by Steven E. Sacks
“Can’t anybody here play this game?” was the plaintive wail of Hall of Famer Casey Stengel in his first year as manager of the lowly, yet lovable, New York Mets. Stengel wondered how grown men who supposedly knew baseball’s fundamentals on the major league level could play like a group of 10-year old Little Leaguers.
The same question can be asked today of the accounting profession and those who are in charge of advancing its cause. Even after a slew of corporate scandals (e.g. Enron, WorldCom, Global Crossing, Tyco and Waste Management), and now with HealthSouth and Wachovia joining the fray, you have to wonder, “Can’t anyone here play this game?”
We see reactionary legislation like the Sarbanes-Oxley Act that Congress passed in July 2002 positioned as the panacea for what ails financial reporting today. The act requires that the Securities and Exchange Commission mandate that chief executive officers and chief financial officers certify every quarterly and annual report, and that the reports comply with the SEC Act of 1934 and fairly present, in all material respects the results of operations and the financial condition of the company.
The act also describes the non-audit services that CPAs are prohibited from providing their audit clients because of the potential independence impairment or conflict of interest, such as valuation, systems implementation and investment advisory services.
Initially most tax services were prohibited until there was a backlash from the profession’s lobbyists. In fact, there had been backpedaling when many CPA firms determined what the downside for them would be if the legislation was enacted in its original entirety.
But let’s be real here. Consider the “burden” placed on the CEOs and CFOs to familiarize themselves with the financial figures beyond the cursory view given when managing pre-established earnings targets. This is not to paint all financial executives with a broad brush, although the echoes of the Harvard-educated, ex-Enron CEO Jeffrey Skilling can still be heard when he claimed that he did not know how to read the financial statement.
And, realistically, how many of the chiefs really do, or take the time to learn how, when they are more occupied with articulating the corporation’s mission or setting forth its strategies? It makes one wonder how many corporate leaders will have to take refresher courses in accounting at night. On the other hand, except for analysts, how many readers of financial statements really understand them?
On closer examination, may-be the tenets of the act won’t be so onerous. According to the PricewaterhouseCoopers Management Barometer, the accounting and corporate scandals, that led to Sarbanes-Oxley resulted in changes in control in 85 percent of large U.S. multinational companies.
However, only a third of the senior executives surveyed by PwC believed that Sarbanes-Oxley would restore investor confidence in the capital markets. Further, only 9 percent of those executives surveyed characterized the act as a good and adequate response to problems in accounting and auditing, while the remaining 91 percent believed that more needed to be done, that it will be too costly to implement, or that - when the dust settles - the act won’t make a difference at all.
But given the specter of a 20-year prison sentence and $5 million in fines for failure to take responsibility, I cannot think of anything else that would possibly motivate the CEOs and CFOs to extend themselves a little.
What about the outside CPA? CPA auditors will be taken to task if they ignore the responsibilities imposed on them by Sarbanes-Oxley. Not only will they have to adequately plan the audit, but they will be responsible for examining systems and processes that may give rise to fraudulent activities.
If fraud is discovered, the CPA will have to report their findings to a corporation’s audit committee comprised of individuals who are expected to have financial expertise. No longer will the committee rubber stamp management’s financials and then share war stories over expensive dinners, wines and cigars, all on the company’s tab.
Today, we face uncertainty in the capital markets due to military action in Iraq, a questionable domestic package of tax cuts and spending by the Bush administration, interest rate adjustments to deflect recessionary pressures, trade protectionism, prescription drug plans, education, and on and on. Is it any wonder that the financial reporting scandals amplify the jittery feelings?
What’s on the horizon?
Okay, so we are all in agreement that those who mislead the public should be recognized and appropriately punished. Hopefully, the act will provide the necessary teeth to accomplish this. The next challenge on the horizon is to make financial statements more meaningful for decision-making, for the investor, the creditor and the financial analyst. Heretofore, financial statements, even if fairly representative of the financial condition and operations of a business, simply showed what had already taken place, which mainly prevented proactive decision-making.
Although continuous audit and fair-value financial statements have been discussed, the SEC has prohibited the use of misleading pro forma statements. Thank goodness. If a jaundiced view is taken of past financial results, how much credence can be given to a rosy prognostication of the future, especially if certain line items are removed?
In terms of sharing financial information on a timely basis, over the past couple of years, a lot of attention has been paid to the Extensible Business Reporting Language. XBRL is an interactive Internet-based tool that allows for the publication, sharing and analysis of the complex financial information in corporate business reports.
XBRL offers a common platform for the key business reporting information currents, and improves the reliability and efficiency of communicating financial data among users internal and external to the reporting enterprise.
However, the premise that the original data must be accurate and meaningful is more important than ever. Otherwise, it is simply a bells-and-whistles response that refuses to address the inherent problems that are associated with misrepresented financial data.
Band-Aid or complete surgical repair?
The improvements in the financial reporting model are a good thing for business and the CPA profession. However, what good can they possibly do if the social compact between the teams of management and CPAs on one side and the users of financial information on the other is breached?
Our corporate leaders and those who attest to financial representational faithfulness have breached their fiduciary responsibility. The trust has been broken. Once trust is violated, the orderliness of the market is then turned on its head. Like a broken bone, care must be taken to allow nature and time to heal.
The battle between ethics and economics never ends. As stewards of their investors’ funds, it is disturbing to realize that the high road is not routinely taken by most corporate leaders.
We have heard the term “new economy” used to describe the marketplace today. Technology, communications and the global economy are the main drivers. But does integrity have to take a back seat to satisfy the needs of special interest groups? The desire for quick profits, while inviting long-term disasters, is not the formula for confidence in the U.S. economy, its system of reporting, or its ability to attract foreign capital.
There will be other financial reporting pressures this year: under-funded pensions, revenue recognition and the treatment of stock options. Whew! So many challenges; so many interest parties. The bottom line is that the bottom line reached is one that really has been achieved without smoke and mirrors.
Through the years, there have been so many different views of company profits. As labor leader Samuel Gompers said, “The worst crime against working people is a company which fails to earn a profit.” Fast forward about 60 years, to the corporate raider of the 1980s, T. Boone Pickens, who said, “Far too many executives have become more concerned with the ‘four Ps’ - pay, perks, power and prestige - rather than making profits for shareholders.” Hmm? The more things change....
Will Sarbanes-Oxley be the cure or just a Band Aid? We have to go through a couple of reporting cycles to see if the market has regained the investors’ confidence. We will also have to see whether the CPA auditors can provide a service that others can rely on, even if it will preclude the wink and nod from senior management and involve real effort to provide assurance to various groups.
If there are still no significant improvements in financial reporting bolstering investor confidence and attracting foreign capital, would it be unfair to ask, “Can’t anybody here play this game?”
