ANTHONY H. CATANACH JR. is an associate professor in the School of Business at Villanova University, as well as the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services. His professional experience includes five years as an audit manager with KPMG and six years in the financial services industry. Dr. Catanach has received numerous awards for his publication, teaching, and curriculum innovation efforts. He has authored numerous articles on a variety of accounting, finance, and management issues, as well as several business education texts..
This is a proud moment for those who are graduating, as well as families and friends. You have successfully earned your degree in Accounting, and you soon will enter the profession to begin practicing auditing, tax, corporate finance, and the like. Also, you will study for and soon pass the CPA exam. Your futures are bright indeed. And your faculty are very proud of you, including these two Grumpy Accountants.
You have learned a lot about accounting and a variety of other topics while in school. Your educational foundation is now complete. Of course, you will be building on this important base through your work experiences as you actually “learn by doing.” This will give you tremendous insights into the nuances of accounting, finance, as well as business in general.
For those of you who will be working in accounting, you are entering a good profession, one that plays several important roles in society, all dealing in one way or another with information. We gather information, we process information, we aggregate information, we communicate information to the appropriate audience, and we interpret the information. Accounting plays a vital role in business and society since quality information drives quality decision-making.
However, you also are entering a profession that is in trouble; some may even say one that is in crisis. Most of you know about the accounting scandal at Enron. Unfortunately, Enron is not an isolated instance. There have been hundreds of accounting and reporting scandals over the years, and accountants appear culpable in many of them. As a consequence, we are losing our credibility as information providers and as auditors of information.
It is very important to realize that the accounting problems which are contributing to our profession’s decline are not limited to just a few “bad apples.” There simply have been too many accounting and audit failures for this “bad apple” story to have merit. As proof, consider the below listed statistics from Audit Analytics for companies issuing securities in US capital markets. Note that the term “restatements” reflects accounting and reporting errors requiring the correction of financial statements.
- 2005 — 1,550 restatements
- 2006 — 1,795
- 2007 — 1,215
- 2008 — 920
- 2009 — 683
- 2010 — 735
Some of these restatements are due to mistakes, while others are due to internal control issues, and a few reflect incorrect estimates. But, a lot of these accounting restatements relate to purposeful exaggerations and purposeful omissions intended to inflate an entity’s true worth. Too many are fraudulent.
With hundreds and hundreds of these accounting “miscues,” clearly we have a lot of bad apples in the accounting profession. Indeed, with so many bad apple trees, one wonders about the whole fruit farm.
The matter rests in our hands, and that includes you. Either we change the accounting profession, or it will rot. As you begin your career, we ask you to be part of the solution and not part of the problem.
As we near the tenth anniversary of the WorldCom debacle, consider the story of Cynthia Cooper. She led the Internal Auditing department at WorldCom that discovered the accounting fraud at WorldCom. Without this group’s perseverance and Cynthia’s leadership and strength of character, it is possible that the company’s fraud may have gone undetected.
Her team’s work was so impressive that Bernie Ebbers, WorldCom’s CEO, and Scott Sullivan, the CFO, demanded they quit looking at the financial statements, and concentrate on various operational audits. Indeed, top management kept the internal auditors busy by adding more and more projects to their “to do” list to distract them from the financial statements. But Cooper and her small staff were undeterred.
They wanted to serve their real master: the capital providers. They wanted to serve the public interest. They recognized that they weren’t serving Ebbers and Sullivan; their responsibilities were far greater.
They had integrity. They smelled a rat and would not drop their detective work until they were satisfied one way or another. Professional integrity dominated dictates by the CEO and CFO.
They had courage. They fully realized the potential consequences to their careers of their actions. If Ebbers and Sullivan had known that Cooper and her staff were still performing financial statement audits after they were ordered to quit, they probably would have lost their jobs. But Cynthia Cooper and her staff continued anyway.
They worked long hours—they had to because they had to complete the many operational projects assigned to draw them away from their financial statement audit work. They also had to use a different computer because others were monitoring their computer jobs. And they had to be careful about their communications because their emails and voicemails were being monitored.
But, they continued on. They had a desire to serve, a commitment to integrity, and a heart of courage. And the rest is history because they eventually unearthed what at that time was the largest accounting scandal in corporate America. Their story is told in more detail in Extraordinary Circumstances by Cynthia Cooper. We heartily recommend it.
As you leave your university, it is our desire that you accept the reality of the profession as it truly is. There is much that is good, but there still is too much that is bad. We hope your desire is to contribute to and improve the profession, not just take from it. We ask that you be part of the solution, and not part of the problem.
We hope that all of these restatements and scandals make you feel uneasy; that they bother and trouble you. The remedy: serve the public interest and have the integrity and courage exhibited by Cynthia Cooper. In fact, we hope you get grumpy. Become a grumpy young accountant and reform the profession. Together we can make a difference.
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.
J. EDWARD KETZ is an associate professor of accounting in the Smeal College of Business at Pennsylvania State University. He has a bachelor’s degree in political science, a master’s degree in accountancy, and a Ph.D., all from Virginia Tech. Professor Ketz has been a member of the Penn State faculty since 1981. He also has taught at the University of Connecticut and the University of Maryland. Professor Ketz has authored and edited 17 books including Hidden Financial Risk (Wiley, 2003) which examines the corporate culture and the institutional setting that engendered recent accounting scandals. Dr. Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, and USA Today. He also has appeared as an accounting commentator on CNN, National Public Radio, and Bloomberg Radio.
“A lot of bad apples”? How about putting this in percentage terms. One of the sloppiest things the mainstream media does is throw out a statistic with no context (“2.5 million Americans died last year!” Is that bad? Not if you consider normal human mortality). What would be really interesting would be to see the trend pre-SOX to post-SOX. Is that 2005/2006 spike due to the over-zealous application of new rules, or has SOX genuinely made a difference?
Following up on Barry Kruse’s comment: What about repeat “bad apples” ? That is, are some companies making multiple re-statements (for different fiscal years) , because they have a history of incorrect/fraudulent financial statements ?
I for one hope you guys stay Grumpy; I’m learning a lot here! Have you seen AOL’s goodwill assumptions? Or TPC? On TPC, the SEC asked for clarification, and the clarification didn’t make any sense!