Robin W. Roberts, Accounting Exemplar

Editorial Note: We are delighted to publish this interview of Professor Robin W. Roberts, our Accounting Exemplar. As always, when you read his comments, we ask that you keep in mind that the opinions expressed therein are those of Professor Roberts. They do not represent the position of the AAA or of any other party.

On Sunday, August 5th, Professor Robin W. Roberts of the University of Central Florida received the 2018 Accounting Exemplar Award during the Accounting Exemplar Luncheon held during the American Accounting Association Annual Meeting in Washington, DC.

The Public Interest Section’s Accounting Exemplar Award is given to an educator or a practitioner who has made notable contributions to the professional and ethical health of the accounting profession. The Exemplar represents a role model who has contributed to our profession in a manner that serves the public interest. Previous winners of this prestigious award have included Abe Briloff, Stuart Chase, Cynthia Cooper, Ralph Estes, Harold Langenderfer, Arthur Levitt, Eli Mason, Tony Menendez, Albert Meyer, Carl Devine, Tony Puxty, Bob Sack, Prem Sikka, and Art Wyatt.

Dr. Robin W. Roberts serves as the Al and Nancy Burnett Eminent Scholar Chair in Accounting and Pegasus Professor at the University of Central Florida (UCF). His research interests focus on accounting and business ethics, regulation, and social responsibility. Dr. Roberts serves on the Executive Council of the Center for Social and Environmental Accounting Research, which is housed at the University of St. Andrews, and is past editor of Accounting and the Public Interest. He has been instrumental in the development of the AAA Public Interest Section Emerging Scholars Colloquium and in promoting public interest scholarship in accounting.

We are delighted to publish this interview with Robin.

When you learned you were receiving the Accounting Exemplar Award, how did you react?

Pat Kelly emailed me and asked if we could talk by phone. I said of course, thinking, however, that I was about to commit to doing Pat a favor. I was so pleasantly surprised when Pat told me I was receiving the award. After finishing my talk with Pat, I called my spouse Sherron. During my call with her I got surprisingly emotional (and continue to be). The Public Interest Section has provided such a supportive and nurturing environment throughout my career. Receiving this honor is a very personal, significant career achievement for me.

I want to thank the Accounting Exemplar Award Selection Committee and my colleagues who conspired behind my back to nominate me, particularly Lisa Baudot, Charles Cho, Joseph Johnson, Pamela Roush, and Dana Wallace. And I have to give tremendous credit to my favorite colleague and life partner, Sherron. Sherron is an education professor and has been my personal teaching coach, professional advisor, and my editor for over 35 years. My career successes are due in large part to her counsel and encouragement.

How did you become interested in public interest accounting scholarship?

Like most public interest accounting scholars, my interest grew as I became more familiar with the AAA Public Interest Section and with public interest research. My original research interests were in governmental accounting and auditing, spurred in part by Dr. Michael Granof assigning our undergraduate class to read Aaron Wildavsky’s book, The Politics of the Budgetary Process. It was the very first time I found accounting really interesting.

Over time this evolved into a stronger interest in political science and in studying the politics embedded in the profession and practice of accounting. Researching and teaching accounting ethics, professionalism, and the public interest rescued me from a much more mundane and less satisfying academic career and I am grateful.

Why do you think you were chosen to receive the Accounting Exemplar award?

First, I will repeat how honored and grateful I am to receive the award. I know there are many others who have devoted significant time and effort to advancing ethics, professionalism, and the public interest in accounting. So, for one thing, I was lucky.

I view the award as a career achievement award. I don’t have a defining life episode when I faced tremendous pressure to stand up against unethical practices. I so admire our award recipients who took such personal risk to blow the whistle. Although I have published public interest accounting research, I think the award primarily reflects my interests and efforts in developing new public interest accounting scholars.

I served for 10 years as Director of the University of Central Florida’s Accounting PhD Program. Our program valued and supported doctoral students interested in public interest research. Also, I helped start the PIS Emerging Scholars Colloquium that is held in conjunction with our section’s mid-year meeting. The success of these two endeavors means the world to me.

What advice would you give to emerging public interest accounting scholars?

I believe that choosing to focus on ethics and public interest accounting research and teaching is a vocational calling. Dedicated ethics and public interest scholars are passionate, caring, and intellectually interesting people. We are the moral conscience of the accounting discipline and the accounting profession. Ethics, professionalism, and the public interest should be key aspects of our collective work as an accounting academy—in our teaching, in our research, and in our service to practice—and it is not. So, work to help these topics find their rightful place.

I will offer three pieces of advice. First, research without regret. Let your curiosity and passion drive your research program. If I had continued to study aspects of accounting that don’t resonate with me as a person, I would have failed miserably. Stand proud as an accounting researcher who cares about solving social problems such as discrimination, income inequality, access to health care, and environmental degradation.

Second, be bold in pushing the ethical envelope in your classes. Accounting is much more than a technical practice. It is a social practice that affects the lives of employees, customers, suppliers, citizens, and all living things. Bring the ethical aspects of decision-making and reporting into all of your classes. I have found students very receptive. Collectively, we can make difference, and it starts with you.

Third, become involved in the AAA Public Interest Section or another group of like-minded scholars. It is very difficult to go it alone as a public interest accounting scholar. If you become involved, you will find encouragement, support, and potential collaborators. Reach out if I can do anything to help!

KPMG Knowledge of PCAOB Inspections: A Good Business Decision orViolation of Ethics?

Editorial Note: We are delighted to publish this “opinion piece” by Dr. Steven Mintz, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

With this piece, we are launching our “Contributing Columnist” series at AAAPublicInterest.org. It is adapted from a 2018 article that appears in the CPA Journal.

We thank the New York State Society of CPAs, the publisher of The CPA Journal, for permission to publish this essay. Richard Kravitz, the Editor-In-Chief of the Journal, will join Dr. Mintz as session panelists during the AAA’s upcoming 2018 Ethics Symposium.

Recent revelations that KPMG had help in its quest to prepare for audits from the PCAOB
raises the question whether it was a good business decision to hire a former PCAOB staffer to help it determine the target of audit inspections by the PCAOB or an unethical act. I would say while it may have seemed to be a good business decision at the time, KPMG’s actions to gain access to possible PCAOB inspections was unethical because it violates the public trust. The key ethical issue is intent. The intent of KPMG was to “cheat the system” by gaining an unfair advantage. In this regard it reminds me of the Volkswagen defeat device case.

