Speaking to a local chapter of the New York State Society of CPAs on October 16, 2002, former Securities and Exchange Commission (SEC) Chief Accountant Lynn Turner blasted some of the today's accounting and auditing reforms as "intentionally misguided." If accountants really want to regain their trust, Mr. Turner suggested, the best approach is to lose their tin ears, listen to their "customers" (investors, creditors and the general public) and redesign their products and standards accordingly.
The lessons paraphrased from Mr. Turner's remarks:
- Be receptive to new ideas, both publicly and privately. Currently, accountants are speaking publicly about their renewed sense of public interest, while privately lobbying against the public interest in such matters as the leadership of the new accounting oversight board. To regain trust, the accounting profession needs to stop talking in one in direction and walking in another.
- Gear reforms toward recent accounting scandals. The debate over "principles-based" versus "rules-based" standards is intentionally misguided. In recent scandals, the problems were caused by lack of compliance with principles-based accounting standards and use of judgment to manipulate numbers. A shift to all principles-based standards may help auditors avoid legal liability, but it doesn't address the real problems in investors' eyes.
- Work to earn investors' trust gradually. Since a major element of the distrust in investors' eyes concerns the ability of auditors to use appropriate judgment, auditors should begin by providing investors with a grade on the quality of the accounting principles applied by the company being audited. If auditors can't do this initial step, then they surely can't be trusted to use their judgment in saying if the principles have been properly applied.
- Expand financial disclosures to include data used in analysis. Investors are tired of surprises. They want more information that will help them predict the future. Examples provided by Mr. Turner include sales backlogs, revenues from new products or stores, and plant capacity and utilization rates. Additional information is also needed about cash flows and cash commitments for the next five years.
- Give investors a seat at the standard-setting table. The Financial Accounting Standards Board (FASB) should consider adding four or more investors to its Emerging Issues Task Force to counterbalance the influence of big accounting firms and their clients.
- Expand audit reports. Today's "wishy-washy" audit standards should be replaced with ones that require auditors to perform specific tests and state in their opinions exactly what steps were taken. As an example, below is the report on U.S. Steel from its first audit by Price Waterhouse in 1902. Mr. Turner bet anyone in the room a steak dinner that if they put this report alongside the one used today, nine out of ten investors would say the 1902 report is more meaningful and useful.
We have examined the books of the U.S. XYZ Corporation and its Subsidiary companies for the year ending December 31, 19XX, and certify that the Balance sheet at that date and the Relative Income Account are correctly prepared therefrom.
We have satisfied ourselves that during the year only actual additions and extensions have been charged to Property Account; that ample provision has been made for Depreciation and Extinguishment, and that the item of "Deferred Charges" represents expenditures reasonably and properly carried forward to operations of subsequent years.
We are satisfied that the valuations of the inventories of stocks on hand as certified by the responsible officials have been carefully and accurately made at approximate cost; also that the cost of material and labor on contracts in progress has been carefully ascertained, and that the profit taken on these contracts is fair and reasonable.
Full provision has been made for bad and doubtful accounts receivable and for all ascertainable liabilities.
We have verified the cash and securities by actual inspection or by certificates from the Depositories, and are of opinion that the Stocks and Bonds are fully worth the value at which they are stated in the Balance Sheet. And we certify that in our opinion the Balance Sheet is properly drawn up so as to show the true financial position of the Corporation and its Subsidiary Companies, and that the relative Income Account is a fair and correct statement of the net earnings for the fiscal year ending at that date.
Download the full speech.