VideoIndustry watchers also point out that an accountant-turned-finance staffer has great familiarity with a firm's audit process. That knowledge could enable a former auditor to help a new employer game the system — or even circumvent audits completely. "As someone who has supervised the audit, he knows what the procedures are," asserts Roy Van Brunt, a forensic accountant with Ten Eyck Associates who once worked with the SEC on the auditor independence issue. "So it becomes somewhat easier for him to hide something — at least in theory."
Farm System
Paul Free puts considerable stock in that theory. Free, corporate controller at Delphi Automotive Systems Corp., avoids hiring auditors from the company's independent auditor (Deloitte & Touche) when filling positions on Delphi's finance staff.
Ironically, Free himself was a partner at Deloitte before joining Delphi, although he was not engaged in the company's audit. Nevertheless, Deloitte and Free have put in a policy prohibiting the Delphi CFO from hiring Deloitte auditors at the managerial level — even ones that aren't working on the Delphi account. The company's audit committee, Free says, reviews his new hires on an annual basis "to make sure that my actions are consistent with my policy."
Free grants that the policy, while probably best for shareholders, does make it somewhat tougher to staff the finance department at Delphi. "It's unfortunate in some respects," he explains, "because the management people who do [audit] Delphi know a tremendous amount about us. They're learning curve would be less steep than someone who doesn't."
In fact, some CFOs see their audit firms as something akin to a farm system. Robert Ryan, CFO of Medtronic Inc., says the company does hire members from its independent audit team — but only for lower-level positions. He says he can then train them to move up at the company. "This, for us, is an opportunity to develop future leaders for the company," says Robert Ryan, "You're better off to hire three or four, get them acclimated to the company, and then you have the bench strength to send them out."
Some shareholders activists concede new auditor employment laws could make it tougher for companies to find qualified finance employees. And union man Durkin say's he not exactly certain what can be done to stem auditor/client abuses. "We're not quite sure how you grapple with it," grants Durkin, who is still in early-stage negotiations about employment relationships with audit committees. "Disclosure may begin to address those concerns."
Human Beings Are Complicated
Possibly. Some shareholder activists suggest that if a CFO has worked for an audit firm within the last five years, that information should be noted in the audit committee's report.
One company has already taken that tack. Last week, IndyMac Bancorp named Scott Keys to the CFO post. Keys came from IndyMac's audit firm, Ernst & Young. In announcing the hire, management at the company noted that, "while Ernst & Young has been IndyMac's auditors since June 2001, Mr. Keys was not a part of IndyMac's year-end audit team."
It remains to be seen if that sort of voluntary disclosure catches on at other publicly traded corporations. The fact is, many corporate managers value their long-term — and close — relationships with their audit firms. UAL, the parent company of United Airlines, employed Andersen as its independent auditor for nearly 67 years. As Richard Roe, partner in the law firm Proskauer Rose LLP, notes: "You have human relationships. But you could have those [close relationships] because the CFO has been the CFO and the audit partner has been the audit partner for years."
Moreover, some CFOs say new auditor employment requirements could also be gotten around. "You can't determine everything with rules," argues Medtronic's Ryan. "You need to have good reputable people with good judgement."
Even some lawyers admit that laws may not be the answer. Notes Neil Lang, partner with Sutherland Asbill & Brennan: "I don't know how you regulate someone's state of mind."
You can't. You can't stop people from conducting insider trading, either, but there are still laws against it. Lawmakers in Washington, feeling pressure from the public outrage over the Enron scandal, may well push through some sort of auditor employment legislation. Such legislation could forever change the nature of the auditor/client relationship, and the careers of countless accountants.
That prospect may cheer shareholders, but it probably won't thrill many accountants. "It's up to an individual company who they hire," insists E&Y's Coulson. "Presumably they hire people based on competence and knowledge, as opposed to some evil motivation that helps them perpetrate some fraud."
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