Why did KPMG do it? It is because their audit deficiency rate was the highest of all the Big Four firms. The average audit deficiency rate for the Big Four since the inception of the inspection process has ranged between 30-to-40 percent. The rate for Big-4 firms has gotten as low as 21 percent (Deloitte) and gone as high as 54 percent (KPMG). In the case of KPMG, it was determined that the firm too often failed to gather enough supporting evidence before signing off on a company's financial statements and internal controls.

Let’s look at the indictment against KPMG’s partners. After being hired by KPMG, Brian Sweet, the former PCAOB staffer, was asked by three KPMG partners, knowing his background with the PCAOB, whether there were any plans to inspect a client of theirs. Reluctant at first to respond, David Middendorf, KPMG's former national managing partner for audit quality and professional practice, is said to have later told Sweet to "remember where [his] paycheck came from" and "to be loyal to KPMG." Sweet was asked about the plans again a few days later, this time by Thomas Whittle, former national partner-in-charge of inspections, who implied that his position within the firm was not secure. Sweet showed Whittle the inspection list later that day. The audit partners used this information to analyze and review audit workpapers relevant to the inspection and suggested revisions to avoid possible findings of deficiencies by the PCAOB.

A CPA’s loyalty should be to the public, not the firm. Otherwise, the public cannot trust that CPAs and their firms will act in the public interest, not those of the client or the firm.

There is an issue to consider with respect to quality controls. Quality controls relate not only to audit engagements but ethics as well. One such example is independence. Firms have quality controls to ensure their staff are independent of clients. I also believe quality controls should extend to integrity issues. KPMG’s actions lack integrity because they were unprincipled and violate the public trust. I believe KPMG’s actions border on being an act discreditable to the profession. Just imagine if all firms acted this way. The audit inspections would be relatively useless because the ethical rule that the audits selected by the PCAOB should not be known in advance by the inspected firm would be compromised.

I’m also troubled by the contingent fee issue. KPMG hired Palantir, the data analytics firm, to help it predict which of its engagements would be inspected and agreed to pay it $250,000, contingent on a certain rate of success. While contingent fees are acceptable in non-audit engagements, with certain exceptions related to tax practice, it is not unreasonable to evaluate the arrangement from a broader lens. Again, it smacks of being an act discreditable to the profession. It has elements of insider trading, in my view.

Another ethical issue is fairness. If we consider that all the other firms, including the non-Big-Four, may not have access to former PCAOB-staffers, or may have a higher ethical standard than KPMG, those firms are not being given the same opportunity to know in advance which audits might be inspected by the PCAOB. Simply stated, they are not playing on a level playing field because KPMG had a competitive advantage, albeit one based on improper actions. The result could have been that other firms wound up with a higher deficiency rate than KPMG because of its advantage and the steps it took to capitalize on it.

At the end of the day, KPMG’s actions should lead to a state board of accountancy investigation whether the firm violated its ethical commitment to standards of professional behavior and protecting the public interest.

Dr. Steven Mintz is a Professor Emeritus at Cal Poly San Luis Obispo. You are welcome to visit him at StevenMintzEthics.com.

Lise Valentine, Deputy Inspector General

Editorial Note: Dr. Lise Valentine is the Deputy Inspector General for Audit and Program Review for the City of Chicago. As a follow-up to her plenary appearance at the 2018 AAA Public Interest Section Midyear Meeting in Chicago, we asked Lise to respond to four questions.

With our Annual Meeting less than four weeks away, we hope that the quality of Dr. Valentine’s responses will remind our Section members of the value of our intellectual content. You are welcome to join us at our Section Business Meeting, at the Ethics Symposium, and at our research presentation sessions during the Annual Meeting in order to enjoy more such content.

(1) How much control do you maintain over defining your own audit and investigatory priorities? Are they strictly defined by statute and regulation? Or do you enjoy some latitude in applying resources where you believe they would do the most good?

Our jurisdiction, which is established by the Chicago Municipal Code, extends to all employees and elected officers of City of Chicago government performing their official duties, as well as contractors providing goods or services to the City. Interestingly, although City Council voted in 2016 to place itself under our jurisdiction, it limited our oversight authority—we have the power to investigate allegations of wrongdoing by aldermen and their staffs, but we may not audit their activities.

With respect to City entities under our jurisdiction, we have complete control over our audit and investigatory priorities. Our investigative staff receives and triages tips from the public, and we often open cases on the Inspector General’s own initiative. Each year we publish an audit plan identifying potential projects selected using our prioritization criteria. We thus have great freedom, but also great responsibility to apply our resources where we believe they will best promote economy, effectiveness, efficiency, and transparency in City operations.

(2) To what extent has budget pressures changed the nature of your procedures? Do you ever feel pressure to “find money,” as taxation authorities in certain jurisdictions are sometimes asked to do?

As a watchdog for the taxpayers, we take very seriously our responsibility to be good stewards of public funds. We apply the same critical eye to our own spending that we do to other departments; the sort of pressure you describe is primarily self-imposed. While we’re not a revenue-generating function, our audits and investigations often identify savings opportunities or result in restitution of City funds.

Pursuant to the Municipal Code, our annual budget is no less than 0.14% of the total City budget. This funding floor largely insulates us from budget cuts. However, we don’t have complete freedom. Our line-item budget is subject to City Council approval, and we cannot fill vacant positions without approval from the Mayor’s budget office.

(3) What kind of student should consider a career in the public sector? How can professors identify such students, and how should we encourage them to consider exploring such opportunities?

Students who are more motivated by mission than by money are the best candidates for the public sector.  While a public sector career won’t make you rich, you will generally have a reliable middle-class income and you’ll be serving the greater good. We all need and use government services—from ambulances to expressways to economic policy—and we all pay taxes. So, proper accounting for these expenditures and revenues, and their accurate reporting, is in everyone’s interest.

All levels of government need accounting and finance experts who will safeguard our shared public assets and promote economy and efficiency in governmental operations. Of course, no job is perfect; everyone has some bad days at work. But in a public sector career you can get through those days by remembering the positive contribution you are making to society.

Governments don’t spend money on advertising and recruiting the way accounting firms do. Professors play the critical role of helping to bring these public service career options to their students’ attention, since they may not even know the jobs exist. Professors can invite public sector accounting professionals to speak to their classes. They can reach out to professional organizations like the Government Finance Officers Association, the National Association of State Auditors, Comptrollers, and Treasurers, or the Association of Local Government Auditors to solicit speakers and collect information on internships or jobs.

