Letters

A Reprimand for the JofA
The accounting profession is in the throes of the greatest crisis it has ever faced, and your cover for September 2002 is about car dealerships.

You guys certainly are not doing enough to outline and discuss the issues facing CPAs. It seems you hope it’ll all go away—very disappointing.

Michael C. Hughes, CPA
Vice-President, Finance
Lockheed Martin Global
Telecommunications
Bethesda, Maryland

Begin Process to Restore Public Confidence
As a longtime member of the AICPA, I am appalled at the recent actions and inactions of our fellow CPAs. We are supposed to be the rock-solid figures of integrity and truth—to provide users of financial statements the independent assurances that reported numbers are accurate, fairly presented and in accordance with accepted practices.

I am disappointed in the profession’s inability to police itself. In all the public discussions about tighter controls and monitoring, I have not heard the CPA profession’s programs or comments. Where are we?

We must begin a process to restore government and public confidence in our creed.

Let’s not just use footnotes in an attempt to cover ourselves. Footnotes should be the last resort. The published numbers must be the most accurate and fair as possible. If the footnote must be used and if it is significant, the pro forma results, alternatives and impacts should be shown in easy-to-understand form.

Opinions should declare concerns if audited management disagrees with the auditor’s view, for example, in the accounting for stock options. CPAs need to take the risk that they may get “fired” by the client for taking this principled route.

Prevent firms from conducting both the consulting and auditing functions within the same client—we never should have allowed this to happen in the first place.

Formulate strong ethical guidelines. Teach accounting ethics in college. Require all practicing CPAs to complete continuing education courses on this subject.

Establish an ongoing process of self-regulation with tougher, more thorough peer reviews and periodic audits of the auditor. Call to task and punish those who are significantly out of line.

Work with the SEC and other government agencies to establish effective control and monitoring procedures.

Make public statements regarding the CPA profession’s actions to improve public confidence.

Implement mandatory auditor rotation.

CPAs have a significant public responsibility and a critical role to play in assuring their clients and the public that decisions are based on fact and not fiction. Let’s take this opportunity to straighten ourselves out.

Samuel H. Treger, CPA
Williamsburg, Virginia

A CPA’s Anguish
My pride in the accounting profession has been severely injured as a result of the recent reports relating to Enron and WorldCom.

An auditor should be inquisitive, dig into financial transactions and ask questions. I received my CPA certificate in 1951, and I do not believe my generation would have allowed what has happened to our profession.

I wonder if the hurt will ever be healed.

Marvin Smith, CPA
Denver

CEOs and Fraud: A Solution
With the spate of high-profile, multi-billion-dollar frauds, the responsibility and focus must be shared by CEOs and CFOs, as well as outside auditors.

First, let’s look at the environment and mind-set in which public companies are viewed and measured today. Financial analysts continually press company officials for revenue-related projections. The financial markets operate like casinos with a horizon comparable to the roll of dice, so it’s no surprise that boards of directors are rewarding CEOs for hitting short-term revenue and earnings targets.

The CPA profession clearly has problems of its own which must be resolved to regain public confidence. However, anyone who has taken Auditing 101 knows that despite admonitions to have checks and balances and segregation of duties, internal controls are easily overridden by senior management acting collusively.

CEOs/CFOs have a fiduciary responsibility to thousands of stakeholders. A mechanism must be put in place to assure these executives do not wittingly or unwittingly succumb to pressure.

The solution, in part, is a major change in the dynamics of compensation. CEOs/CFOs should not own stock in companies they manage, nor should they receive stock options or other indicia of ownership. Such presently owned stock should be held in a blind trust until the CEOs/CFOs conclude their terms of office.

They should receive very handsome base compensation. Bonuses should be based on the executives’ achieving sound financial goals over an extended period of perhaps three years.

Further, bonuses so earned should be unfunded liabilities of the company, to be paid beginning one year after the conclusion of the CEO’s/CFO’s term of office. The bonus money would become deferred compensation subject to the claims of creditors in the event of business failure. CEOs/CFOs would be at risk just as their employees and other stakeholders.

Some might argue that such a system would discourage talented men and women from aspiring to senior management positions. However, if all public companies were mandated to subscribe to such a system and if the base compensation was attractive, the playing field would be level.

We cannot legislate ethics or integrity, but we can design systems to deter the massive fraud that has permeated our society.

Stanley H. House, CPA
Kansas City, Missouri

Stand Tall for Independence
While reading the August 2002 issue, I noticed the JofA is working much harder to catch up with the public’s perception of the financial reporting crisis. Keep it up!

I particularly agree with Professor Hass’s comments in “Hazy Reporting” (page 47). Marketplace standardization of key performance measures is one of the major issues in this crisis. We must have comparable financial information about companies and their industries.

The great pillar of comparability is independence. This used to be the greatest strength of our profession, but it appears that lately we’ve been distracted from that principle. I would like to see our profession press for tougher standards on independence for all industries as well as for CPAs.

We ought to demand that solid walls of separation be constructed between corporate audit committees and management. The authors of the U.S. Constitution designed an effective system of checks and balances with separation of power for the government more than 200 years ago. Now we know it’s time to bring this kind of system into the business world. This might not be a popular idea with our clients, but it surely would inspire public confidence.

Tom Louderback, CPA
Louisville, Kentucky