In the wake of financial scandals,
'bean counters' promote reforms.
With the fall of billion-dollar behemoths such as Enron and WorldCom and a string of corporate scandals including cooked books and shamed executives, Northeast Ohio accountants have paused to take a closer look at their profession. Lately, they have had to defend their century-old image as a dogged, buttoned-down, scrupulously honest breed.
'We're not thrilled,' says David Brockman, director of business assurance services with Brockman, Coats, Gedelian & Co. in Akron. 'We've always been the most trusted business advisers and now, because of a few bad apples, the perception has been challenged.'
Brockman compares the trust placed in accountants to that of Catholic priests. 'Just as there have been some wrongdoings by some priests, this does not diminish the role that the vast majority of them have in offering advice and counsel,' he says. 'The same is true of CPAs.'
Leslie A. Murphy, CPA, managing partner-client services with Plante & Moran LLP, which has a Cleveland office, agrees. 'It is important to remember that the incidents really involved a small number of accountants,' she says. 'Still, it does have implications in our profession. We need to restore people's confidence.'
To do so, accountants — careful examiners by nature — are searching for the root of these recent problems while studying their own practices.
The time has come for a 'rejuvenated accounting culture' for internal corporate finance offices and external firms, Barry C. Melancon, president and CEO of the American Institute of CPAs, said in a September speech.
He addressed accountants in a forum convened by the Yale Graduate School of Management in response to the Corporate and Auditing Accountability, Responsibility and Transparency Act (the Sarbanes-Oxley Act) of 2002.
'The culture must build on traditional values rigorous commitment to integrity a passion for getting it right, a commitment to rules — not just in their letter but in their spirit,' he said.
'Part of the problem was simple greed or arrogance' among Enron and WorldCom executives and some auditors, Melancon said.
And local accountants agree that punishment is in order.
J. Clarke Price, president and CEO of the Ohio Society of Certified Public Accountants, says, 'In my opinion, special-purpose entities and management at Enron were aware and drove the accounting gimmickry that went on.
'On behalf of the CPA profession, I believe that CPAs caught in wrongdoing, those found to be too cozy with management and who are not fulfilling the obligations of their profession, should be punished as the law allows,' he adds. 'This should not, however, diminish the 100-year history of our profession in serving the public interest.'
The uncertain market contributed to the climate of corporate malfeasance, Murphy says.
'It was a much more volatile market than we had seen even three years ago,' she says. 'Within companies, the volatile swings put pressure on people to normalize earnings. At Enron and WorldCom, they were responding to this market. Add investment bankers who provide the ratings that dramatically impact trading numbers and who want to be looked on favorably for the next deal. There was a pressure not to say sell' even when they saw it.'
Reemphasizing Values
The business world reflects society, says Patrick Mullin, office managing partner of Deloitte & Touche in Cleveland.
'Look at our former president [Clinton] saying, I didn't have sex with that woman.' People cut the rules and say, It's OK,' ' he says.
'What's honest and not honest? What's legal and not legal? In the last five or 10 years, we have not been as rigid in the application of rules. I think as accountants get more conservative, it is a very healthy thing.'
Price says it is important to 'reemphasize core values of independence, objectivity and understanding a client's needs. We need to go back to the basics.'
Historically, the profession struck a balance between the guiding principles of individual judgment and rule-making. In the 1970s, additional rules were developed because of the belief that accountants had too much individual judgment.
'At one time, rules were broad and principles-based and directed [accountants] as a way to make a judgment,' Murphy says. 'Now, accounting is a structured, rules-driven profession. It has become like the IRS code. But as there are more rules, there are more ways around them. Some fail to back up to apply overarching principles. We need to transition back to a principles-based framework.'
Also, the task of auditing is hardly a cut-and-dry process, Brockman says.
'An audit is not a 100 percent guarantee that there are no fraudulent statements,' he says. 'An auditor knows what to test, where to test and how to take a sample selection, but an audit cannot guarantee, beyond a shadow of a doubt, that there are no fraudulent statements.'
To improve the likelihood of catching fraud, the American Institute of CPAs and other groups have introduced new initiatives to educate accountants about red flags and warning signs and to emphasize internal controls. Also, there is discussion about requiring CPAs who practice auditing to spend 10 percent of their education on fraud prevention. Currently, there is no minimum requirement.
Small-business Concerns
The largest reform measure, recently approved by Congress, is the Sarbanes-Oxley Act. It was enacted to provide safety guards protecting the integrity of audits, particularly in publicly traded companies.
Local accountants agree that changes in the industry are in order, but have some concerns with the legislation. Some see a problem if portions of the act were ever applied to privately owned businesses — especially the law's new requirement that publicly traded companies employ separate accounting entities for tasks outside of auditing, such as investment advising or bookkeeping.
'My biggest concern is that the changes restricting the scope of services will filter to privately held companies in the $5-to-$50 million price range — people who need accountants for advice and help,' Brockman says. 'They don't have the time or resources to go to multiple sources, and they look to CPAs for help with technical issues and for help structuring loans from a tax standpoint.'
Murphy agrees. 'Their needs are very distinctive and different [from publicly traded companies],' she says. 'They often don't have a very specialized staff and can't afford to hire separate firms.'
An accountant's role is actually strengthened by increased knowledge of the firm, Murphy adds.
'Imagine a $25 million manufacturing company, owned by an individual,' she says. 'The bank, which reviews receivables daily, has a lot of information available about the company. There is one owner and he does everything — he hires an insurance company, he works on the floor. When he needs highly specialized services, like accounting, he buys it as he needs it.
'The CPA is often his most trusted adviser and knows the company's strategies. So if he can't use his CPA for financial analysis as he considers introducing a new product line and he does not have the talent or time to do it inside, will he do it?' Murphy says. 'A new adviser needs to get up to speed on the operation of the company and, frankly, there isn't time. He doesn't do it. That's how this would hurt small- and medium-sized companies.'
Price says it is appropriate for smaller companies to access a number of services from one accounting firm to increase profits. 'Beyond the audit, CPAs should be able to provide tax preparation and consulting about the consequences of certain actions, such as buying other companies,' he says. 'They also should be able to offer advice on the design of new financial reporting systems.'
Some support forming an overarching organization of accountants and businesspeople — a ready, regulating body of informed professionals that studies the accounting woes at Enron and other companies. Its goal would be to learn from their mistakes and address them.
'We've noticed a consistency in the problems today and such a group could enact new rules quickly,' Mullin says.
Sarbanes-Oxley calls for an independent committee to review auditing and to hire and fire outside auditors working for publicly traded companies. The hope is that making management less involved will make the auditors less susceptible to losing their objectivity.
The legislation has made headlines because it requires that CEOs and CFOs attest to the truth and appropriateness of their companies' financial statements and disclosures.
Technically, there has always been a requirement that CEOs and CFOs sign off on audits, Mullin says.
'It is what we call a representation letter, though before all this happened, most CEOs didn't pay too much attention to it,' he says. 'I had one client who called it the whitewash letter.' This year, I see CEOs and CFOs taking it very seriously. Long term, it is yet to be seen if this will last.'