For example, the U.S. Government Accountability Office and the Government Accounting Standards Board have excellent intern and fellowship programs. Students should also consider following @ChicagoOIG on Twitter or connecting with the Office of Inspector General on LinkedIn, where our office regularly posts job vacancies. We also publish reports and promote our work, which helps students better understand what we do and discover that they may want to be a part of it. Our office regularly recruits interns, for both legal and IT roles, so be sure to visit our website for those details.

(4) Why did you leave the academic world for your current position? Was it more of a personal decision, or a professional one? And do you ever miss the opportunity to teach and to engage in research?

It was more of a professional decision. During my five-year Ph.D. program I had the good fortune to publish a single-authored article in a major journal, to design and teach 10 stand-alone courses, and to serve on several committees. I appreciated having these experiences while still a student because they made me realize I didn’t want an academic career. To be frank, I burned out on undergraduate teaching and I wasn’t motivated by the publishing race.

But my love for learning, teaching, and service persisted. Happily, my current role provides me with ample opportunities to teach and train others, to research ways to improve government, and to serve on committees working to advance OIG and the profession. What I miss most about academia is roving the real and virtual library stacks, marveling at all there is to know.

***

Dr. Lise Valentine is Deputy Inspector General for Audit and Program Review for the City of Chicago. To support the Inspector General's mission, her office conducts independent evaluations of municipal programs and operations, and makes recommendations to strengthen and improve public services. She has taught Public Finance for the Master’s in Public Administration Program at the University of Illinois at Chicago, and is an instructor for the Inspector General Institute®.

Prior to joining OIG, Valentine served as Vice President and Director of Research at the Civic Federation, a non-partisan governmental research organization, where she led research on government efficiency, transparency, and tax policy. She was elected to the post of Commissioner and Treasurer of the Park District of Oak Park, IL and served on advisory task forces for the Governmental Accounting Standards Board.

Dr. Valentine is a Certified Public Accountant, a Certified Internal Auditor, and a Certified Inspector General Auditor®.

Introducing Our Contributing Columnists

In the early days of the global economic meltdown of 2008 and 2009, Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute, declared:

Fair value accounting is clearly the reigning orthodoxy among accountants, but is that the right test? Accounting is simply a measurement system. What we want to know determines what and how we measure.

Which is more important, the balance sheet or the income statement? Do we want to measure financial strength or earnings per share or cash flows? Is the purpose to inform equity investors or creditors and counter parties? Does one measurement system meet all of these objectives?

Given its impact on institutions and whole economies, common sense suggests that we consider whether one means of measurement is the only one we should be looking at. The world view of accountants at a particular time should not determine the answers to these questions. It is important to recall the famous remark of Clemenceau that war is too important to be left to the generals.

Many such issues impact the public interest. We, the Public Interest Section of the American Accounting Association, believe in addressing such topics with vigorous and spirited discussion in a social media forum.

Accordingly, we are proud to announce the introduction of a new feature for our social media network. Five distinguished thought leaders have agreed to serve as Contributing Columnists for the Section’s blog, newsletter series, and web site.

The five Columnists are:

Steven Mintz, Emeritus Professor, California Polytechnic San Luis Obispo, USA; Prem Sikka, Emeritus Professor, University of Essex, UK.

Michael Kraten, Associate Professor, Providence College; Richard (Rick) Kravitz, Editor-In-Chief, CPA Journal; Sri Ramamoorti, Associate Professor, University of Dayton.

Each of these individuals has agreed to contribute two editorial essays per year for publication by the Public Interest Section. Our current plans include the distribution of two guest editorials per year from other colleagues, resulting in a full year of monthly thought pieces.

We are immensely grateful to these individuals for supporting our growing presence in social media. Please join us in welcoming their contributions to our intellectual content.

Source Credits: We thank Sri Ramamoorti for suggesting the quote by Peter J. Wallison. It appeared in the April 30, 2008 edition of the Financial Times, in an article entitled “Judgment too important to be left to the accountants.”

Unintended Consequences of Supreme Court Whistleblowing Decision

Editorial Note: We are delighted to publish this “opinion piece” by Dr. Steven Mintz, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

The U.S. Supreme Court may have turned whistleblowing on its head with the decision on February 21, 2018 in the case Digital Realty Trust, Inc. v. Somers. The ruling is likely to encourage employees, managers, and compliance officials to blow the whistle on retaliation as soon as it begins, and not after a sometimes-lengthy process plays out to convince superiors to change the accounting and financial reporting. Essentially, employees who choose to inform the SEC of financial wrongdoing under the Dodd-Frank Financial Reform Act must now inform the SEC while the issue with the employer is unfolding to be eligible for Dodd-Frank protections.

The key issue in the Digital Realty case is the interpretation of who is a whistleblower under Dodd-Frank, and when does a would-be whistleblower qualify for protection against retaliation. The statute defines a whistleblower as a person who reports potential violations of the securities laws to the SEC.

The SEC had been interpreting the Act with respect to the retaliation provision broadly, thereby allowing the protections to apply to internal company reporting even if the individual did not report to the SEC. The Supreme Court disagreed with that interpretation. Writing for the Court in its 9-0 unanimous decision, Justice Ruth Bader Ginsburg put it this way: “A whistleblower is any person who provides … information relating to a violation of the securities laws to the Commission” [emphasis added]. “That definition,” she added, “describes who is eligible for anti-retaliation protection if the individual engages in any of the protected conduct enumerated in the [Act]. Moreover, she observed, “this interpretation is consistent with the ‘core objective’ of Dodd-Frank’s robust whistleblower program,” … [which] is ‘to motivate people who know of securities law violations to tell the SEC.’”

Ginsburg also made an interesting observation about the Sarbanes-Oxley Act. She said: “By comparison, SOX had a broader mission to “disturb the ‘corporate code of silence’ that ‘discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.’”

One thing that Ginsburg failed to address is that SOX retaliation claims must be filed within 180 days of discovering the act, not much time to get the information straight. Dodd-Frank, on the other hand, has a three-year period to file. The reality is that very few SOX filings have been successful, in part due to the fact that filings go to the Department of Labor whereas Dodd-Frank filings go the SEC. We may not be a fan of the SEC’s regulatory speed and efficiency. but it’s light years ahead of the DOL.

Prior to the ruling in the Digital Realty case, employees would almost automatically first report the alleged violation internally and take the matter up the chain of command all the way to the board of directors before going to the SEC. Informing the SEC was seen as a last resort. A typical scenario is: an employee jumps through the hoops internally, fails to induce change, may be demoted, treated badly, or fired, and then files for whistleblower protections under Dodd-Frank. If successful under the SEC process, the whistleblower could be reinstated and receive back pay. There is even an award if the SEC brings a lawsuit based on original information voluntarily provided to the SEC that leads to sanctions in excess of $1 million. The award is between 10%-30% of the total sanctions. This provision does not seem to be disturbed by the ruling since the SEC, presumably, would have first been informed of the retaliation.

