Letters

Prefers Paper Filing
“It’s Time to E-File”(JofA, Nov.02, page 79) asserts that my clients will like me more and that I will be in a more competitive position if I’m compelled to pass through to them (in the form of higher fees) additional software costs, additional costs related to electronic filing program compliance and additional costs stemming from my diminished productivity—the natural result of adding steps to both the tax-preparation and recordkeeping processes.

That, in my opinion, is offensive not only because it defies common sense, but because its weaknesses make this work of presumably independent authorship appear indistinguishable from the most self-serving work of the Internal Revenue Service’s own staff writers.

The IRS can set e-filing goals until it’s blue in the face, but until it is equipped by Congress with the ability to modify behavior with incentives or with compulsion, its goals never will be achieved.

Until the time arrives that I can look my clients in the eye and tell them e-filing is simpler and cheaper than paper filing, I will continue to advise them to save their money by filing the low-tech way.

James G. Fawls, CPA
New Hyde Park, New York

Time for CPAs to Take a Stand
The letter, “Sees Profession as Scapegoat” (JofA, Dec.02, page 15), suggested Congress should shoulder part of the blame for not providing the SEC with enough resources to actually review public-company reports submitted to it and that management perpetrates the fraud in these companies. It also claimed the integrity of internal auditors, the ones most capable of detecting fraud, was being compromised by management.

To a large extent, I agree with the letter. However, the bottom line is that the people most important to investors are the CPAs. They attest to the fairness of the financial statements, and unless they perform that duty with confidence, competency and integrity, they are not doing their job.

If the current investing environment is corrupt, it is up to the accounting profession to demand the SEC be sufficiently funded so it can perform its intended function of regulating companies. We should insist that management act in an ethical manner. If it doesn’t, Congress should establish severe consequences—civil and criminal—for companies and individuals alike.

If the accounting profession is a scapegoat, it is because it has compromised its core values and has become a weakling. That’s not what I was taught when I began working at an accounting firm in 1973. My partner and manager impressed upon me that the CPA is the final gatekeeper, the hero, if you will, for the investor and that the CPA does not sign off on the financial statements until he or she is satisfied they fairly and accurately represent what happened.

The accounting profession has always been the most respected of all, until recently. It’s time for us to fight back to regain that coveted position.

Gilbert F. Noble, CPA, MBA
Vista, California

System Needs More Than Band-Aids
I take exception to the letter “Sees Profession as Scapegoat” (JofA, Dec.02, page 15). The Enron debacle did not result because “one Andersen partner didn’t do his job.” If one Andersen employee could cause the magnitude of grief that resulted from the Enron situation, there are more fundamental problems involved than we as a profession can ever hope to solve. An entire floor of auditors worked exclusively on Enron all year. To think the entire blame rests with the single person who occupied the corner office on that floor is unreasonable.

In the best case, the Enron collapse was the result of a single audit team’s failure. In the worst case, it was the fault of the profession.

Also, I would like to see some new thinking with respect to fraud. The letter correctly pointed out that most audits focus on “those areas most susceptible to fraud—mainly property, personnel and money.” This indeed represents the traditional view of fraud, and it has served the profession well in the past when most corporations were single, isolated entities that could be audited as a whole. The modern corporation, however, is a vast maze of interrelated entities. I think related-party transactions are a growing area in modern-day fraud, and the profession is ill-equipped to audit these types of deals.

I find the WorldCom case even more troubling than Enron for CPAs. WorldCom was a simpler company than Enron. It was in the business of building a communications network and providing services on it—a simpler business model than Enron’s creating a market for commodities trading. The fraud committed by WorldCom was in the more familiar area of property, not the complex area of related-party transactions. By all reports, WorldCom overstated its property—and thereby understated its expenses—by $9 billion. How did the auditor fail to detect that much missing property? Even the most cursory and poorly executed audit should have detected a fraud of this magnitude.

