Topic 1.2.1 - Ethical leaders in accounting
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© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved. Page 1 ICAP_182_1-2-1-2_RD_v3-0ICAP Ethical leaders in accounting Chapter 1, Reading Extract from Kelly P.T and Earley, C.E 2011, 'Ethical leaders in accounting', Advances in Accounting Education: Teaching and Curriculum Innovations, Volume 12, 53–76. The ethical leaders we identify include individuals from a variety of accounting areas. Examples are selected from the public accounting profession (both historical and modern day), from commercial industry, from government, and from education. … Historical Leaders Arthur Andersen In 1913, Arthur Andersen founded Andersen, Delany, and Co. with Clarence DeLany, an accountant from Price Waterhouse. The 28-year-old Andersen was an accounting professor at Northwestern University and five years earlier had become the youngest CPA in Illinois. In 1918, Mr. Delany resigned and the firm became Arthur Andersen & Co. From the early stages of the firm, Andersen stressed ethical behavior. ‘‘Think straight and talk straight’’ was a rule Andersen had learned from his mother and this concept was emphasized in the firm. In terms of integrity and high ethical standards, Mr. Andersen personally set the example (Squires, Smith, McDougall, & Yeack, 2003; Toffler & Reingold, 2003). In one famous incident in the early stage of the partnership, Arthur Andersen noticed that one of his largest clients, a railroad company, did not include maintenance charges in operating expenses. At a meeting with an irate president of the company, Andersen noted that ‘‘There was not enough money in the city of Chicago to induce me to change the report’’ (Squires et al., 2003, p. 32). Andersen lost the client, but was vindicated a few months later when the company went bankrupt (Toffler & Reingold, 2003). While Andersen undoubtedly felt pressure to retain one of his most important clients, he was able to demonstrate moral courage in resisting his client’s demands. During the years that followed, Andersen and his firm became well known for integrity, independence, and doing what was right. He was known as one who would address ethical issues. He noted the following at a lecture that he gave in 1932: If the confidence of the public in the integrity of accountants’ reports is shaken, their value is gone. To preserve the integrity of his reports, the accountant must insist upon absolute independence of judgment and action. The necessity of preserving this position of independence indicates certain standards of conduct. (Toffler & Reingold, 2003, p. 16)
© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved. Page 2 ICAP_182_1-2-1-2_RD_v3-0Andersen sought to maintain high standards of conduct for the firm until his death in 1947. This included the idea of the ‘‘One Firm’’ concept that attempted to achieve consistent performance for every client around the world. It also included a commitment to the ‘‘Andersen Way’’ of conducting business ingrained into new hires by more senior partners (Toffler & Reingold, 2003). He continually demonstrated moral judgment, moral motivation, and moral character in leading his firm and insisted on these from others. It is ironic that decades after his death the firm that bears his name was faulted for issues related to competence, integrity, and independence. As one retired Andersen partner who worked with the firm’s founder noted: ‘‘He (Andersen) would be disgusted with what these guys did to his company’’ (Dugan, 2002, p. A1). Leonard Spacek After Arthur Andersen died in 1947, the future of his firm was uncertain. Andersen had been a strong leader, but was ill for an extended period before his death and had not planned for his successor. Leonard Spacek stepped in to lead the firm and proved to be another leader who stressed integrity and competence. He used some of the firm’s earnings to establish a professional development program that reinforced the firm’s values and methods. The Andersen training program became one of the most highly regarded programs in the country and served to support the organizational culture (Squires et al., 2003; Toffler & Reingold, 2003). The firm grew rapidly during Spacek’s tenure, with revenues increasing from $8 million to $190 million between 1950 and 1970 (Squires et al., 2003). Spacek also prodded the profession to improve accounting principles used in financial reporting. He referred to Generally Accepted Accounting Principles (GAAP) as ‘‘generally antiquated accounting principles’’ (Toffler & Reingold, 2003, p. 18). He was not afraid to challenge the profession to improve. Spacek took on his own industry with the ferocity of a pit bull, warning that the myriad of interpretations and the lack of a true ruling body would lead to trouble. ‘‘I would like to tell you that our profession is standing steadfast to our principles and responsibilities ... This I cannot do ... I find that the most serious problems of our profession were caused by our indulgence ... We just wait for the catastrophe, because we do not have a sufficiently strong or self appraising accounting profession to right this public wrong before, not after, serious injury results.’’ (Toffler & Reingold, 2003, p. 174) Spacek also advocated conservative accounting treatment in specific areas. For example, in 1957 he criticized accounting practices used in the railroad industry, noting that the principles were not honest. As one can imagine, this condemnation was not appreciated by the other accounting firms (McRoberts, Alexander, Burns, Manor, & Torriero, 2002). Bob Sack, a former partner at Touche Ross and SEC chief accountant noted, ‘‘Andersen effectively set the standard for everyone else to follow’’ (McRoberts et al., 2002, p. 6). Spacek’s role in helping Andersen to set the standard was well known. When he retired in 1973, Fortune magazine noted: Arthur Andersen’s differentness can largely be traced to the personality of a strong partner, Leonard P. Spacek … who for many years has been the dominant figure in the firm. Spacek has become internationally famous, if not legendary, as a result of his attacks on the accounting profession. Although he stepped down as chief executive seven years ago, he remains intensely active, and his spirit and influence are unmistakably evident ... (Squires et al., 2003, p. 48).
© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved. Page 3 ICAP_182_1-2-1-2_RD_v3-0Modern Day Leaders … Cynthia Cooper Cynthia Cooper was the vice president of Internal Audit at WorldCom. Unlike the other leaders profiled in this chapter, she is unique not only because she is the sole woman profiled but also because she represents leadership at the middle management level. Although she led a relatively small team of internal auditors, her story still provides a compelling example of transformational leadership. She and her team uncovered the largest fraud in U.S. history (Shean, 2007). Cooper grew up in Clinton, Mississippi, home to WorldCom’s headquarters and began her career in public accounting, working briefly for Price Waterhouse and Deloitte in Atlanta before going to work in industry, first in corporate reporting, then in internal audit at WorldCom (Cooper, 2008). The internal audit department grew under Cooper’s leadership although internal audit was not considered a priority for WorldCom’s management. She fought hard to hire additional staff and to get raises and promotions for existing auditors (Cooper, 2008). When her department first began to question entries made for ‘‘prepaid capacity,’’ they were stonewalled by both the controller and the chief financial officer and discovered that their access to computer files had been severed (Cooper, 2008; Shean, 2007; Wells, 2006). Cooper followed her instincts and convinced her staff to follow up on the suspicious transactions, often working late hours, and finding creative ways to circumvent the roadblocks that were set up to prevent internal and external auditors from discovering the fraud (Cooper, 2008). Cooper’s true leadership emerged when her department actually uncovered the first $3.8 billion fraud. At this point she was faced with the decision to blow the whistle to the audit committee of the board and the external auditors. She knew that when the fraud was made public, many at WorldCom would lose their jobs, and a significant portion (if not all) of their savings that was invested in WorldCom’s stock. In addition, Cooper faced personal concerns, such as the fear of retaliation by her employer or being ‘‘blacklisted’’ within her industry (Marshall & Filoromo, 2010; Yeargain & Kessler, 2010). According to Cooper, ‘‘I found myself at a crossroads where there was only one right path to take, and I would take it again’’ (Wells, 2006, p. 44). Ultimately, the fraud totaled $11 billion culminating in a jury conviction of CEO Bernie Ebbers (Cooper, 2008). Cooper remained at WorldCom after the fraud was discovered and after the firm emerged from bankruptcy in April 2004. However, by November of 2004, she was only working for them on a contract basis until her replacement could be hired (Cooper, 2008). She has since written a book about her experiences and often lectures to students and professional organizations about what they can learn from her story. She continues to work as an anti-fraud consultant for organizations (Wells, 2006). …
© 2023 Chartered Accountants Australia and New Zealand ABN 50 084 642 571. All rights reserved. Page 4 ICAP_182_1-2-1-2_RD_v3-0References Cooper, C. (2008). Extraordinary circumstances: The journey of a corporate whistleblower. Hoboken, NJ: Wiley. … Dugan, I. J. (2002). Auditing old-timers recall when prestige was the bottom line – Andersen’s Al Bows relished going over the books: CEO brought to account. Wall Street Journal, July 15, p. A1. … Marshall, D. J., & Filoromo,, M. A., III. (2010). When accountants blow the whistle. The CPA Journal, 80(5), 58–61. … McRoberts, F., Alexander, D., Burns, G., Manor, R., & Torriero, E. A. (2002). A final accounting – The fall of Andersen. Chicago Tribune, September 1. Retrieved from http://www.chicagotribune.com/news/chi-0209010315sep01,0,538751.story … Shean, T. (2007). CPA lauded for disclosing fraud at WorldCom. Knight Ridder Tribune Business News, February 8, p. 1. Squires, S. E., Smith, C. J., McDougall, L., & Yeack, W. R. (2003). Inside Arthur Andersen – Shifting values, unexpected consequences. Upper Saddle River, NJ: Pearson Education, Inc. … Toffler, B. L., & Reingold, J. (2003). Final Accounting – Ambition, greed, and the fall of Arthur Andersen. New York, NY: Random House, Inc. … Wells, J. T. (2006). Will history repeat itself?. The Internal Auditor, 63(3), 38–44. … Yeargain, J. W., & Kessler, L. L. (2010). Organizational hostility toward whistleblowers. Journal of Legal, Ethical, and Regulatory Issues, 13(1), 87–92.