Here’s the problem in a nutshell. Let’s assume an employee reports wrongdoing. Will that employee go to the SEC first before informing his or her supervisor? If I were the CEO and found out one of my managers went straight to the SEC without giving me a chance to first fix the matter, well you fill in the blanks. Just imagine an employee goes to the SEC to qualify for whistleblower protections, the organization finds out because the SEC starts investigating, the employee is then fired. What should the employee do next? Go back to the SEC and say, “Now look what you’ve done.”

The Supreme Court ruling is counter-productive to the intent of Dodd-Frank, which is to protect whistleblowers, but also to encourage internal reporting. In fact, the SEC has openly promoted internal reporting, especially for compliance officials. The bottom line is that the ruling will have unintended consequences, whether it is to heighten the pressures internally on an employee who wants to do the right thing and must now first report to the SEC, or to create a floodgate of reports that the SEC won’t be able to handle because its resources are limited. Either way, the ruling is a loss for whistleblowers and, most likely, companies because more employees will run to the SEC.

Dr. Steven Mintz is a Professor Emeritus at Cal Poly San Luis Obispo. His website is stevenmintzethics.com.

How Should We Teach Sustainability?

It’s difficult to teach a topic like sustainability, isn’t it? On the one hand, it’s one of the most important public policy challenges of our era, a topic that has inspired the development of the Sustainability Accounting Standards Board (SASB) and other organizations. But on the other hand, it’s difficult to fit its content within one of the silos that define our accounting courses.

That’s why the AAA Public Interest Section has dedicated the Teaching segment of our web site to pedagogical materials regarding sustainability and CSR. At the moment, the segment features URL links to content that has been shared by Professors Irene Herremans of the University of Calgary and Michael Kraten of Providence College.

Irene has shared a five module online learning activity entitled Sustainability Reports: Making Sense of Sustainability. It features text, graphics, video, and other content at an introductory level.

And Michael has shared his interdisciplinary graduate-level teaching case Save The Blue Frog. Developed with PwC Partner John Formica, it is an integrated accounting case involving valuation, sustainability, controls and risk, and ethics.

Do you have an effective teaching resource that addresses the topic of sustainability? Do you believe that it can be used by our colleagues in their own accounting courses?

If you do, please consider sharing it with your AAA Public Interest Section colleagues. Simply use our Contact Us blog page to let us know what you have in mind; we’ll be delighted to share it with others!

Note: The blue frog image is available in the public domain.

Critical Auditing Studies and "The Bigger Picture"

For many years, accounting researchers have studied the culture, the technology, and the regulation of audit firms. We’ve observed and explained the complex factors that have shaped the profession.

But while studying these details, is it possible that we have missed the bigger picture? Should we be critically appraising the audit function instead of simply understanding it? In order to assess its future relevance to our society, and to its role within it?

The Elsevier journal Critical Perspectives on Accounting is addressing these questions by publishing a special issue entitled "Critical Auditing Studies: Adopting a Critical Lens toward Contemporary Audit Discourse, Practice and Regulation." The editors are Anna Samsonova-Taddei of the Alliance Manchester Business School of the University of Manchester and Yves Gendron of the Faculté des sciences de l’administration of Université Laval.

The editors are calling for manuscript submissions that focus a critical lens on our profession, addressing such topics as: (1) the consequences of the rise of audit firms’ commercialism, (2) the ongoing changes in regulatory approaches to auditing, (3) claims about auditors’ knowledge base, (4) auditing and the public interest, (5) the shifting identities of auditors, and (6) control and surveillance within accounting firms.

What type of content is suitable for the special issue? Anna cites a recent report and notes that:

The strong impression is that now is not a time for complacency but nor is it a time for knee-jerk reaction or base political point scoring. Substantive change and developments in the competencies and capabilities of audit and auditors requires more fundamental action than are offered by ‘quick fix’ solutions, audit rebranding exercises, tinkering with professional examination syllabi or the promotion of ‘new’ audit testing/analytical techniques.

In light of such concerns, there is a call for:

 … a fundamental contemplation of the overall competence of the audit function itself and what is required for the longer-term sustainability of audit as a service of high professional standing and broader public worth.

Skills, Competencies, and the Sustainability of the Modern Audit, by Turley, Humphrey, Samsonova-Taddei, Siddiqui, Woods, Basioudis, and Richard (2016)

And according to Yves:

Critical accounting research is a complex endeavor and it may be articulated in a range of relevant ways. That being said, one of the distinguishing features of critical accounting research is a high level of reflexivity in analyzing, from a “phronetic” viewpoint, socially-important phenomena – such as the trajectories (past, present and future) that surround the financial auditing concept … this phronetic exercise implies the following questions: “Where are we going? Is this desirable? What should be done?” – which we may translate as “Where is financial auditing going? Is this desirable? What should be done?”

On the Elusive Nature of Critical (Accounting) Research, Gendron (2018)

These are the critical issues that challenge the future of the auditing profession. We are gratified that our colleagues at Critical Perspectives on Accounting are dedicating a special issue to the topic, and we encourage you to contact them with any questions about potential submissions.

Mark Your Calendars! Our Mid-Year Conference Begins On March 23rd

Have you begun to mark your calendars for the next two months? Then please keep in mind that a pair of noteworthy events will occur in late March. One is the arrival of Spring in the northern hemisphere. And the other is the mid-year conference of the Public Interest Section of the American Accounting Association.

What if you are feeling impatient for Spring? To accelerate its arrival, you can always root for Punxsutawney Phil to fail to see his shadow. If this occurs, Spring will begin on February 2nd, just two days from today.

Regrettably, our favorite groundhog is powerless to advance the date of our mid-year conference. However, there are other ways to begin enjoying this academic experience before you join us in Chicago on March 23rd. You can volunteer, for instance, to serve as a reviewer, a moderator, or a discussant.

And you can register to attend the conference at any time.

You’ll undoubtedly find it worthwhile to join us in the Windy City. For instance, in addition to our manuscript presentation sessions, our conference will feature an Editor’s Panel. Richard Kravitz of The CPA Journal, Pamela Roush of Accounting and the Public Interest, and Marcia Annisette of Critical Perspectives on Accounting will provide valuable commentary about the publishing environment.

