Ethical Realism

April 7, 2011

Review of Barbara Toffler’s Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen

Filed under: ethics,philosophy — JW Gray @ 7:12 am
Tags: , , ,

I decided that I want to know more about ethics in accounting and someone recommended that I read Barbara Toffler’s book, Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen. Toffler worked at Arthur Anderson, a prominent accounting firm, as a consultant and she believes that she witnessed the culture of greed and salesmanship that lead to the Arthur Anderson’s involvement in the greatest scandals of the accounting world, including both Enron and WorldCom. She describes her experiences, she pinpoints cultural influences of corruption, and she suggests how changes in the accounting world can help avoid scandals the future. I will (1) briefly describe auditing scandals, (2) summarize Toffler’s findings, and (3) discuss my own perspective.

1. Auditing scandals

Many accountants are “external auditors” and they play a vital role in our economy. They exist for our benefit, not merely the benefit of their “clients.” Auditing scandals exist because auditors can neglect their duties to the public and help their client commit fraud. I will (a) discuss the duty of auditors and (b) discuss auditing scandals in general.

What is the duty of external auditors?

Auditors investigate the financial statement of a company. This is important to know the worth and earnings of a company. There are internal and external auditors. Internal auditors work for the company, and external auditors double check and assure the public that the company is honest and the “books are in order.” The public often needs external audits to be assured of the worth of a company to decide if and when to invest in the company. Stockholders in particular want to know that their investment is “worth it.”

If a company lies about making high profits and is really bankrupt, then the stockholders have been scammed and will lose money from their investments. Reliable external auditing is essential to give the public the confidence needed to invest in the stock market, and auditing scandals can destroy that confidence or even cause damage to the economy as a consequence.

What are auditing scandals?

Auditing scandals exist when external auditors don’t investigate the worth and earnings of a company appropriately. Sometimes the external auditors will do little more than trust the audit done by the internal auditors with virtually no investigation or follow up involved. When this happens a company committing fraud is likely to get away with it and many stockholders can be scammed.

One powerful motivation behind auditing scandals is that external auditors are hired by companies and thorough investigations can get the auditors fired. External auditors often compete to be hired by large companies because a great deal of money is at stake, and they can give into the demands of their “clients” to win over new business and avoid losing business.

One example of a huge accounting scandal was the Enron scandal. Enron was committing fraud by lying about its earnings and worth using a “special purpose entity” to hide its debt in order to increase its stock princes (211-215). Anderson auditors found issues, but appropriate demands were not made to Enron to set their statements straight. Enron was eventually caught by the authorities and were forced to do a restatement for 1997-2000 of 591 million dollars.

2. Toffler’s findings

First, Toffler argues that there are cultural elements at Arthur Anderson that partially caused the auditing scandals, which are likely to be shared by other accounting firms. Second, Toffler offers suggestions that can help avoid auditing scandals in the future.

Arthur Anderson’s culture

Many people seem to act like criminals merely choose to do wrong and that each crime is an isolated incident. All we have to do to stop crime is make sure we punish those who choose to do wrong. Toffler doesn’t think we should find the auditing scandals to be isolated incidents and believes that immoral behavior in many cases, and the auditing scandal in particular, are partially caused by “the system” or “the culture.” In fact, she thinks we witnessed certain elements found in the culture of Arthur Anderson that partially caused the auditing scandals. Certain elements in Anderson’s culture reward risky behaviors that could lead to scandals, and other elements of the culture discouraged certain cautious behaviors that could lead to scandals. For example:

  1. There were people working for accounting firms known as “consultants” who were hired to help other companies in various non-accounting ways, and would often work with the external auditors for the same client (74).1 The consultants would generally make much more money than the external auditors. This compromised the “independence” (objectivity) of the external auditors because losing a client would cost the accounting firm a tremendous amount of money. [Note that consulting a company by an auditing firm is now almost entirely prohibited when the auditing firm is also auditing it.]
  2. Auditors would be pressured to “keep the client happy” because too much money was often at stake (161). This was the primary value of Anderson employees, and their duty to the public was not discussed (ibid.).
  3. The most aggressive salesmanship was valued the most (49). The money brought in by an Anderson employee would directly reward that employee. This meant that employees with charm were valued more than those who did their job well.
  4. Auditors were not rewarded for proper risk assessment (163). Auditors should demand that their clients give honest financial records and refuse to do business with clients who are more likely to be committing fraud. Employees would lose money if they lost a client, even if the client was obviously committing fraud.
  5. Anderson auditors were part of a hierarchy involving superiors and subordinates, and subordinates were expected to have unquestioning loyalty to their superiors (34, 66). If a superior wanted to tell auditors to ignore the suspicious activity of the client, then that was final. Questioning the superior would be “insubordination.” This extreme sort of obedience might not be so bad if the superiors are ethical, but it can be disastrous when the superiors are unethical.

How to avoid auditing scandals.

