I read with interest and appreciation the article “ Corporate Governance and Client Investing ” ( JofA , Jan.04, page 43). The author’s insight that most individual investors are not focused on corporate governance when selecting a stock is indeed true and is the case for equities traders as well. Most traders do not hold an equity long enough to care about long-term governance issues, and most individuals cannot relate to the personal fallout from corporate governance lapses unless they worked directly for or held stock in the failed company.

Most individual investors own stock through mutual funds or pension funds where they depend on the professional managers to assess all opportunities and threats to a stock, including poor corporate governance. That leaves the institutional investors to lead the corporate governance charge, which they have done with greater frequency since the early 1990s.

It is now paramount that all institutional owners revisit the adequacy of their corporate governance assessments when evaluating a stock for long-term accumulation. The red flags identified in the article are indeed helpful, and I would like to suggest one more: A combined chairman and CEO position at a public company is a red flag. The chairman of the board is responsible for running the board of directors, which has a fiduciary responsibility for selecting new directors, setting executive compensation, evaluating executive performance and, through the audit committee, evaluating the company’s financial reporting and disclosures, in addition to general corporate oversight. These functions conflict with the role of the CEO who is directly affected by these board decisions.

Controlling both the board and the management functions of a company creates an “imperial CEO,” with few checks and balances to protect the shareholders that own the company. A newly published book, The Recurrent Crisis in Corporate Governance, written by the Yale economist Paul MacAvoy and corporate governance expert Ira Millstein, studies the economic impact of this red flag on our largest public companies and makes a compelling argument for having an independent chairman of the board.

The Sarbanes-Oxley Act of 2002 did not require that these roles be segregated, but this oversight was not lost on those concerned about corporate governance. Last year, the Business Roundtable, which is composed of 150 CEOs of our nation’s leading companies, reported that 55% of its members had or would have an independent chairman, independent lead director or presiding outside director by the end of 2003. As significant as this progress is, CPAs, institutional investors and other large shareholders can play an important role keeping this issue on the front burner of the remaining 45% that do not have an independent chairman or lead director. The most important tool we have to ensure change is our collective ownership in these companies, which ensures that our voices will be heard.

Scott Green, CPA
New York City

As an educator, CPA and subscriber to the Journal of Accountancy , I was appalled by your selection of the cover for the January 2004 issue. Money does not grow on trees, and growing wealth is more than just money for the taking.

During the past two years, the auditing profession has lost its self-regulatory status to a governmental oversight organization, the PCAOB. The image you chose is reckless at a time when the accounting and auditing profession desperately needs to regain the public’s confidence on issues of independence and ethics. Such an image is extremely inappropriate and in poor taste for starting the new year. Has the accounting and auditing profession forgotten that independence and ethics include both “in fact” and “in appearance” constructs?

Our profession should be more focused on competence, ethics and protecting the public and less focused on developing solicitation, marketing and sales skills. Haven’t we learned anything?

Helen M. Roybark, PhD, CPA
Assistant Professor of Accounting
Radford University
Radford, Virginia

The article, “ How Sarbanes-Oxley Will Change the Audit Process ” ( JofA , Sep.03, page 49), in its discussion of management’s and the auditor’s duties regarding internal controls emerging from the Sarbanes-Oxley Act, shows obvious parallels in Germany.

In 1998 German public limited companies were obliged to establish a monitoring system for early recognition of developments that might endanger the company as a going concern. The auditor has to assess the corporation-wide existence, the effectiveness of design and the operating effectiveness of the measures taken.

Compared with the internal control system of the Sarbanes-Oxley Act, the German risk early recognition system is narrower in scope because it highlights but doesn’t exclusively aim at going-concern uncertainties and more general in that it does not focus on information related to financial accounting.

Moreover, the auditor’s tasks differ particularly because German legislation requires no publicly available disclosure of the auditor’s assessment of the system and does not refer to the management’s assertion but directly to an audit of the system.

Despite these discrepancies the major implications of the new requirements appear similar:

Management is provided little regulatory guidance on establishing an adequate system. This allows for firm-specific solutions, but causes uncertainty.

Auditors face a new challenge and the need for changing audit procedures. Pure substantial tests are no longer valid. In Germany this was even interpreted as a legal codification of the concept of audit risk.

However, empirical evidence from Germany suggests implementation of risk early recognition systems even five years after the new legislation was imposed has been unassertive and unsatisfying. Higher risk of litigation and sanctions in the United States seem capable of preventing these failings in part but not in total.

For further information on this topic, see my paper at www.intranet-lehrstuhl.bwl.uni-muenchen.de/dispatch/Publikation/Volltexte/1728.pdf .

Michael Dobler
Diplom-Kaufmann,
Master of Business Research
Munich, Germany

I believe “ The Most Misunderstood Investments ” ( JofA , Oct.03, page 17) demands a response. The letter chastised the JofA for publishing an article that was critical of annuities as retirement planning vehicles, claimed that annuities were “misunderstood” and later stated, “Many CPAs now have securities and insurance licenses and offer these products to their clients.” This is the ultimate example of why I think CPAs should not sell investment products.

The most prevalent reason in favor of our selling such products is that we know our clients’ financial situations, histories and preferences better than anyone else. Many CPAs follow this argument with: “I used to recommend investments, then pass the client along to another professional to close the sale. Why shouldn’t I be the one to get the commission, instead of giving it to someone else who doesn’t know as much about the client?”

CPAs who leverage their knowledge of their clients and the trust they put in us in order to make a commission are being very shortsighted. We will not be the most trusted professionals for very long if we lose our independence in our clients’ eyes. When we become commissioned salesmen, we lose status and trust, because no matter how much we protest to the contrary, it does affect our thinking and clients know that.

Michael J. Noonan, CPA
Joliet, Illinois

I would like to add my comments to the letter “ The Most Misunderstood Investments .” Those extra fees associated with variable annuities are used to pay the investment adviser—me. When I recommend an annuity to my clients, I can easily show how it is actually less expensive for them to invest through an annuity than in the alternatives. For example, paying a 1.25% variable annuity fee is lower than the 1.5% I would have to charge them in a managed account.

Variable annuities also can be less expensive than using loaded mutual funds where the upfront fee can be more than 5%. Part of my job as an adviser is to continually track the performance of the underlying fund managers I select for my clients. When the manager leaves or the environment changes, I move my clients’ money to another manager within the annuity. If the client were in a loaded fund, each change would cost them another fee. Within an annuity, I can make changes without any charge to my clients. After all, it is not a matter of if a change will be required within the account, but when.

I rebalance my clients’ portfolios on a quarterly basis back to the appropriate allocation. Rebalancing has historically enhanced performance. If I use loaded funds outside a managed account, the rebalancing will be expensive for the client and an administrative nightmare. Within a managed account (that is nonqualified) the rebalancing would only lead to income tax implications. However, under a variable annuity the rebalancing can be set up to occur automatically and is tax-deferred and without charge.

Finally, on top of all the above benefits, if my client should die during a down market, his or her beneficiaries would typically receive at least what was originally invested, if not more, under an annual step-up feature. This “death benefit” is very valuable to many clients and simply comes along with the package.

Carole-Lynn Saros, CPA
CS Financial Services LLC
Willington, Connecticut