Would you place your firm’s business in the hands of a company you didn’t trust?
Trust is a necessary ingredient in any important relationship, be it personal or professional. And thanks to large-scale and very public accounting scandals like those at Enron and WorldCom, the issue of trust has become a prominent one in the world of business.
With images of top executives in handcuffs in the news, consumers’ suspicions of big business have increased and there is a new wariness of public accountants.
“There is a lot of distrust, and it is up to the public accounting profession, along with company executives and boards of directors, to address these concerns,” says Michael Petrecca, managing partner of PricewaterhouseCoopers’ (PWC) Columbus office.
PWC has taken the bull by the horns — its CEO Samuel A. DiPiazza and PWC fellow and former Harvard Business School Professor Robert G. Eccles have written a book aimed at restoring public confidence in the accounting and consulting industry. Titled “Building Public Trust,” the book recommends a new model of financial reporting for public companies, as well as a new version of accounting principles.
Petrecca calls PWC’s approach a three-legged one.
“There needs to be a spirit of transparency encompassing public companies,” he says, “as well as a culture of accountability and integrity.”
Petrecca says one thing recent events have taught the business community is that those directing a company’s accounting and financial reporting need to communicate regularly.
PWC advocates the development of a new set of generally accepted accounting principles, or GAAP.
“We feel a company needs to present its true underlying value and not hide behind the accounting,” says Petrecca.
He says this is accomplished by reporting financial information that is most relevant to the corporation and making the data comparable to other markets. To stay above reproach, Petrecca says companies need to maintain transparency, accountability and integrity throughout the corporate reporting supply chain.
“That’s where I think most companies have lost face,” he says.
This means separating business divisions that might raise questions of a conflict of interest, says Petrecca.
“The reality is, when we audit a public company, we should not do its IT consulting as well, for example,” he says.
Lawrence Hilsheimer, managing partner of Deloitte & Touche in Columbus, says it’s important to remember the majority of the nation’s companies conduct business with integrity.
“A minority of companies are accused of any misleading accounting issues,” says Hilsheimer. “We will advise our clients to continue what they have always done — be honest and follow the rules.”
On a corporate level, James E. Copeland, Deloitte & Touche’s CEO, recommends the creation of a National Financial Review Board (NFRB) to investigate business failures. Copeland says the board would be similar in structure to that of the National Transportation and Safety Board and would determine the cause of failures and recommend steps to prevent a recurrence.
In keeping with the movement to keep business lines drawn, Deloitte & Touche severed ties with its consulting firm, Deloitte Consulting, in February. Deloitte Consulting has further differentiated itself by renaming the company Braxton.
Hilsheimer maintains, however, that the advice it gives clients like American Electric Power and Borden will remain unchanged.
“Our approach has not changed. We deal with the issues at hand,” he says.
And, he adds, the vast majority of American businesses have and will continue to report appropriately.
A national perspective
As election season nears, the Senate and House have signed a bill that addresses the issues raised by Enron and WorldCom. Aimed at corporate reform, the Sarbanes Bill was crafted by Sen. Paul Sarbanes, (D-Maryland) in the Senate, while Rep. Mike Oxley (R-Ohio) negotiated House changes.
The final bill calls for the creation of an accounting oversight board, which will work with the Securities and Exchange Commission (SEC). This five-member board will have the authority to mandate auditing standards for public companies, as well as conduct investigations. The bill also includes stiffer penalties for those found guilty of securities fraud.
And while the focus remains on public companies, there is growing debate over imposing the same standards on private firms.
“The legislature will impact what an accounting firm can and cannot do with its publicly traded clients,” says Plante & Moran LLP’s Managing Partner Robert Shenton. “But should the rules be the same for privately held companies?”
Plante & Moran’s clients are almost exclusively privately held businesses in the health care, manufacturing, construction, real estate and retail industries. Shenton says once the Sarbanes Bill is law, it is up to each state to decide whether privately held companies should be held accountable to the same standards.
He says it makes sense to do so.
“If you have consulting services that assist the client’s operations, then you can’t also audit it,” he says. “You can’t audit work you’ve done yourself.”
On the other hand, he says, using the same accounting firm for audit purposes has been done for several years and does offer advantages.
“There is no clear black and white answer,” says Shenton. “A firm familiar with the client can do a more effective audit, but there are some big struggles going on to find the right balance between consulting and remaining independent for auditing.”
The CPA point of view
The membership of the Ohio Society of CPAs has debated the public vs. private company question, says President, J. Clarke Price, and at least 80 percent of the 23,000 members feel private companies should not fall under the same guidelines as public ones.
“We feel the laws should not extend beyond publicly traded companies,” says Price.
CPAs of private companies feel they should be able to offer clients a complete range of accounting and consulting services. Private firms are typically smaller and may not have the budget to use two different agencies — and, says Price, a change in practices could result in an increase in the cost to obtain auditing services.
“The auditing firm is already familiar with the client and its operations, and so won’t have the learning curve that an outside firm would, saving time and the client’s money,” says Price.
But that doesn’t mean that CPAs should have no governance, Price qualifies.
“Our position as a profession is that we believe CPAs that violate the law and standards are culpable and should be punished,” he says.
Price also notes that as the Society’s members speak with business owners and individuals, they’ve been asking them how they feel about their CPA.
“The response we get is, ‘We trust them implicitly,'” says Price. “The CPA profession has been questioned, but it has not affected any individual relationships.”
So is there hope for restoring public confidence? And when that objective can be accomplished?
“That’s the $64,000 question,” says Petrecca. “Eventually, we’ll settle on some new standards.”
Petrecca says there is some tension between generally accepted accounting principles internationally and in the United States.
“The International GAAP are more clearly defined rules and simpler,” he says.
Petrecca hopes Americans adopt the international rules. Then, he says, “We’ll need a year or two without business failures to get the public to re-embrace the market. And continued strong earnings and growth will help, too.” How to reach: PricewaterhouseCoopers, (614) 225-8700 or www.pwcglobal.com; Deloitte & Touche, (614) 221-1000 or www.deloitte.com; Plante & Moran LLP, (614) 791-9200 or www.plantemoran.com; Ohio Society of CPAs, (614) 764-2727 or www.mysocietyonline.com
