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No wonder auditors are building up their consulting practices again. The current situation and pricing strength will not last, and then they will be left with just a lot of low-value, rubber-stamp relationships.
Dana Stiffler
Via E-mail
"Fractured Fraternity" (September) describes the change in the management-auditor relationship as if it's primarily a negative development. While I understand that some financial executives long for the days when the auditor was a counselor and adviser, it's not clear to me that auditors ever should have filled such a role. The audit opinion states, "These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits." The intended division of labor is very clear: management is to prepare the financials, and the auditor is to test management's financials.
I believe that we ended up with the auditor as an adviser/counselor due to confusion about the identity of the client. If the client is management, then advising and counseling are appropriate. However, the Sarbanes-Oxley Act reinforces the notion that the audit committee/board is the client — and that ultimately, the financial-statements users are the clients. As a result, I believe that a more formal relationship between management and the auditor is quite healthy.
Dana R. Hermanson
Dinos Eminent Scholar Chair of Private Enterprise and Professor of Accounting
Kennesaw State University
Kennesaw, Georgia
A New Definition of "Assets"?
Tim Reason's article on lease accounting, "Hidden in Plain Sight" (August), was a good summary of the issues. I found it sadly humorous that Securities and Exchange Commission staffers themselves complained that companies were "taking advantage of the bright-line nature of the [FASB leasing] standards" to structure off-balance-sheet transactions.
Really now, shouldn't standards be clear, concise, and easy to apply? If the SEC, the Financial Accounting Standards Board, or the International Accounting Standards Board wants to improve lease accounting and reflect economic reality, then any new standards need to: (a) provide unification to the Uniform Commercial Code in regards to the definition of sales and lease transactions; (b) acknowledge and build in aspects of legal title possession (by country or U.S. state) and the benefits and obligations surrounding ownership; and (c) be clear and easy to understand, and have a consistent application formula with very little room for subjective inputs.
Finally, if FASB chairman Robert Herz really believes that all money payments relating to an asset that you "can't get out of" need to be on the balance sheet, then there are plenty of other company obligations that the SEC, FASB, and the IASB should start requiring to be on it as well. Remember, it wasn't the leasing of personal or real property that brought down Enron, Global Crossing, or MCI. Maybe we need to change the definition of an "asset."
I don't disagree that lease accounting may need an overhaul, but obfuscating the standards or formula procedures isn't the answer.
Chris Smith
Vice President for Finance
Science Applications International Corp.
San Diego
Simplistic Thinking
In a letter in your August issue ("True Independence"), Butler University professor Arun Khanna stated, "Sarbanes-Oxley requires public companies to beef up their independent directors." He then opines that there is "no reliable way to identify independent directors." Not to be deterred by such a truism, Professor Khanna proposes a neat solution: "Directors that have voted differently from the CEO in the past can be characterized as independent directors: others are simply nonexecutive directors."
Brilliant! Such criteria should make selection of directors a snap. Forget whether the CEO might have been right. Simply give candidates a list of past CEO decisions. Presumably, disagreeing with all of them would make one a genuine, first-class, independent board member. It would also preclude the need to actually review the quality of CEO decisions.
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