Klion Forum Weighs in on Accounting Crisis

By Jason Couchman ’03

In the wake of recent accounting scandals surrounding Enron and its audit firm Arthur Andersen, business experts, lawmakers and the media have grappled with questions about what went wrong and how to fix the problem. This topic was addressed at Columbia Business School at the annual Klion Forum on Ethics and Integrity. Panelists included: Jack T. Ciesielski, publisher of The Analyst’s Accounting Observer; Laurence M. Downes, Chairman and CEO of the New Jersey Resources Corporation; Bevis Longstreth, senior partner at the law firm Debevoise & Plimpton; and Marc Sternfeld, adjunct professor at Columbia Business School.

Perhaps the most salient point conveyed by the panel was the interrelationship between accounting income reported on financial statements of firms listed on the S&P 500 and taxable income reported to the Internal Revenue Service by those same firms from 1987 to the present. Accounting and taxable income reported by firms during this period began to diverge dramatically after 1997. Panelists agreed with striking unanimity that the cause of this divergence had a great deal to do with the blurred roles many “Big 5” accounting firms have taken as auditors acting on behalf of shareholders’ interests as well as consultants performing non-audit work at the behest of corporate management.

After opening remarks from David Luke Palmerlee, co-chair of the Integrity Board of Columbia Business School, Mr. Ciesielski started the panel discussion by commenting on how accounting firms should be restructured to avoid conflicts of interest. Mr. Ciesielski described the importance of splitting accounting firms into audit and non-audit business to avoid the conflict of interests inherent in serving stakeholder interests by facilitating auditor independence to identify potential earnings manipulation by management.

Mr. Downes offered pointed commentary on the role of audit committees within a corporate organization. Whereas many CFOs believe themselves responsible for selection of the accounting firm who will audit the work of the finance office, Mr. Downes indicated that the responsibility for accounting firm selection must lie with a company’s audit committee. Mr. Downes indicated that the audit committee at New Jersey Resources Corporation bears this responsibility, and that CFOs attempting to hire auditors themselves may face allegations of a conflict of interest down the road if earnings go awry.

Bevis Longstreth described the opposition to a reform plan proposed by Harvey Pitt at the hands of both captains of US industry and by members of Congress. As a result of the dramatic alteration of Pitt’s original plan, Mr. Longstreth commented that understanding the content of financial statements with respect to some of the more exotic methods used to book revenue by US firms facing accounting challenges will continue to pose difficulties. He did comment favorably on one point of Pitt’s original plan that continues to be considered – inclusion of a footnote describing the breakout of auditing versus other fees paid by firms to their accountants in future US financial statements.

Professor Sternfeld offered a strong critique of the oversight provided by many corporate boards of directors as well. He described the need for corporate boards to question the earnings and balance sheet numbers provided by management while simultaneously describing the challenge in doing so. Since corporate board members often meet for only one day per period to discuss earnings results, Professor Sternfeld argued, the challenge for board members is to break against the overwhelming current to move through the day’s agenda quickly and ask probing questions about earnings to uncover potential misdeeds.

However, while all panelists stressed the need for change in the accounting profession, all readily agreed that the incentives not to address the problem are strong, while the incentives to make corrections seem to be weak.