A cross-section of Pittsburgh corporations say they have implemented stricter accounting controls and accountability measures to reassure nervous investors that their financial reporting is reliable.
And as President Bush and Congress propose new standards and revamped bureaucracies to improve policing of corporations and the accounting profession, accounting and corporate finance experts say such reforms are overdue.
Even so, things will get worse before they get better, says Robert Strauss, a professor of economics and public policy at the Heinz School at Carnegie Mellon University.
“There will be other revelations about accounting manipulations,” he said. “On a corporate and board level, a lot of companies have taken on a lot of debt. If they haven’t gotten the performance they need in revenues, they’re going to find other ways to get their numbers up.”
The process of regaining investor confidence will take time, Strauss said. “Trust is slow to rebuild. It’s like virtue: it’s easily lost and very hard to regain.”
The accountability issue is a tricky one, especially at large companies. “In one sense when you’re at the top of a large corporation, it’s difficult to always know what’s going on underneath. On the other hand, based on their compensation, CEOs should bear the final responsibility,” he said.
So the Securities and Exchange Commission has proposed that top executives be required to certify their company’s financial reports.
Dr. Stephen Rau, a professor of accounting at Duquesne University, said most companies already do this in their annual reports to shareholders.
“I don’t see what this (SEC) proposal changes,” he said.
And according to CMU’s Strauss, Treasury Secretary Paul O’Neill has the authority to require a company’s tax filings be independently audited, which would help crack down on fraud. “If you read the IRS code closely, if Paul O’Neill wanted to, he could take an aggressive position and change the market for accounting services, accounting ethics, and the accounting profession with the stroke of a pen by requiring that corporate tax returns be reviewed by independent auditors.”
Don’t expect much from corporate self-policing. “There are boards (of directors) who care, and boards who don’t,” Strauss said.
In one business sector where stronger monitoring already exists — banking — major companies rarely have accounting problems because of oversight by the Federal Reserve and the Comptroller of the Currency.
In late January, the Federal Reserve objected to Pittsburgh-based PNC Financial Services Group’s accounting treatment on its 2001 sale of corporate loans and venture capital investments. As a result, PNC reduced its 2001 earnings by $155 million, which caused PNC stock to fall 9 percent the day of the announcement.
PNC since then has been proactive in guarding its financial reporting. In December, the company appointed new auditors, Deloitte & Touche, and charged them with conducting a critical review of the company’s internal reporting processes. In April, it created a new position of “chief risk officer,” filling it with a veteran company executive.
Other Pittsburgh companies issued statements saying their accounting policies and procedures are strong.
Mellon Bank said its financial reporting is dependent on a system of internal and external checks and balances, in addition to the integrity of its people.
“No information collection and dissemination system can work effectively unless the people involved are of the highest integrity.† In any organization, that tone is established within the leadership ranks, and from Mellon Chairman and CEO Martin G. McGuinn on down throughout the company, Mellon has consistently emphasized integrity as one of its shared values,” said spokesman Ron Gruendl.
“In addition, our board’s audit committee is very engaged and is presented with a review of our financials throughout the year.† They meet eight times annually, always asking probing questions.† In addition, the chairman of the board’s audit committee has numerous informal meetings with Mellon management,” he said.
One problem has been that the audit committees of many boards of directors have been taken lightly in the past, experts say. This group is charged with reviewing with the company’s auditors the quantity and quality of financial information provided by the company’s executives.
Charles M. Elson, Director of the Center For Corporate Governance of the University of Delaware, said independence of corporate board members, especially on the audit committee, is key to responsible financial stewardship.
Elson said that the hiring of a company’s auditors should be at the sole discretion of the audit committee, and that both a company’s internal and external auditors should report exclusively to the committee.
A review of the proxy statements of some Pittsburgh companies shows that the audit committees meet a minimum of twice a year, with some meeting more often.
In recent years, some local companies have raised the profile of their audit committee, recognizing that this committee.
Craig Creaturo, director of finance at II-VI Corp., a Saxonburg-based maker of industrial laser components, said his company recently updated its audit committee charter and filed it with the SEC. He said it more clearly spells out the committee’s responsibilities for protecting shareholder interests.
Rau said frequent meetings are better, but only if they are substantive meetings, with members who are knowledgeable in accounting and finance and are on the lookout for irregularities. “Two good meetings could be much more relevant than having a dozen meetings where the members just sit there and twiddle their thumbs,” he said. “They have to do their homework.”
Duquesne University’s Rau said that there are thousands of companies that are above board in their financial reporting practices. But he agrees that new measures must be adopted, both internally by companies, and by regulators, to restore the faith of investors.
Robert C. Denove, managing partner of Deloitte & Touche’s Pittsburgh office, said he welcomes reforms, but only ones that are “real, comprehensive and , just as important, without unintended consequences that are worse than the problems they were intended to cure.”
Denove said he supports the establishment of a mandatory rotation of auditors within a company on a particular client, but not the mandatory rotation of auditing firms. In February, Deloitte & Touche separated its accounting and consulting businesses to eliminate the appearance of a conflict of interest.
“There is strong evidence that requiring the rotation of entire firms is a prescription for audit failure. … We believe a more useful action would be for the SEC to automatically review companies who do change auditors to make sure they are not doing so in an effort to escape a diligent auditor,” he said.