In response to attendee feedback at our previous conferences, we’ll dedicate our Friday lunch period to catching up with old and new friends. And the President of the American Accounting Association will deliver an address on Saturday at noon.

We have also invited a spokeswoman from the Roosevelt Institute to discuss their projects. In addition, she will describe how the Institute is working with students on college campuses to “make a difference” in society. Our attendees are sure to discover that the Institute’s agenda matches our own values and beliefs.

So please join us on March 23rd and March 24th. And in the meantime, if you’re able to serve as a volunteer, we’ll be delighted to hear from you!

Our Colleagues Respond …

As you may recall, on December 3rd, we published Michael Kraten’s opinion piece If Corporations Are People, Why Aren’t They Taxed Like People? And then, on December 20th, we published responses by our colleagues Andrew Felo of Nova Southeastern University and Wm. Dennis Huber of Capella University.

But we still are not yet ready to bring our taxation policy conversation to a close! Lawrence Murphy Smith of Texas A&M in Corpus Christi recently responded:

Corporate earnings are taxed like people, as the people who own the corporation (i.e. stockholders) receive dividends or capital gains from selling stock. For that reason, I've always thought the corporate income tax should be zero, thereby avoiding double taxation at the corporate and then the individual level. Further, as you may be aware, the U.S. corporate income tax rate is currently second only to Japan. You might find my paper on taxes and economic activity of interest.

He elaborated:

My point is that corporate income shouldn't be taxed at all. In other words, if the corporate income tax rate is zero, that would not mean corporate income avoids tax. The people who own the corporation would pay taxes on all the corporate earnings, either when they receive dividends or when they sell the stock. Thus, corporations need have no income tax imposed on the corporation itself, as the owners/people/stockholders ultimately pay taxes on whatever the corporation earns.

As shown in my paper, the US corporate income tax rate is currently second highest in the world, not to mention the most complex, creating high compliance costs. Lowering or eliminating the US corporate income tax would be a boon to the economy.

These are interesting questions, aren’t they? They certainly carry broad public interest ramifications.

We thank Murphy for responding to our recent posts with his astute comments. We continue to welcome, and we shall continue to publish, our colleagues’ perspectives regarding the system of taxation in the United States.

If You Sense That You Need A Different Approach, Why Not ExploreAlternative Accounting Practices?

One of the strengths of mainstream accounting research is its standardized regularity. We define our exogenous and endogenous variables based on prior research studies. Then we develop our experimental hypotheses. And after drawing a sizable sample from our clearly defined population of transactions, we use large-scale statistical methods to test those hypotheses.

But what if the variables aren’t easily defined? Or the population, for that matter? Or what if a sizable sample cannot be extracted and quantitatively tested at a meaningful level of significance?

In other words, what if you sense that you need a different approach? How should you proceed? Under such circumstances, you may wish to explore alternative accounting research practices.

For instance, let’s say that you’re evaluating the anti-theft preventive controls at the card, dice, and roulette tables of a casino. How can an auditor test those controls while the games are in progress on a floor that never closes?

The best approach for testing whether controls are in place to prevent dealers from stealing chips may be to employ the auditing method of focused observation. And to make the system more “auditable,” the casino may choose to keep all of the stacks of chips in plain sight.

Indeed, the “plain sight” tactic may convey an additional benefit by deputizing gamblers to serve as auditors. In other words, by enhancing the visibility and thus the “auditability” of the preventive controls regarding chip theft, the casino can enable the players to form a transitory social community to observe and police the dealers.

Likewise, according to Ingrid Jeacle’s 2017 Accounting, Auditing & Accountability article entitled Constructing audit society in the virtual world: the case of the online reviewer, the reviewers of online services like Amazon have formed virtual communities that feature audit logics. Ingrid utilizes a new research methodology entitled “netnography” as a means of “… becoming familiar with the operational features of the site and analyzing its textual discourse.”

It’s not a traditional method of accounting research, is it? But its alternative approach is necessary for studying emerging communities in virtual online spaces.

Caroline Lambert, the Chair of the Conference Organizing Committee of the May 2018 Alternative Accounts Conference at HEC Montreal, also utilizes alternative accounting practices when necessary. According to Caroline:

Alternative Accounting is both an approach and a state of mind. It’s a way to look at events and characteristics with different lenses. It requires us to re-think our assumptions about the influences of accounting in our daily lives, encompassing the largest meaning possible.

For instance, together with Claire Dambrin, in an article entitled Beauty or not beauty: Making up the producer of popular culture that was published in Management Accounting Research in 2017, we analyzed the control mechanisms -- mostly cultural controls -- through which brand managers embody their product. The managers must continuously brand themselves within their own organizations to be considered “performing individuals.”

Alternative accounting is an interesting approach, isn’t it? Clearly, it is needed to study cultural, sociological, and other topics when traditional approaches fail to offer practical research methods. And given the prevalence of such topics in the Public Interest field, it’s the type of research approach that is sure to attract our colleagues.

Our Colleagues Respond …

On December 3rd, we published Michael Kraten’s opinion piece If Corporations Are People, Why Aren’t They Taxed Like People? You can find that piece, and all of our other blog posts, on our blog page at AAAPublicInterest.org.

But Michael’s post did not bring an end to our taxation policy conversation! Two of our colleagues then responded with follow-up comments.

First Andrew Felo of Nova Southeastern University noted that “individual owners of the corporation also pay income tax on the corporation’s earnings. That means the income is taxed at a much higher rate than 20%.”

Why is that important? Because it addresses the concern that the corporate tax rate is about to be reduced to a level that is far less than the individual tax rate. Nevertheless, the two-tiered nature of our system of corporate taxation does illustrate Michael’s original observation that “corporations aren’t taxed like people.”

And then Wm. Dennis Huber of Capella University suggested that: “To see how the Supreme Court has created corporations as persons, see Law, Language, and Corporatehood: Corporations and the U.S. Constitution, and The Supreme Court’s Subversion of the Constitutional Process and the Creation of Persons ex nihilo.” Both are available at Dennis’ SSRN page.

We thank Andrew and Dennis for responding to our recent post with these insightful comments. And we shall continue to publish our colleagues’ perspectives regarding the American system of taxation.

If Corporations Are People, Why Aren’t They Taxed Like People?

