Gray Flannel Civil War

Of all professions, the staid, gray flannel world of accounting last week erupted in a name-calling civil war. The contestants: Chicago-based Arthur Andersen & Co. v. the Securities and Exchange Commission, an industry self-policing board, and five other companies that, like Andersen, are members of accounting's "Big Eight" firms. The issue: How far should the Government go in monitoring the standards used in auditing a company's books?

The background of the argument is that accountants have long been able to follow widely varying methods of calculating a company's profit or loss. As a hypothetical case, depending on which of two methods of figuring the value of goods held in inventory was followed, an oil company in 1974 might have claimed a profit of $6 or a loss of $1 on each barrel of petroleum sold from stockpiles. Companies and their auditors have been known to switch from one method to another, which would enable a company to report the greatest immediate profit. In an effort to provide more uniformity, the Financial Accounting Standards Board (F.A.S.B.), a body set up by the industry itself, has been setting out consensus guidelines for accountants to follow. The SEC, which watches over corporate financial statements, had generally been content to let accountants follow any methods that they themselves chose. But since the creation of the F.A.S.B. in 1973, the SEC has promulgated rules that in effect require auditors to follow the standards laid down by the F.A.S.B. or demonstrate a good reason why they should not do so.

Which might seem reasonable enough--but not to Andersen. In late July the company filed suit in federal court to invalidate the SEC regulations. Andersen's essential point: the Government should leave accountants to police themselves. By backing the F.A.S.B. rules, Andersen contended, the SEC is imposing a heavy bureaucratic burden on accountants. Andersen fears the agency might penalize auditors who switch from one accounting method to another in the belief that they are best representing the financial conditions of the companies whose books they keep. Says Senior Partner George Catlett: "You let the Government in a little bit and they end up running everything."

Five of Andersen's fellow members of the Big Eight last week countered with "friend of the court" briefs accusing Andersen in effect of promoting chaos and anarchy in accounting. The brief of Price Waterhouse & Co. magisterially thundered about "Andersen's evident desire to discredit the F.A.S.B. and substitute its own personal and private decision-making procedures." Said Touche Ross Managing Partner Russell Palmer: "Taking sides and looking to the courts will confuse the issue without resolving it."

Nitpicking Rules? One question is why Andersen, of all firms, should assail the SEC's effort to back up the F.A.S.B. Andersen has long argued for more uniformity in accounting procedures, and its executives played a key role in setting up the F.A.S.B. But the company also has long been an aggressive maverick. Some competitors grumble privately that it is merely seeking publicity, and Price Waterhouse's brief publicly refers to "Andersen's past attacks on the accounting profession." Andersen Chairman Harvey E. Kapnick Jr. protests that his company is merely trying to preserve the profession's right to set its own rules, free from Government interference. Some of his colleagues fear that Andersen is inviting the very Government dictation it professes to abhor. If the SEC cannot expect compliance with the F.A.S.B.'S rules, they think, the Government agency might well promulgate nitpicking standards of its own. The ordinary stockholder, trying to make sense out of his company's financial statement, can only hope that somebody, somehow brings about greater uniformity in keeping the books.

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