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The case against accountants revolves primarily around their function as auditors, which accounts for 60% of the profession's revenues. An additional 23% comes from tax planning and the remainder from consulting work. After examining a corporate client's books, auditors usually issue a letter intended to adorn the company's financial statement and certify that the statement is free of errors that could distort the company's fiscal picture. The note often includes the auditor's opinion of the company's business risks. But, cautions Dennis Beresford, chairman of the Financial Accounting Standards Board, the profession's chief rule-making body: "The auditor's signature is not the Good Housekeeping Seal of Approval."
The problem is that many investors think it is. If something goes wrong, they tend to blame the auditor as well as the company's top officers. The common assumption is that auditors should be among the first to know whether a company is failing or even defrauding investors. To be sure, accountants can be found negligent and held liable if their own work is sloppy. A 1989 report by the General Accounting Office on failed thrifts, for instance, found many cases where auditors simply failed to provide independent verification of management claims that problem loans were collectible.
Responsibility for spotting outright fraud, though, is another matter. Says John Hill, assistant professor of accounting at Indiana University: "No audit is going to uncover cleverly disguised fraudulent schemes concocted by management." In the strictest sense, auditors are not required to look for fraud -- but controversy rages about what they should do when they stumble upon it. Rather than inform on clients, auditors usually prefer to drop the account quietly. When that happens, the client must file form 8-K with the Securities and Exchange Commission, explaining why the auditor resigned. But details of the disagreement are typically fudged and played down.
Many lawmakers want to change that practice. Democratic Congressman Ron Wyden of Oregon wants to force accountants to blow the whistle on lawbreaking clients. In 1990 Wyden introduced legislation that would have required auditors to report to the SEC any client found engaging in fraud. Though it passed the House, the bill failed to clear the Senate. Says Wyden, who plans to try again this year: "They're called certified 'public' accountants because they're accountable to the public. But accountants are not living up to their public duty. If they find wrongdoing, they have an obligation to come forward."
Wyden and others lay a large part of the blame for the S&L crisis at the door of the accounting profession. "Accountants didn't cause the S&L crisis," says Wyden. "But they could have saved taxpayers a lot of money if they did their jobs properly and set off enough warning alarms for regulators."