Barbara Toffler discusses several ideas that could help accounting firm behave more ethically and have less scandals in the future:

  1. There should be more government regulation and oversight (244).
  2. Executive compensation should be based partially on ethics and risk avoidance rather than just bringing in money (245). CEOs who make their money purely on making profit for the compay will not necessarily be encouraged to make the company money in an ethical way nor will they necessarily be encouraged to make decisions that will be good for the company in the long term.
  3. We should think about doing away with the partner system (247-248). The partner system destroys personal responsibility because it’s too democratic. The limited liability partnership destroys personal responsibility even more. When one partner does something wrong, others can “turn a blind eye” because the those committing crimes will be punished while everyone else will get off scott free.
  4. Accounting fims should commit to the investors, not the client (248).
  5. Accounting firms should drop consulting (249).
  6. Accountants shouldn’t “play with numbers” because accountants are so good at self-deception and can distort everything (249). It’s not always clear where we should “draw the line” when playing with numbers, but accountants often cross that line without acknowledging it. Many accountants would find discrepancies in their client’s numbers but declare them to be “immaterial” (insignificant), even when the company is making millions of dollars less than they declare
  7. Accountants need to stop buying their clients or potential clients gifts (250). Buying influence through gifts is bribery. The client can act in personal interest instead of in interest of the company. Lots of this is going on in accounting, but almost no where else.
  8. Accounting firms should stay out of campaign finance (251). Toffler finds it inappropriate for accountants to want to buy government influence to attain favorable government policies. This can prevent greater degrees of government regulation and oversight when it’s needed. Accountants need to make it clear that they are here for the public, not just themselves or their clients. Toffler makes it clear that accountants have been greatly involved in public finance. “During the [2000] presidential campaign, Arthur Anderson, through its PAC, contributed enough to George W. Bush’s campaign to become one of his top five corporate contributors. Between 1989 and 2002, Andersen contributed to the campaigns of 94 of 100 U.S. Senators and more than half of the members of the House of Representatives, according to the Center for Responsible politics” (ibid.).

3. My perspective

I think there are at least two important points that should be discussed in greater detail that was not discussed by Toffler:

  1. Our culture at large should be improved. Accounting culture is a product of the greater culture we live in. Our culture doesn’t take ethics, philosophy, or personal responsibility seriously enough, so it’s not surprising that people are tempted to be unethical. We pretty much aren’t required to learn about ethics or philosophy in our education, and that says a lot about what we think about these subjects—we think they’re nonsense or relatively unimportant. If we can educate our children to value and understand ethics, philosophy, and personal responsibility; then we can expect more ethical behavior.
  2. Accountants should have more ethics education. California is planning on upping the ethics requirements for certified public accountants to 10 units. We need to get our priorities straight. Our attitude that ethics classes have little to nothing to offer accountants is not the right message. The right message to send is that ethics is so important that we need a lot more ethics education. Ethics education can help remind us about what’s important, help us know what’s ethical, help us think rationally about ethics, and help motivate us to be ethical. The more we know about ethics, the more likely we are to know how important it is to be ethical and to remind ourselves what it means to be ethical. If someone has only spent a couple hours thinking about ethics, then I don’t find it very surprising when that person decides to do something unethical. I discuss this idea in more detail in Philosophical Lobbying & Improved Ethics Requirements in Accounting.


I agree with Toffler that the auditing scandals were probably partially caused by the culture found within accounting firms, and her suggestions to change the accounting world seem reasonable. However, she doesn’t consider that the accounting culture is a product of our culture at large and improving our culture at large can also help. Toffler also neglects to discuss the idea of personal responsibility. We aren’t just robots who will do whatever a culture programs us to do. Additionally, personal responsibility is something that our culture can improve. For example, more ethics and philosophy education can help teach us how to be more ethical, reasonable, and self-reliant.

I would be interested in knowing if the accounting world has changed much since she wrote the book. I know that consultants and auditors can no longer work for the same client to help assure independence and objectivity.

There’s a lot to Toffler’s book that I didn’t discuss. You can buy her book at here.

You might want to also see a review of Final Accounting by Bill Cummings from 2005. His review is completely different from mine.


1 Auditors and consultants could often get more clients if they worked together and helped recommend the services of one another to the same client. Consultants could give business advice, help install computers, and so on. Not all of the consultants working for Arthur Anderson worked for the “Anderson Consulting” division.



  1. Tell your manager no, get fired, wear the disgruntled employee label, and your accounting career ends. The honest real world answer. The fish rots from the head first. Nothing will change until senior management is infected with honesty and integrity, which they have been vaccinated against with short term goals.

    Comment by Gordon Cannoles — January 14, 2017 @ 2:24 am | Reply

    • Being willing to be fired might be important sometimes. Having opportunities to get other jobs can make that choice a lot easier, of course.

      Comment by JW Gray — January 14, 2017 @ 10:09 pm | Reply

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