Herb Miller, a retired partner from Arthur Andersen and a former accounting professor, wrote an important essay entitled "Collectivization of Judgment," which first appeared in The Arthur Andersen Chronicle in January 1974 and was later reprinted in Journal of Accountancy.

He begins by asserting that professional judgment lies at the heart of the accounting profession, in part because few measurements, recognitions, and aggregations of accounting data can be undertaken in an objective fashion. Accounting is essentially subjective; thus, accountants must hone their individual professional judgment to carry out the tasks they take on. Society holds accountants responsible for their decisions, whether in their roles as corporate financial officers or as external auditors, hence they need to exercise good professional judgment so they can meet their responsibilities.

After noting these fundamental considerations, Miller focuses on the collectivization of judgment. He begins by stating that, "Judgment develops from the interaction of education and experience." However, "the quality of the judgment developed by the interaction of education and experience is not automatically assured." Accounting firms and professional associations such as the American Institute of CPAs engage in various activities that help increase the quality of a person's judgment.

Dr. Miller then contrasts judgment developed by a profession vis-à-vis judgment cultivated by a professional firm, and he argues that the profession's activities cannot enhance the quality of personal judgment nearly as much as the accounting firm. Essentially, the accounting profession has taken the route of attempting to improve judgment by increasing the uniformity of accounting standards. Miller argues that merely creating rules under the guise of self-regulation does not enhance professional judgment by individual accountants because it actually replaces judgment with a sense of uniformity, whether uniformity is justified or not. Worse, if an audit problem develops, the accountant is held responsible for his or her mistakes, but the profession is not. Since the civil and criminal courts do not hold the profession responsible for its construction of bad rules, there is a disconnect. The profession has a penchant for creating accounting and auditing rules, but these rules in fact reduce professional judgment.

Collectivization of judgment by the firm is quite a different matter to Miller. Because the firm suffers when the individual is hauled before civil or criminal court, the firm has incentives to develop judgment in its personnel. In addition senior partners can develop the professional judgment of junior partners by having the junior partners observe the problem-solving abilities of senior partners in real and specific instances. Likewise, junior partners can train managers and so on. The result is a firm that has a high quality of professional judgment.

While the original essay by Herb Miller concentrated on what he saw as encroachment on professional judgment by the AICPA (today he would include the FASB) as it legislates proper accounting and auditing, I am struck by its relevance today. As we view the ashes of Arthur Andersen, I wonder what happened to this vision by Miller. Did the firm forget the wisdom of one of its own partners or were other forces at play that led to the demise of the firm?

Miller correctly anticipated the transition from a judgment-based to a rules-based profession. When he wrote this paper, the Accounting Principles Board had passed maybe 27 of its 31 Opinions. Today, we read and observe 144 Statements of Financial Accounting Standards, 7 Statements of Financial Accounting Concepts, and scores of related documents. The proliferation of accounting rules has truly been enormous! What we don't know is the extent to which Miller is correct in his contention that this increase in rules has diminished professional judgment. If he is correct, then this attenuation should be observed in all accounting firms.

On the other hand, Miller seems incorrect in his assertion that the accounting firm can and does cultivate professional judgment in its own staff. The audit failures of Enron, Global Crossing, Waste Management, and Sunbeam -- as well as others -- serve as evidence to the contrary. For example, why did Arthur Andersen ever allow a partner in charge of an audit such as David Duncan to overrule a technical partner such as Carl Bass? I find it amazing that a firm with the collective wisdom of Arthur Andersen could have such a breakdown in its own internal control system. 

If Enron were the firm's only audit failure, we could talk about some renegade partner or two. But the number of audit failures by Arthur Andersen suggests instead a disintegration in its own culture. Either Miller is wrong in his assertion about how firms develop professional judgment or his own firm ignored his voice.

J. EDWARD KETZ is associate professor of accounting in Penn State's Smeal College of Business Administration.