In his new book released this month, Hidden Financial Risk: Understanding Off-Balance Sheet Accounting, Ketz delves into accounting scandals that serve as case studies throughout the book, including Enron, WorldCom, and Waste Management. Divided into four parts, he tells how businesses deliberately understate their levels of risk, why nobody stops them, what to do about it, and concludes with an explanation of a doctrine created by accounting firm Arthur Andersen about 40 years ago that may, ironically, hold the key to the industry's resuscitation.

In an exclusive interview with SmartPros, the professor admits at this point he sees "the glass as half empty" insofar as the "shifting accounting landscape" is concerned. He believes the efforts made by Congress with the Sarbanes-Oxley Act and the rush to add ethics courses to college curriculum exemplify the reactionary approach taken to remedy years of corrupt financial accounting. He boldly predicts another round of scandals in just a few years, yet adds, "I hope I am wrong."

Like most experts, Ketz agrees that the source of the problem is not limited to one group. He views managers, auditors, Congress, and corporate boards all as culprits. First, managers receive incentives -- stock options -- for good company earnings. "This provided incentives to monkey around with accounting earnings to increase one's compensation," Ketz explains. Second, auditors' try not to be "too hard" in order to keep clients and their audit and consulting fees. Third, Congress is easily swayed by corporate dollars, and will make exceptions to the rules to accommodate big companies. And fourth, boards of directors have been too lax by not properly overseeing managers.

"You have all the elements of the perfect storm," says Ketz. "Everything has come together for a big collapse of the market. I try to address each of these segments in turn and try to examine what is going on and to what extent we need to tweak the system."

Ketz shares that it was a slew of letters questioning his expertise and objecting to his public statements that inspired the book. Many letters were from Arthur Andersen accountants, angry with Ketz for his candid insight into the Enron/Andersen scandal. Ketz includes two of these letters, and his rebuttals, in the book.

For instance, "Auditors are not designed to detect fraud," writes one person displeased with Ketz's opinions. "Never have been. Auditors to [sic] not go into client offices and put a gun to the client's head and demand that they tell them about all of their fraudulent activities while searching through the secret drawer in the client's desk for the second set of books. Auditors perform a professional service that can be subverted by management fraud."

Indeed, many auditors believe it is not in the job description to find fraud, Ketz explains, but he points out that many outside the industry maintain a different opinion.

"Auditors don't understand their responsibility to ferret out fraud. But shareholders have that expectation, as have the courts. So there is this continual tension between what the profession says and what shareholders desire. If not looking for fraud, why bother with an audit?" asks Ketz.

He adds that the problem can't be "a few bad apples." Andersen's poor performance on several auditing engagements, not just Enron, proved the firm was not doing a proper job. It "undid itself" with "screwed up audits at Boston Chicken, Waste Management, Sunbeam, Arizona Baptist Foundation, Global Crossing, as well as at Enron and WorldCom."

Ketz is skeptical that the industry is successfully correcting the wrongs. His instincts tell him that the overextended Securities and Exchange Commission will lose Congressional support once the scandals fade from the headlines.

"If things look good over the next year or two, I think Congress will be tempted to decrease the SEC's budget, then we will have crippled resources again," he explains. "My concern is that once things start hitting -- anything from war on terror to issues with Social Security and Medicare -- when you start getting the deficits increasing considerably, Congress will bring cuts. If they do cut it, the SEC will be reduced in its power to enforce the rules."

Similarly, he questions the purpose of the Sarbanes-Oxley Act, and reserves judgment on the Public Company Accounting Oversight Board it created. "I think it's too early [to determine what] the oversight board's influence will be...The oversight board may turn out to be a positive improvement, but except for that I don't see Sarbanes-Oxley providing much of anything."

And what of all this talk about "ethics"? Ketz asserts ethics is the backbone of the profession, and writes extensively on this philosophy. But he thinks the rush to add ethics courses to university and college curricula is "really just for show" and nothing more than a philosophy lesson or a debate class. Ethics classes fail to make students face "gut decisions."

"I would argue that if you're going to deal with issues of ethics, we probably should do more with ethics where the students are now -- cheating and plagarism," he says.

Ketz contends the "recent accounting scandals are the product of profound systemic failures and the remedy will require fundamental change in the U.S. economic system." Some of the changes we have seen so far may help, he says. "But as long as we have firms paying auditors, as long as Congress does not sufficiently empower the SEC and provide funds, as long as boards of directors tend to be picked by CEOs... The question is whether the changes being made are sufficient, and my guess is that we will repeat this process."

Do you agree with Ketz's analysis of the profession?

Hidden Financial Risk is now available for purchase. Buy now to save 15%. Enter code W4448 in the discount information field on the online order form and then click the apply button to calculate the discount. Expires April 30, 2004. Not applicable to WileyVirtual.com. Other restrictions may apply.

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