Editorial Note

We are delighted to publish this “opinion piece” by Dr. Michael Kraten, a member of the AAA Public Interest Section and a frequent contributor to our social media blog. As always, when you read this contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

Author Biography

Michael Kraten, PhD, CPA (Mike) is an Associate Professor of Accounting at Providence College, where he teaches the graduate accounting capstone course and an interdisciplinary undergraduate course in sustainability. He serves as the publisher and editor of the AAA Public Interest Section's social media blog.

Mike specializes in valuation, risk management, and management accounting issues, with functional interests in sustainability and corporate social responsibility. He has written papers for Accounting and the Public Interest, the Journal of Banking and Finance, the International Journal of Accounting, the CPA Journal, and other publications.

Opinion

Have you been keeping track of the U.S. Republican Party’s proposal to transform the American system of income taxation as it wends its way through the legislative process? If you’re doing so, you may be wondering about the answer to a very simple question:

If the Republican Party truly believes that “corporations are people,” why is it willing to tax corporations at rates that fall so far below comparable personal (or individual) rates?

After all, if corporations are people, one may conclude that they should be taxed like people. Conversely, if they are not, then one may conclude that several recent Republican legislative positions are dissonant in nature.

To elaborate on this question, it may be helpful to review some historical background. And to do so, we may wish to begin with the birth of the American nation in 1776.

In June 1776, for instance, Virginia ratified its Declaration of Rights, a document that later evolved into its State Constitution. The declaration included an assertion that “… all men … have certain inherent rights … namely, the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing and obtaining happiness and safety.”

The Declaration clearly drew upon John Locke’s earlier assertion, in his Two Treatises of Government, of an individual’s natural rights to life, liberty, and estate (or property). And at roughly the same time that the colony of Virginia was ratifying its Declaration of Rights, Virginian Thomas Jefferson was defining life, liberty, and the pursuit of happiness as unalienable rights in the American Declaration of Independence.

But did Locke, Jefferson, and their peers intend to imply that business organizations also possess these unalienable rights? Or were they strictly referring to rights that are held by individuals?

Their writings appear to be focused on individual rights. Nevertheless, the U.S. Republican Party now supports the libertarian position that corporations are associations of individuals. Thus, consistent with recent U.S. Supreme Court decisions, certain human rights that are held by individuals can be aggregated into rights that are held by associations of individuals, and thus by corporations.

That’s why, during the 2012 Presidential campaign, candidate Mitt Romney declared that “corporations are people” in regards to the legal rights of corporations. Despite subsequent public criticism of Romney’s declaration, he was accurately describing the Supreme Court’s position in various decisions (such as the Citizens United and Hobby Lobby cases) that confirmed the existence of corporate rights.

In a fiscal sense, President Ronald Reagan’s earlier Tax Reform Act of 1986 also established a rough equivalence between corporations and individuals by bringing the maximum corporate tax rate and the maximum personal rate into rough equality. Specifically, it reduced the nominal corporate rate to 34% and the nominal personal rate to 28%. However, due to the phase-out of personal exemptions, it “topped out” the effective personal rate at 33%.

So how can we summarize these established (or “establishment”) Republican positions? Although the Founding Fathers and their predecessors defined individual rights without explicit reference to corporate rights, U.S. Republican Party leaders from Ronald Reagan to Mitt Romney implicitly or explicitly declared that “corporations are people,” and concluded that business entities should enjoy many of these same rights.

But then what are we to make of the fact that President Donald Trump favors a reduction in the top corporate tax rate to 15.0%? While only supporting a slight reduction in the top individual rate to 35.0% from 39.6%?

That’s a bit inconsistent with the established Republican position, isn’t it? After all, if business corporations possess many of the natural rights of individuals, it is reasonable to believe that they should be taxed as individuals. Instead, the President favors an ostensibly dissonant policy of treating corporations like people on legal matters when it favors business entities to do so, while treating them differently than people on tax matters when it likewise favors the entities to do so.

On the one hand, there may be nothing illegal about such a position. But on the other hand, its natural dissonance may breed a sense of cynicism about a lack of equity in our system of government.

Ethical Claims of Large Accountancy Firms Smack of Hypocrisy

Editorial Note: We are delighted to publish this “opinion piece” by Dr. Prem Sikka, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

Prem Sikka is Professor of Accounting and Finance at the University of Sheffield and Emeritus Professor of Accounting at the University of Essex in UK. His research on accountancy, auditing, tax avoidance, tax havens, corruption, corporate governance, money laundering, insolvency and business affairs has been published in international scholarly journals, books, newspapers and magazines. He has appeared on domestic and international radio and television programs to comment on business matters. He has advised and given evidence to a number of UK and EU parliamentary committees. Most recently (2016-2017), he advised the UK House of Commons Work and Pensions Committee for its investigation into the collapse of BHS, one of the largest retailers, and related pension matters.

Prem holds the Working for Justice Award from Tax Justice Network, Accounting Exemplar Award from the American Accounting Association (AAA), Lifetime Achievement Awards from the British Accounting and Finance Association (BAFA) and PQ Magazine, Personality of the Year Award from Accountancy Age and the inaugural Abraham Briloff Award from The Accountant and International Accounting Bulletin for promoting transparency and public accountability of businesses.

All over the world there is concern about tax avoidance by large corporations and wealthy elites. The latest revelations known as the Paradise Papers add further fuel to the debate. The Paradise Papers consist of some 13.5 million pages of internal information leaked from Appleby, a law firm specializing in international tax planning. The documents are publicly available on the website of the International Consortium of Journalists.

In common with previous leaks known as the Panama Papers, Luxembourg Leaks and HSBC Leaks (see References, below), once again attention is focused on the role of the Big Four accounting firms in crafting schemes that enable wealthy elites and large corporations to avoid taxes. All too often the firms sell tax avoidance schemes to their audit clients and then report on the resulting transactions. Audited Company accounts rarely provide information about corporate tax avoidance strategies. Whether the tax avoidance schemes are legal or otherwise can only be established by test cases, and these are comparatively scarce as tax authorities frequently lack the resources to investigate and challenge the schemes.

In any case, the revelations raise questions about ethics and morality of practices that deprive elected governments of resources for alleviation of poverty and investment in social infrastructure. Faced with the ability of capital and wealthy elites and corporations to avoid taxes, citizens are left with stark choices: either pay more for a crumbling infrastructure or forego hard-won social rights. Neither is palatable or conducive to social stability.

