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The TSC Streetside Chat: Accounting Historian William Samson

George Mannes

A certified public accountant himself, Samson is president of the Academy of Accounting Historians. So we asked him for some perspective on where Enron, WorldCom and Xerox -- not to mention the companies that have audited them -- fit into accounting history.

TheStreet.com: How do Americans feel about accountants, and how has that changed over the years?

Bill Samson: The accounting profession and accountants have been held in very, very high regard by the public. In polls about integrity and so forth, we have been up there with ministers and priests and so forth. (Unfortunately, I guess, maybe priests have fallen down, too.) But I'm sure new polls will show we have fallen dramatically. And we're down, probably, beneath car salesmen and so forth down there on the scale.

TheStreet.com: Is there any other time or crisis that you can compare this to? When there were other financial crises, were accountants ever the target of scrutiny?

Bill Samson: You can go back to the 1980s. We had some problems with the savings and loans debacles where things were missed, and accountants in some sense did some bad audits for savings and loans and real estate businesses and construction businesses and so forth. And lots of dollars were lost in that. But we didn't receive the huge criticism that we are today.

TheStreet.com: Why do you think that was?

Bill Samson: I don't know. Maybe the savings and loan scandals were very specific in a specific industry. Maybe the losses were to a different group of investors. I don't know why we weren't taking quite the hits. Certainly the accounting profession did have to atone for it in part -- pay for some damages and so forth. But again, by and large, it wasn't to the point of being in the newspapers. And people didn't know who the public accounting firms were, like we're being hit with today.

TheStreet.com: How did the stock market crash and the 1930s Depression affect accountants? How much of the blame did they get from the crash?

Bill Samson: The accounting profession, in some sense, emerged out of the Depression. It was mandated that you had to have audits and so forth -- audits by CPAs -- whereas before it was voluntary. A large number of companies were hiring CPAs to audit their financial statement prior to the [early 1930s] SEC legislation, but afterward, again, it was required. And so we came out pretty well out of the Depression. ... It was just one step that lent, I guess, credibility to the financial statements and helped restore confidence. There was an external audit, and people could take and trust these financial statements now that they were being audited by an outside party.

But there was a big scandal in the late 1930s when it was discovered that the auditing being done lacked certain standards. ... McKesson & Robbins was basically a drug manufacturer. It was a guy who basically said on his financial statements he had huge amounts of inventory. He did not have any inventory at all. The auditors just had not been taking inventory.

TheStreet.com: Is what's going on right now, the perception of an accounting crisis, or is it an actual accounting crisis?

Bill Samson: Well, it's certainly a crisis in auditing, in that we really believe the auditors have not understood their role, have lost their perspective on what their role really is.

We say that the client is the company you're auditing. That's not true at all. The client really should be the public out there who's going to be reading the financial statements.

Putting it in a different perspective, the auditor is hired to protect shareholders. That has been a tradition. And we've sort of lost our perspective that the auditor is there to look at the financial statements that are being produced by management, and render opinions that these financial statements can be relied on by these external investors, the shareholders and so forth, so in some sense they are representing to the shareholders and investor public -- bondholders and so forth -- that these numbers are reliable.

TheStreet.com: Why do you think this has come about?

Bill Samson: We've lost sight that accounting is a profession. Certainly that has changed. We used to view it as a profession like law and medicine and so forth, and over about the last 20 years, we've haven't talked about it as a profession. We've talked about it as a business. And that's made a whole lot of difference. The idea is that the auditor is going to be engaging in consulting activities and trying to boost revenues any way he can with these companies. And that made it a whole lot different perspective when you start talking to the corporate management -- you certainly want to make sure he's going to be hiring you for consulting activities.

And that in the past was not at all the perspective. Consulting activities were relatively minor. ... The auditing was the major thing that the CPA firms were doing.

TheStreet.com: What's your prescription for how to fix the industry?

Bill Samson: I like to think we could open up a giant school or a giant re-education program just like maybe they do over in China and some places where the Communists have lost their way -- well, we have accountants who've lost their way -- and have a giant re-education program somewhere where we're saying that ethics do matter.

We probably can't do that, but I think that these horror stories, and the fact that accountants are now in some really deep trouble, and some of them are going to be testifying in front of Congress and some of them are probably going to end up indicted and having criminal charges against them -- that's very sobering. And hopefully that will make a difference to the accounting profession. Maybe some of the other firms and some of the others will say, "There but for the grace of God go I," and maybe change their ways. I think some of that is happening.

I think changing auditors -- as we've seen when Arthur Andersen's clients are now with these other firms -- has caused some of these restatements. We're discovering, for example, with Xerox and so forth, that the numbers changed a whole lot. Same thing with what just happened over at WorldCom. Again, the numbers change a whole lot when another auditor comes in, looks at the same story. I think that says that the new auditor is going to be taking a very, very tough approach.

TheStreet.com: Do you think a change in auditors should be mandated?

Bill Samson: I think that's helpful. I really do.