Clearly there are major problems with the accounting profession. These are not isolated cases of single auditors failing to do their job or of corrupt corporations misleading overly trusting auditors. These are spectacular failures of the system as a whole. A few Band-Aids may hold the system together for a while, but I hope that we as a profession study the events and resolve to never allow these mistakes to happen again.

Peter H. Wilson, CPA
Houston

Treatment of Earnings
The accounting profession has had a long and unsuccessful history of trying to determine how to treat nonoperating and nonrecurring items on a financial statement. The current movement toward including most of them in GAAP earnings has led to an increasing disconnect between GAAP earnings and what stockholders want to know.

The concept of pro forma earnings emerged to address this problem. Now various people are attempting to define what pro forma earnings should include.

One of the main purposes in reporting earnings, as far as stockholders are concerned, is to project future income. These forecasts largely determine how much an investor is willing to pay for a company’s stock. For GAAP earnings to serve this purpose, they must not include nonoperating items, particularly if they are not disclosed. They also must not include items that occur randomly, such as a casualty or litigation loss, or items subject to management manipulation such as a gain on the sale of an investment.

I believe many of the problems we are experiencing today could be resolved by requiring companies to report GAAP earnings in two categories: operating and nonoperating. Financial statements would include both, with taxes allocated to each.

This change would require somebody to define what should be reported in each category, a difficult task. However, to avoid people rejecting GAAP earnings as useless, either the profession or FASB must do the job. I believe the nonoperating category should include items that are recurring in certain businesses, but that occur irregularly, and could be subject to management manipulation. It’s impossible to accurately forecast the future results of transactions of this nature based on past results, but it should be possible to project operating earnings. People could then make their own guess as to what future nonoperating items would be based on past history.

We must avoid introducing random variability into operating earnings by recomputing, as now proposed, pension expense, for example, using the current year’s actual return on pension assets rather than a normalized return. However it occurs, pension income is nonoperating and should be so treated.

Stanley F. Dole, CPA
Grand Rapids, Michigan

Bribing the Messenger
I am astounded that in the United States it is common practice to remunerate the chief financial officer and the accounting department (collectively the “accounting function”) with bonuses based on a company’s performance. These rewards may take various forms including stock options and other incentives based on earnings and EBITDA (earnings before interest, taxes, depreciation and amortization) thresholds. One has to be careful not to put the CFO in a catch-22.

The accounting function can influence earnings by identifying and assisting in implementing activities that relate to obtaining advantageous financing, identifying the ideal leverage level, initiating cost cutting measures, determining and monitoring the key critical components in the industry and performing benchmarking comparisons against these indicators, ensuring a sufficient amount of cash is available to fund operations and future projects and investing all resources in such a way as to maximize return on investment without exposing the corporation to unacceptable levels of risk and tax optimization.

However, one of the CFO’s main functions is being a messenger who reports the facts as they have happened, and he or she should not be able to influence the historical numbers.

Part of the problem with corporate reporting today is a direct result of bribes to the messenger. In the article, “Use Best Practices in Executive Compensation Plans” (JofA, Jun.02, page 22), the first bullet refers to earnings per share and cash flows as a basis to remunerate executive officers. The CFO should not be able to influence the reporting of the historical amounts as they have occurred. To expect or require him or her to do so is the root of “cushion” and “aggressive” accounting that often leads to a game of cat and mouse between the reporting entity’s accounting function and the external auditors. The CFO needs to be relieved of the onus of meeting earnings. To allow a CFO to change the bottom line after the fact or with accounting gimmicks would be to empower him or her with a dangerous responsibility.

So what is the CFO’s responsibility? In addition to the functions described above, it is to report, on a timely, accurate and consistent basis, the financial position and operations of the company.

We should, however, set performance goals to measure and reward the CFO. I firmly believe CFOs should be adequately remunerated for the talent and skill they employ and that such remuneration should equal in dollar amounts what’s given to other executive officers. Accurate, reliable and timely reporting and the directing of the accounting and finance functions in an organization are tough tasks that need to be suitably recognized.

Stephen Hodes, CPA
Miami