The Big Four accounting firms routinely seek to distinguish themselves from others by appealing to ethics and social responsibility. Their websites boast of ethics. The website of PricewaterhouseCoopers (PwC) claims that the firm’s “high standards of ethical behavior, are fundamental to everything we do ... We are willing to walk away from engagements and clients if our independence, integrity, objectivity, or professionalism could be called into question if we continued”. Deloitte claims that “Integrity and ethical behavior are central to maintaining our reputation”. Ernst & Young boldly states that “We reject unethical or illegal business practices in all circumstances ... We are alert for personal and professional conflicts of interest”. KPMG boasts “high ethical principles”. In the light of a steady stream of revelations, the above seem to be just cynical PR statements designed to disarm critics and it is unlikely that journalists and general public attaches too much credibility to the claims.

Big accounting firms have a long history of profiting from tax avoidance. In 2003, a report by the US Senate Permanent Subcommittee on Investigations concluded that

“respected professional firms are spending substantial resources, forming alliances, and developing the internal and external infrastructure necessary to design, market, and implement hundreds of complex tax shelters, some of which are illegal ... They are now big business, assigned to talented professionals at the top of their fields and able to draw upon the vast resources and reputations of the country’s largest accounting firms ...”.

Here is an interesting extract from a 2013 UK House of Commons inquiry into the role of the Big four firms in tax avoidance. Just before the hearing, the chairperson of the Committee met a senior person connected with PwC and then said

“I have talked to somebody who works in PwC, and what they say is that you will approve a tax product if there is a 25% chance—a one-in-four chance—of it being upheld. That means that you are offering schemes to your clients—knowingly marketing these schemes—where you have judged there is a 75% risk of it then being deemed unlawful”.

Partners of other firms admitted to having a threshold of 50%.

The Paradise Papers once again show a huge gap between the public claims and actual practices of accounting firms. How can this be explained?

The gap persists because the internal dynamics of the firms are decoupled from external responses. Firms manage external pressures and public skepticism with claims of ethical behavior and social responsibility. Well, they can hardly do anything else. At the same time, internal processes cannot easily be aligned with such claims. Internally, staff are trained to design and sell tax avoidance schemes. Tax departments and staff are assigned revenues and profit generating targets. Those failing to meet the targets are disciplined whilst those meeting the targets are rewarded with promotions and salary increments. Over a period of time, certain habits and practices become normalized and tax avoidance becomes just another part of daily organizational life. As the internal and external dynamics remain decoupled, any claims of ethical conduct come across as hypocritical. The hypocrisy is not an accidental or unintentional outcome, but rather it is the intentional outcome of policies deliberately chosen and implemented by senior executives of the firms.

The tensions between internal and external responses are exposed by whistle blowers, court cases, media investigations and leaks such as the Paradise Papers. The negative publicity and public anger should encourage firm to align organizational culture, goals, practices and mindsets of staff with social expectations but they have shown little inclination to do so, especially as large amounts of profits are at stake. So the prospect is of further loss of legitimacy, public anger and possibilities of tougher regulatory responses.

References

HSBC Leaks

Luxembourg Leaks

Panama Papers

Speculations about the implications of the Pathways Vision for how we understand accounting

Eileen Taylor, PhD, CPA, CFE, is an Associate Professor of Accounting at North Carolina State UnEiversity's Poole College of Management, researching whistleblowing, ethics, and accounting information systems. She has published in a wide range of journals, including Journal of Information Systems, Journal of Business Ethics, Behavioral Research in Accounting, Accounting Horizons, Accounting and Public Interest, and Journal of Accountancy. She serves on several editorial boards. She holds a BS, MAcc, and PhD from University of South Florida.

Paul F. Williams is a Professor of Accounting at the Poole College of Management at North Carolina State University. Paul earned a BSF from West Virginia University, and MBA and Ph.D. degrees from the University of North Carolina at Chapel Hill. He joined the N.C. State faculty in 1985 after spending 1977 to 1985 at Florida State University. His research interests include accounting ethics, theory, and critical perspectives in accounting. His publications have appeared in Critical Perspectives on Accounting, Accounting, Organizations and Society, The Accounting Review, Contemporary Accounting Research, Journal of Business Ethics, Accounting and the Public Interest, Accounting Horizons (for which he won the best paper award for 2014), among many other journals. He has served as chairperson of the Public Interest Section of the American Accounting Association and as editor of Accounting and the Public Interest. He received the Public Interest Section's Accounting Exemplar Award in 2013.

Abstract

The draft manuscript is available online at:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3052976.

Discussion

In the spirit that a picture is worth a thousand words, the Pathways Commission Vision’s “perception” of accounting is a simplistic caricature of a practice epitomized by bookkeeping and governed by a “black letter” tradition whereby hard-and-fast rules exist for distilling the vast number of data business generates into a meaningful narrative about the financial state and performance of a firm. The “Reality” Vision is a rather heroic self-perception the profession has for the role it will play in producing a prosperous society. The problematic ambiguity with the “Reality” obviously revolves around the concept of “prosperous society” and what implications different notions of "prosperous" have for accounting’s role in society, given accounting’s (and accountants’) limitations. We propose a vision for a prosperous society based on the 17 UN goals, specifically focusing on the two which relate to income distribution and sustainability. We consider how accounting can play a role in helping achieve this view of a prosperous society.

<1> For the benefit of our readers who didn’t attend our Symposium, how would you describe your interest in the topic?

We have long thought about how accounting could be used to better serve the public interest; by which we mean using accounting and its tools and concepts to promote (to the extent possible) the well being of a large and diverse set of individuals. We have unfortunately witnessed accounting practice become a profession, more aptly, an industry, that serves a narrow swath of stakeholders rather than a wide public interest.

At the same time, we have observed social changes wrought by questionable policies, unchecked private interests, and technological advances. While some individuals and organizations are better off, others have been disproportionately and negatively affected. Issues such as income inequality, declining natural resources, hunger, declining upward mobility, and access to education are challenges to our success and sustainability as a human race. The United Nations has identified 17 goals which address many of these global challenges, and in our paper we focus on income distribution as the one most closely tied to accounting, and to our role in society as experts in accountability, measurement, and safeguarding of resources.

<2> Do you think the Pathways Vision Model accurately represents accounting as it is; as it should be?

While we applaud the AAA and AICPA for considering a better way to represent accounting to the public, we do not believe that the Pathways Vision Model accurately represents accounting. While this vision may represent what the industry (and by this we mean corporate clients and audit firms) would like the public to believe, we believe it is lacking. And that concerns us as academics and as educators.

If accounting is to hold true to its origins as a function that helps maintain justice and accountability in our society, then this vision needs revision. The first part of our paper is a critical analysis of the model, while the second part of the paper proposes a new model and equation for accounting that works toward fulfilling our obligation to the public interest.

