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| 2003
News and Press Releases |
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HEADLINE:
Accountants Must Put Investors First
By: Arthur Levitt
FinancialTimes.com. November 24, 2003
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EXCERPT: The accounting profession is a profession like no other. To my mind, it is one of the most noble in our marketplace. Accountants are private-sector actors with a public role to play. But with that precious franchise come unique pressures and challenges. In most businesses, the watchword is: "The customer is always right." Accountants are charged with telling their customers when they are wrong. But as firms, and their profits, have grown, the profession has lost its focus on public responsibility, the ethical demands of the job and the role auditors play in keeping markets healthy. New regulations will curb many abuses that led to scandals such as those of Enron and WorldCom. But I believe strongly that the way back for the accounting profession rests with the profession itself. As a first step towards restoring their reputation and regaining the public trust, auditors must put investors, not management, first, even though managers pay the fees. When there is a tough call to make on whether to disclose certain information, decisions must be based on what serves the interests of the investing public. Second, regulators need to work with auditors, and auditors need to work with regulators. This is the only way we shall be able to craft accounting standards that make sense. The profession and each of the firms need to reaffirm their leadership in standard-setting, even when "the right answer" runs counter to the short-term interests of client management. There needs to be robust debate - even open disagreement - as standards are discussed. That is the only way to ensure that standards represent not just a finely negotiated compromise but the best thinking in the field. Accountants need to offer strong support to the Financial Accounting Standards Board, the US standard-setter, in its efforts to improve transparency and the quality of the numbers. And they need to defend the FASB passionately against attacks on its independence. The profession must help lay down good rules of the road. Instead of getting mired in the false choice between "rules-based" and "principles-based" accounting, firms need to help craft "objectives-based" accounting. New rules should ensure that the underlying economics of any company are reflected in the balance sheet. This may require expensing of stock options; showing leases as financings; and taking out the smoothing mechanisms in pension accounting that fail to reflect market swings. These are tough for accountants to sell to clients, perhaps even for accountants to sell to their own profession, because they are a change from the way things have been done in the past. But change is important, especially when it produces better information. Auditors need to show investors they are on their side by demonstrating what they know. There cannot be specific rules for every possible business transaction. Yet too many in the accounting profession and among standard-setters resort to the old defence of: "Where does it say in the standard that I have to do that?" This excuse is, at best, counter-productive; at worst, it is childish. FASB should consider - and the accounting profession should support - adopting a rule similar to one the Securities and Exchange Commission SEC has on its books, which obliges companies to disclose any material information that ensures financial statements are not misleading, whether or not that information is specifically required. Even if this rule is not passed, auditors should ensure that material information is disclosed clearly and transparently. In each company and in each industry, there is a set of statistics that helps investors and management predict the future earning power and potential cash flow of the business. Accountancy firms need to propose to the SEC how to achieve greater disclosure of these data. Accountancy firms also need to declare and assert their independence. For instance, when considering the type of tax shelter work the profession does in the future, firms must ask themselves whether the economic incentives that drive them to provide these shelters are worth the stain on their reputation. If they refuse tax shelter work, will that increase the firm's standing in the eyes of critics, regulators and, most of all, investors? I believe the answer will lead more companies to forgo this type of work. Firms must take corporate governance seriously, including their own. The top accounting firms should take the lead in establishing independent governing boards, with a real voice in governance and scrutiny and the power to ask tough questions and demand real answers from management. Last, the profession must help in improving accounting education and recruiting a new generation of auditors and accountants. Only through such efforts can we show a new generation that accountancy is defined by a tradition of honour and veracity, rather than by the legacy of the recent past.
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