Stern Business panel offers up creative and far-reaching reforms for corporate governance.
[Editor's Note: This report summarizes a strategic marketing and communications project for a private client.]
It could take more than a routine round of government and corporate reforms to fully and permanently restore investor faith in the nation’s accounting and auditing system, attendees were told at a major New York University Stern School of Business conference.
Despite a slew of so-called reform moves in recent years, said Art Siegel, a CPA, former PricewaterhouseCoopers vice chairman, and now a leading figure in corporate governance issues, there hasn’t been enough “thinking out of the box.” The system still relies on auditors as gatekeepers. But, Siegel said, “The gatekeeping function is one of the main culprits in the recent debacles.”
“The reason for the corporate governance failure is the inherent conflict of interest that exists because of the cozy relation between auditors and the managements of their clients who hire their services,” said NYU Stern Professor of Accounting Joshua Ronen.
Great Neck, N.Y., CPA Mark Lilling put it a little more bluntly: “You can’t be a little bit independent. Either you are, or you aren’t.”
For CPAs and other business and financial professionals, the place to be for “out of the box” thinking was at the NYU Stern School of Business seminar.
More than 135 leading practitioners, regulators and academics in the auditing field convened to discuss the impact of auditor conflicts on the industry, to propose recommendations to foster auditor independence and to help prevent future accounting scandals. The event was sponsored and co-organized by Lilling, president of The Audit Committee Consulting Team LLC, an advisory firm in corporate governance.
“The continuing rash of audit failures, collapse of Arthur Andersen, sanctions against Ernst & Young and continuing tax shelter abuses have damaged and possibly destroyed public confidence in my profession and my lifetime’s work,” Lilling asserted.
“Auditors have an important role in capital markets and public. And investor confidence in the fairness of financial reporting is critical to the effective function of these markets,” according to Lilling. “Congress gave an ‘exclusive franchise’ to certified public accountants. With this franchise comes a responsibility to the investing public which is not being met.”
The standing-room-only forum featured a panel of experts representing different points of view from Corporate America. Other commentators included John Biggs, former Chairman and CEO of the vast TIAA-CREF pension fund; John O’Connor, Vice Chairman and Services Leader at PricewaterhouseCoopers LLP; Thomas J. Ray, Deputy Chief Auditor for the new Public Company Accounting Oversight Board; and Melvyn Weiss, Senior Partner at the class-action law firm of Milberg Weiss Bershad Hynes & Lerach LLP.
The panelists addressed some of the major issues confronting the auditing industry and put forth the following recommendations:
-- The rule of auditor independence: Auditors should only perform auditing services, and corporations should consider various types of auditor rotation (e.g., change principal, change firm) to ensure independence
-- SEC guidelines for auditors to follow have not prevented scandals: Sarbanes-Oxley should provide a set of objectives, not rules, to assist auditing committees and auditors in implementing and adhering to standards, and to prevent the common practice, “if it’s not prohibited, it’s permitted”
-- Public duty: Auditors should proactively search for fraud – a duty inherent in the profession.
The event drew influential media coverage, with Thomson Corp.’s WebCPA reporting, for instance, that PricewaterhouseCoopers’ O’Connor gave the three primary reasons why his firm resigns as an auditor -- which he said happened 500 times in 2003.
1. A failure of the company to manage risk properly;
2. Lack of profitability for PwC; and,
3. Dissatisfaction with how PwC personnel are being treated.
And CFO Magazine reported that the conference yielded at least “two new notions of how to liberate audits: Insure the financials and ditch income statements.”
In his presentation, for instance, Professor Ronen suggested engaging insurers to achieve greater quality and honesty in the auditing process and provide management with strong incentives to improve the reliability and transparency of their companies’ financial statements.
Coined by Ronen as Financial Statement Insurance (FSI), the plan would require insurers to hire the auditors and set coverage and premiums for companies based on an initial risk evaluation; whether the coverage becomes effective would depend on the results of the audit. The insurance premium and other policy terms would be disclosed publicly for all investors to see. Insurers would be liable if their client’s shareholders sustained losses due to omissions or misrepresentations in the financial statements.
Separately, Shyam Sunder, a professor of accounting, economics and finance at the Yale School of Management, proposed using corporate tax returns as the publicly reported income statement to reduce both earnings management as well as aggressive tax reporting.
Sunder argued that management and auditors legally game the tax and accounting systems by decreasing income to lower taxes, while at the same time increasing income they report to the shareholders, placing a heavy burden of auditing and oversight on the IRS and the directors.
According to Sunder, using the same statement for both purposes would discourage manipulation by imposing real dollar costs on manipulation in either direction.
Assessing the results of the conference, Lilling vowed to continue effort to improve corporate governance and auditor independence. A book, for instance, is expected to become one of the outgrowths of the meeting.
