Perspectives

March 2004

Leonard Spacek: Ahead of His Time, Relevant Today

By Frank Grippo

Born on September 12, 1907, Leonard Spacek was a true professional and pioneer. Although he died in 2000, Leonard Spacek’s words and values are as pertinent in today’s world of Sarbanes-Oxley and accounting profession scrutiny as they ever were.

Enron’s collapse has had a pervasive impact on both the investment community and the accounting profession. The largest bankruptcy in American history, the event resulted in new reforms and criminal and tort litigation that is still in process. We now question the financial community’s integrity, the AICPA’s slowness in pursuing radical solutions to conflicts of interest among national and international accounting firms, and inadequate, unintelligible FASB pronouncements. There is no one culprit; nevertheless, a preeminent accounting firm went out of business. For many, including myself, that was perhaps the hardest pill to swallow.

In my opinion—based on several high-profile mishaps by the Big Five and others over the last few decades—it is not surprising that a large firm finally failed. After all, there were cases such as Mattel, Inc., ZZZZ Best Company, Inc., the PTL Club (significant in the 1990 demise of Laventhol and Co., then the seventh-largest CPA firm), Fund of Funds, Ltd., Regina Company, Inc., and Crazy Eddie, Inc. Before these, there were BarChris Construction Corporation, Yale Express System, Inc., Equity Funding, and National Student Marketing Corporation. Granted, in some of these cases firms were unjustly criticized, but in others there was indeed sloppy auditing. As long as greed exists, there will be future Enrons—regardless of Sarbanes-Oxley or anything else the government can come up with.

So, was Andersen in the wrong place at the wrong time? I don’t think so. It appears, based on its performance in the accounting arena over the last 20 years, that Arthur Andersen was no longer the same firm that Leonard Spacek helped form. Few would argue that in the 1950s, ’60s, and ’70s, Andersen was one of, if not the, most respected of the Big Eight. With tremendously high standards and excellent personnel, it had a wide reputation for being the “conscience of the profession.” Andersen grew from within, always cognizant of the need to maintain quality and high standards. Unlike the profession today, accountants in those days were “professionals who happened to be accountants.” What caused the turnaround? There were a number of contributing factors, including advertising, competitive bidding, and digressing from the core of an accounting and auditing firm. What is certain is that Arthur Andersen became perhaps the most aggressive accounting firm—and strayed from the management philosophy of the genteel and ethical Leonard Spacek.

Spacek’s Influence

As an Arthur Andersen partner, Leonard Spacek united the firm’s numerous factions after its founder’s death in 1947; he emerged as managing partner at only 39. Spacek revealed his “ethical” trademark when, in the absence of any partnership agreement, he arranged to pay the founder’s widow an annuity worth about $600,000.

During Spacek’s tenure, Andersen went from the 20th-largest firm in the world in 1947 to a leader among the Big Eight. For years, he toured the country, promoting sound accounting principles. Though initially he was a lone ranger, individuals within the profession and business community eventually began to listen to him. Spacek was years ahead of his time; his call for such entities as an “Accounting Court” bore fruit in the establishment of the Accounting Principles Board. Certainly, he would have been extremely distressed to witness the fall of the company he invested with so much of his energy and vision.

One has only to look at some of his speeches to see Spacek the pioneer. What he promulgated in the 1960s remains apropos today:

On Footnotes:

For those who are so naïve as to think footnotes are made to inform investors by giving them complete information, let me illustrate the reality of our very low standards in this regard by referring to a recent action of the Accounting Principles Board. [The APB] decided that the dollar effects of a particular accounting practice under consideration should be disclosed in a footnote explanation. Three months later, when pressures had been exerted, the requirement for disclosing the amounts involved was removed and the footnote now need only disclose the practice.

Thus, the issuer of financial statements and the auditor in this case are provided a way of ducking their responsibility, leaving the user of our services whom we as a profession are supposed to protect, holding the bag, not knowing whether the amount involved is $1,000 or $10 million. (“Principles of Accounting,” Temple University Accounting Forum, October 26, 1965.)

On Public Accounting Practice:

The practice of public accounting as CPAs must be undertaken as a professional responsibility, not as a means of assuring anyone an income. … The only time when we can make a decision as to the effect of our work on our income is at the outset of an engagement, i.e., whether to accept it or not to accept it. Once the work is undertaken, we must be able to afford to follow the job through to completion on a proper basis, irrespective of the consequences on our income. Therefore, no one should undertake to practice public accounting unless he can afford to lose clients or reject work. This is fundamental. (“Development and Expansion of an Accounting Practice,” 57th Annual Meeting of The Illinois Society of Certified Public Accountants, June 7, 1960.)

On Public Responsibility:

Let me state the problem simply and frankly. There is only one reason for misleading financial statements. It is the failure or unwillingness of the public accounting profession to square its so-called principles of accounting with its professional responsibilities to the public …

Why are reports of certified public accountants necessary to the corporate financial statements which are submitted to the public and to the Securities and Exchange Commission? Why is credence given to such reports? Is it because the public has come to believe that certified public accountants are a group of professional people who accept the responsibility of holding true to the public’s standards of accountability? I think the answer is ‘yes.’ The public assumes that a public accountant’s report is free of bias and grounded on facts developed independently of the representations made by the company being reported on. Such reports are accepted as assurances that the company’s statements can be relied on …

Statutory authority for the Securities and Exchange Commission to promulgate accounting rules and regulations is contained in the Securities Act of 1933 and the Securities Exchange Act of 1934. This is the ‘Damocles Sword’ that hangs over the head of the accounting profession. I did not put it there; neither did you. The public did. And that sword will fall, if we fail to give the public truthful financial statements. (“Professional Accountants and Their Public Responsibility,” Milwaukee Control, Controllers Institute of America; February 12, 1957.)

Didn’t Damocles’ sword fall? Do we not have Sarbanes-Oxley? Do we not face an uncertain future?

Arthur Andersen abandoned Spacek’s philosophies to its own demise; its recent managing partners were no Leonard Spaceks, who would certainly not have allowed renegade accountants at local offices the final call on accounting principles.

Hopefully, remaining accounting firms will not make Andersen’s mistakes, but instead learn from the words of Leonard Spacek. If we are to regain the public’s trust in our objectivity and integrity, we must make the right choices. Only by doing so, while adjusting to society’s changing needs, will we deserve to be called professionals.

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