Letters

Sees Profession as Scapegoat
The failure of companies such as Enron and WorldCom is attributed to the CPAs’ improper auditing of the books. As a result, Congress is attempting to micromanage the accounting profession. Our profession is being blamed because of Congress’s own failure to provide the resources to the SEC to review the reports public companies submitted.

The unfortunate conclusion being drawn from the vast decline in stock values these days is that the CPA is the culprit. But it is management that perpetrates these major frauds. Congress is questioning the auditor’s independence because he or she is being paid by the client. In his or her review, the CPA must rely on the company’s internal auditor, who has the responsibility for disclosing irregularities and fraud. Although professional standards for internal auditors require that they be independent of company management, where were they when irregularities and fraud occurred at Enron and WorldCom? In those cases, was their independence compromised by management? Who is the culprit? Congress should have determined that before blaming the CPA profession.

For as long as I can remember, the accounting profession has been trying to find its role in auditing for fraud. This type of audit requires vast resources and skills, which many large firms lack. A CPA firm would have to charge exorbitant fees to do both internal audits and financial audits.

Auditing for fraud is a gamble. You can’t audit every transaction, so you use sampling and concentrate on those areas most susceptible to fraud—mainly property, personnel and money. There, skill is needed in the selection process. Congress should be questioning the internal auditors instead of the outside auditors.

The AICPA, of which I am a former council member and which just honored me for 40 years of membership, should speak out in support of the profession, and explain what financial audits entail.

My experience with Arthur Andersen when I was in government was an excellent one. The firm impressed most government auditors and we find what happened unbelievable. What I saw was that one Andersen partner didn’t do his job, and now the public blames the whole accounting profession. That is wrong.

Sidney S. Baurmash, CPA
Pompano Beach, Florida

Rotate to Stay Fresh
There has been much debate recently about rotating auditors to give “fresh looks” a chance.

As a guide the SEC requires companies to publish three years’ worth of statements of income and expense and cash flows.

I suggest three-year audit engagements may be in order to comply with the “fresh look” theory.

Frank Thomas Murphy, CPA
Glendale, California

CPE Must Address Reporting
Continuing professional education adds enormous value to the CPA profession—that is uncontested. However, any program must be tailored to meet the needs of the market.

Since the landscape of corporate reporting has been shifted to a more pervasive earnings management, the fundamentals of conservative financial reporting seem suspended in some companies. Thus, CPE courses at public accounting firms should incorporate effective analytical tools to address current reporting issues.

Above and beyond emphasizing new accounting pronouncements, CPA firms should equip their staffs with the skills to uncover financial shenanigans. The main financial statements are synonymous with the “checks and balances” system of the three branches of our government. If a manipulation of numbers had occurred in one statement, later statements would expose the deficiency. Financial statements should be in balance. Auditors need to be on the alert for any unreasonable relationships among the financial statements—for example, creating a relationship between net cash flow from operations and net income to determine quality of earnings.

Omar Camara, CPA
Chicago

Need More Effective Risk Management
“Beyond Traditional Audit Techniques” (JofA, Jul.02, page 28) did an excellent job describing a company’s nontraditional approach to internal audit and risk management. My recommendation is that all CPAs, especially those who are CFOs, CEOs and on boards, read the article several times, file it, read it again and then put in place a similar process within their own organizations. Everyone will sleep better.

An effective integrated enterprise risk management system could have prevented or detected many of the activities that caused the recent events at WorldCom, Enron, Tyco and other companies.

Currently, most organizations take a silo approach to risk management at best. Silos do not provide executive management with a forum to know all the major risks and how they are being mitigated collectively to a level of assurance consistent with a company’s risk tolerance. For example, successfully managing environmental risks a company faces requires the input of legal, insurance, business, human resources and internal audit.

Executive management/board members should ask themselves why silos arise and what can be done to get rid of them. Here are some reasons they exist and some actions that will help reduce or eliminate them.

Various functions compete for ownership of risks, and it’s not clear who ultimately owns them or whether the functions should work together. The solution is facilitated by using workshops with employees from different areas to identify business risks. Another forward-thinking solution is for executive management to align appropriate resources into the risk management function or to have dotted line relationships with key groups, such as legal or human resources.

Executives are cost conscious and view the bottom line as a high priority. Building an enterprisewide risk management system requires investment. Just as companies need to invest in people with the expectation of payback down the road, companies need to invest in infrastructure. Of course, as with other investments, one needs to weigh expected cost against anticipated benefits. Unfortunately, an out-of-sight, out-of-mind mentality often prevails. For example, even after September 11, how many companies have concrete business continuity plans in place?

Boards may not have the right talent to ask probing risk management questions. Companies need to assess the competence of individual board members and replace those who cannot ask the difficult questions.

From the perspective of an in-house legal function, an enterprisewide risk management program breaks apart the attorney/client privilege because it documents in writing all of the major business risks, including legal matters. Legal counsel generally directs a company to maintain silo approaches to risk management because they believe documenting such matters could attract unfavorable attention in the event of a third-party investigation. But a well-drafted risk management program with a commitment to action would prevent risks from becoming legal issues or benefit a company’s defense in court proceedings. Boards have a responsibility to know what is going on with all major business risks (constructive knowledge doctrine). Failure to document and communicate this in a robust fashion is one of the first steps in failing to adequately recognize and mitigate the risks.

Arnold Schanfield, CPA,
CIA, CA, CFE
Vice-President, Risk Management and Internal Audit
Itochu International
New York City

KPIs + CPAs = Help
Congratulations on the article, “Help Clients Take Measure” (JofA, Jun.02, page 53). CPAs are in an ideal situation to help clients through the performance measurement process.

I believe it is necessary to stress the most critical component of a performance measurement engagement—the resulting financial impact of measuring and monitoring key performance indicators (KPIs).

Often successful business owners intuitively know what needs to be monitored but lack the technical skills to identify the cause-and-effect relationship between KPIs and the resulting financial outcome. The business owner may know what to monitor, but not what the targeted outcome should be to achieve his or her desired financial and strategic goals.

For example, assume a mail-order-catalog company selects “same-day shipping” to give it a competitive advantage. The company will need more inventory to satisfy the same-day-shipping requirement. Inevitably, some form of an inventory turnover measurement becomes appropriate (inventory turnover rate, number of back orders per sales order, for example). In this case, what is the effect on cash flow and related borrowing costs if the monthly inventory turnover rate is nine vs. seven times? Conversely, what is the estimated loss of market share if the turnover rate is seven vs. nine times?

A CPA provides value to a client not only by identifying KPIs, but also by clarifying the financial and strategic results for those KPIs to specifically help the business achieve its long-term goals.

Eric G. Bowers, CPA
Colorado Springs, Colorado