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FINANCIAL-
May 2002 by Stephanie Rommel Sidebar- “In golf my score is frequently below par on a pro forma basis. I have firm plans to ‘restructure’ my putting stroke and therefore count only the swings I take before reaching the green.” —
Warren Buffett, chairman of the board, Berkshire Hathaway
In March, Enron’s accounting firm, Arthur Andersen LLP pleaded innocent to obstruction of justice on charges it shredded documents and deleted computer files related to Enron Corporation. It called the U.S. Government’s action “a tragically wrong indictment of the whole firm.” Fast forward to present day and the impact this has (and will have) on CPA firms across Kentucky. Significant changes, including severing auditing functions from consulting services, peer review oversight and auditor rotation, all appear on the horizon. Ben Gratzer, executive director of the Kentucky Society of CPAs, stated, “This hasn’t even been felt yet. It’s very, very early to gauge what the impact will be.” Gratzer stated that his organization is concerned at the state level for CPA firms who do not represent publicly traded companies. His fear is that reaction by the federal government’s regulatory agencies will cascade down and have a negative impact on local firms.
He is referring to the January ruling by the U.S. General Accounting Office that established significant changes to the auditor independence requirements effective Oct. 1, 2002. Basically, it employs two principles for nonaudit services: 1) Audit organizations should not provide nonaudit services that involve performing management functions or making management decisions. 2) Audit organizations should not audit their own work or provide nonaudit services in situations where the nonaudit services are significant to the subject matter of the audits. These changes not only apply to auditors of federal, state and local governments, but include colleges, universities, trade schools, hospitals, charities, cities, counties, school and utility districts. Reforms in peer review and auditor rotation are other major areas of concern. For background, in 1972 the Financial Accounting Standards Board (FASB) became the authority to set the ground rules for how an auditor determines whether the information reported in a financial statement is reasonable and whether it conforms with “generally acceptable accounting principles (GAAP).” Because of the Enron scandal, the Securities and Exchange Commission is now in the process of making its own proposals to create a new oversight body made up of a majority of public members and operating outside the American Institute of Certified Public Accounts (AICPA). One of the current requirements of the AICPA’s SEC Practice Section membership is a peer review of CPA firms every three years by another accounting firm of comparable size. With much more public involvement of these reviews, Gratzer sees peer review changing. In addition, Congress might order mandatory auditor rotation every five years for these firms who audit SEC registrants.
“The need for auditing services is critical. No way can it disappear,” Mullineaux said. But, he does see the auditing side of the profession perhaps gravitating from the larger to the smaller accounting firms. “There has never been a better time to use a CPA as they are all now super sensitive in these areas,” said Thomas P. Howard, director of the School of Accountancy, University of Kentucky. “Yet, the biggest impact I’m concerned with is on our students. Andersen recruited our very best, and through no fault of the students they may be penalized. “The real problem is political. A lot of people in Washington, D.C. who are in those meetings and hearings don’t want to be held responsible,” Howard added. “The real problem is not Andersen, the real problem is Enron.”
The challenge now is to modernize the financial reporting system so it discloses more meaningful, more transparent information for investors. Working with the SEC, the CEOs of the Big Five – Andersen, Deloitte & Touche, Ernst & Young, KPMG and Pricewaterhouse Cooper – are jointly making recommendations to overhaul the system. “We do need to address this and come up with changes in a timely way, but not as a Band-Aid fix. These need to be thoroughly thought out,” stated Rebecca Whitehead, CPA and partner with EKW & Associates LLP, Owensboro. Whitehead also is serving her second term as president of the Kentucky State Board of Accountancy. Lindy Karns, CPA and partner with Dulworth, Breeding & Karns, LLP, Lexington, referred to previous surveys of professions where accountants ranked as the most respected. “We are accustomed to having great credibility, and now every client asks if I have any Enrons. I don’t, but I’ve seen a lot of tax returns where people held Enron.” Her firm does not handle any publicly traded clients as it specializes in closely held businesses and their owners. “It is a personal relationship working with clients over a period of time. You have to be on guard not to lose your objectivity. “Change is hard on people,” she emphasized, “and the Enron debacle will have a dramatic, long-range impact on us and how we deal with clients. Moreover, the new GAO Independence Standard will have consequences for us also as we provide services to charitable organizations.” Mullineaux pointed out it is “relatively rare for firms to disclose more than what’s required. They disclose the bare minimum. Because, the more disclosures you make, the more likely others see it as negative news… Even when there is adequate disclosure, in 95 out of 100 cases investors aren’t reading the company’s financial statements, footnotes and 10Ks. Instead, they’re relying on analysts to decipher this information for them.” Sam K. Brown, CPA and director of Radwan, Brown & Company PSC, Lexington, said, “If businesses will be held to what income tax accounting is, then we can reform the system. Let’s just hold to one set of rules.” Complicated accounting concepts like “special purpose entities,” EBITDAs and “costless collars” place the average investor at a disadvantage. “Frankly, the game really hasn’t changed as the debits are still on one side and the credits on the other,” Brown said. “Enron is very much the exception and not the rule. I think accountants have done an incredibly good job with keeping up with what’s going on in business. It’s a world economy, not a U.S. economy anymore.” Brown pointed out
that with seven shareholders at Radwan, Brown & Company, “our
firm works much differently than a national accounting one,” noting
that Anderson employed 85,000 people in 84 countries and reported 2001
revenues totaling $ 9.3 billion. “With 10,000 partners you‘d
never get to know one another.” Stephanie Rommel
is a staff writer for The Lane Report. |
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Copyright 1996-2002, by Kentucky Business Online. All rights reserved. Editorial content
is copyright 2002, Lane Communications Group The Lane Report is a trademark of Lane Communications Group. All other trademarks are the property of their respective owners. |
In
just two deft sentences, the oracle of Omaha humorously cuts to the
very core of the current and complex accounting crisis. On Dec. 2, 2001
– less than a month after it admitted accounting errors that inflated
earnings by almost $600 million since 1994 – Enron Corporation
filed bankruptcy. With $62.8 billion in assets, its stock closed at
72 cents that day, down from over $75 less than a year earlier. The
largest bankruptcy case in this country’s history resulted in a
multitude of Enron employees losing their life savings and tens of thousands
of investors losing billions. Also, by not disclosing off-the-balance-sheet
transactions, Enron became mired in such gigantic debt that unsecured
creditors (totaling 54 pages) will receive nothing.
For
example, he cites a hypothetical small CPA firm in a rural part of our
state that is conducting audits for the local school board while consulting
on its tax and strategic planning issues as well. And, this may be the
only CPA firm within a five-county radius. Based on the new GAO Independence
Standard, that CPA firm would not be allowed to do both consulting and
auditing functions for the school board. Gratzer questioned, “Where
else could that school board go to get professional accounting expertise
without major inconvenience and cost?
Don
Mullineaux, director of the School of Management, Gatton College of
Business and Economics at the University of Kentucky, noted, “
It’s inevitable anytime someone is in a place to be overseeing
to ask, ‘who’s going to monitor the overseer?’ If Congress
gets involved, they are going to make new rules and create some kind
of governing apparatus.”
Self-regulation
by the accounting profession began just after the SEC was established
in 1933. The SEC was given statutory authority to set accounting standards
and oversight over the auditors. However, the role of establishing these
standards was left to the accounting profession. But in Howard’s
opinion, the SEC hasn’t enforced these standards.