonable to assert that the Generally Accepted Accounting Principles (GAAP) are so confusing that even the brightest and most well-trained CPAs cannot understand them? Remember that these standards are actually set by a self-regulated board of CPAs called the Financial Accounting Standards Board (FASB). Based on the training CPAs typically receive and the professionalism shown in most accounting firms, such incompetence on a mass scale is rather remarkable. It is highly unlikely that any company would entrust a $25 million audit and consulting project to incompetent staff.

A third and final point of examination could be that the entire audit team was involved in some level of unethical and/or immoral behavior. A disturbing question looms: Is such behavior prevalent in one of the world's largest professional accounting and consulting firms? Or could it be that the Generally Accepted Accounting Principles (GAAP) are written to encourage and allow for “creative interpretation?” Arthur Andersen is attempting to play down the allegations of widespread unethical behavior; however, it has acknowledged limited liability through the swift actions to remove those deemed responsible for the Enron mess. If the audit and consulting activities of Enron do not even equal one half of one percent of their revenues, one rightly wonders why Andersen executives have jeopardized the entire organization for this small percentage of its business?

Obviously, the three points above concerning the conduct of Arthur Andersen do not provide answers. The question remains: How did Arthur Andersen fail so miserably to fulfill its professional duties as independent auditors? The answer has yet to be discovered. Although $25 million may not have bought illegal actions, paid salaries of incompetent CPAs, or fostered unethical behavior, it can surely be said that this is the worst return on any investment Arthur Andersen has ever made.

Key in understanding Arthur Andersen and its actions is an examination of the moral and ethical system individuals within the company used in evaluating what was right and wrong in determining Enron's fiscal situation. Morality deals with and serves as a point of examination for human actions and intentions. The ability to engage in moral reasoning and make sound ethical decisions, based on clear understandings of right and wrong, is a power unique to humans. No doubt, a skewed moral compass concerning ethical business practices is a sure way to introduce strategic dissonance into the life of a corporation. If the moral compass of those executing corporate polices is at odds with the policies themselves, trouble is on the horizon.

We are already seeing a push for greater government regulation of financial markets and adoption of more complex financial and accounting principles with the intent to protect investors. In fact, the SEC, the FASB, the House Financial Services Subcommittee, and countless other organizations have vowed to pursue reform of accounting standards that would make transparency and full disclosure a legal requirement. These are essential features of free markets, but it is far from clear as to whether government intervention is capable of achieving this goal.

The cycle of the “accounting life” continues. As a self-regulating board, FASB is a target for those who push for greater governmental regulation. Critics cite the Andersen/Enron situation as an example “par excellence” of accountants' inability to police themselves. It remains to be seen, however, if greater regulation and more complex accounting standards will accomplish the “reforms” necessary to discourage another failure similar to the one Andersen and Enron are now experiencing.

Perhaps the question that needs to be asked is a much harder one, dealing with the moral convictions and lapses of those responsible for the current situation. Given the mysterious dynamics of human freedom, it would be impossible to guard against every harm an investor may encounter. The reality is that the most fundamental reforms needed deal with those individuals charged with the governance of a company, and these are the tough reforms that no amount of regulation can enforce.

Rob Simpson, Ph.D. is the director of administration and finance at the Acton Institute.