<3> What is your vision?

We start by considering the goal at the top of the model. If accounting, as a social function, is to lead us to a prosperous society (note, this is not a society with some prosperous individuals in it), we must first consider what contributes to (or detracts from) society’s prosperity. In our paper, we focus on reducing income (and wealth) inequality, noted by Stiglitz as a critical aspect of well being, and identified by the United Nations as one of the top 17 global challenges facing us today. We then consider how accounting, in particular accounting concepts, tools, and expertise, can help us achieve that goal.

The Pathways Vision Model would have us measure only economic activity narrowly understood, make critically important judgments with our existing accounting expertise, which by our own definition of our expertise would result in useful information, leading only to good economic decisions, and thus a prosperous society.

While we may want this model to be accurate, we don’t think the world works that way. So, we have thought about how we might change our accounting perspective to achieve the prosperous society goal, at least as it pertains to income inequality reduction.

In the second part of our paper, we examine the individualistic (corporate) centered equation, and consider how it might be rearranged to serve society.

The current accounting equation is: 
Assets = Liabilities + Net Assets (aka equity), and 
Net Income = Revenues - Expenses
.

However, if we look closer at the income equation (below), we begin to see the value laden nature of accounting, which prioritizes and denotes as good, gross income of owners, and denotes everything that reduces that shareholder income as bad. This very equation leads us to focus on creating a society with a few prosperous individuals, since the goal of an owner in this equation is to increase his own income, and minimize all others’ incomes.

Gross income of owners = Revenues – gross income of labor – gross income of suppliers – gross income of creditors – gross income of government – capital allowances – net externalities.

However, we could rearrange the equation to put any one of the arguments on the right as the focal argument because a corporation is a legal being whose purpose may be specified by the society that permits corporations to exist. Viewed in this way, the management of a corporation is not focused solely on shareholder income, but on what distribution of revenues is appropriate considering that all of the parties have status that deserves respect in the management process. In the sustainability literature, this notion is referred to as “integrated thinking.” Thus, rather than generate net negative externalities to maximize shareholder income, efforts to internalize such costs is a corporate end-in-itself and an object of managerial decision making.

<4> Is the Pathways vision just one in long line of initiatives and fads that have come and gone with little to no lasting effect?

With all due respect to the well intentioned individuals who worked on the committee and on the model, we are concerned about the narrow focus on economic measures and decisions. We have learned enough at this point to recognize that human behavior is much more complex than can be explained by the rational man and principal/agent theories so often put forth as legitimate reasons for our behavior.

In addition, we see an explicit bias toward financial accounting in this model, and find it difficult to apply the model to the many other areas of accounting (e.g., tax, systems, governmental, etc.) that all share an accounting mindset.

According to its creators, the model is a starting point. We can only hope that academics, educators, and students will question this vision as we have, and work towards creating a more accurate model, one that serves the public interest.

Important Clarification

Hello, AAA Public Interest Section Blog subscribers! Here is an important clarification message for you.

If you visit our blog’s home page at AAAPublicInterest.org and read the essay that was posted yesterday, you’ll notice author and contributor Steve Mintz’s photo, professional title, and contact information at the bottom of the page. My name, Michael Kraten, does not appear on the essay at all.

Is that a problem? Well, no … it isn’t. It’s perfectly correct.

So why is that noteworthy? Well, if you look closely at the corresponding email message that Wordpress sent to your inbox yesterday, there’s a line near the top of the message that simply states “By Michael Kraten” instead of “Posted By Michael Kraten.” Steve’s authorship is correctly noted at the bottom of the email message, but for some reason, Wordpress only includes the name of the Publisher at the top of such messages.

So, for the sake of transparency, let’s clarify the authorship of the essay. Steve is the author who wrote the piece, and I am the blog publisher who posted (i.e. uploaded) the piece. Although my name doesn’t appear anywhere on the blog’s home page, I’ll add a post-hoc clarification statement to Steve’s essay on that page as well.

My apologies for the need to send you this follow-up message. Having budgeted a grand total of $35.88 annually on blog expenditures, I regret that we need to live with Wordpress’ limited default options. Nevertheless, we’ll continue to transmit clarifications whenever appropriate.

Mike Kraten

Can Ethics be Legislated in Accounting? The role of SOX, the SEC andthe ERM Framework

Post-hoc Editorial Comment: We are delighted to welcome the following contribution by Steven Mintz, the Ethics Sage. His photo, professional affiliation, and contact information are provided at the conclusion of his essay (below).

Government regulations, whistleblower protections, GAAP reporting standards, and internal control requirements are meaningless and not worth the paper they are written on if what has been promised is not done. A healthy financial reporting system depends on the enforcement of laws and the existence of an ethical culture in organizations that support accurate and reliable financial reporting.

These issues are relevant to the case of Tony Menendez, former Director of Technical Accounting Research at Halliburton, who blew the whistle on improper accounting for revenue. Menendez was hired by Mark McCullum, the chief accounting officer at Halliburton, who reportedly told him to serve as his “Smokey the Bear,” helping the company prevent accounting fires from flaring. That is what Menendez tried to do.

Back in 2005, Menendez identified improper accounting for bill-and-hold transactions where the company booked revenue before product was sent to customers, all the while holding it in its warehouse for future delivery. Menendez worked hard to convince his superiors of the errors in accounting. He sought out the help of KPMG, Halliburton’s auditors, to no avail. He informed the SEC, which seemed disinterested and chose not to get involved. The company retaliated against him once it found out about his reporting to the SEC. Menendez finally lodged a complaint with the Department of Labor under the whistleblower protections of the Sarbanes-Oxley Act. He then endured a nine-year battle to clear his name.

Two questions from Menendez’s experiences are: (1) Did SOX work as intended and protect Menendez as a whistle-blower under Section 806? (2) Did the SEC fulfill its oversight role of financial reporting and audits of financial statements? The answers are no and no. However, it’s not due to the ineffectiveness of SOX. Instead, Halliburton’s management had established a culture that this is the way things are done around here and Menendez should be a team player.

Absent an ethical culture, no law is likely to be effective in enforcing financial reporting standards and ensuring internal controls operate as intended. A good example is Halliburton’s own ethical requirement that purported to protect confidential complaints, which was ignored when the company outed Menendez after he informed the SEC.

The SEC failed in its responsibilities in the Menendez case. Overworked, underfunded, and, quite frankly, lacking in a commitment to ensure ethical behavior and GAAP-conforming financial reports, the Commission gave in to pressures from Halliburton and hastened the day of retaliation against Menendez.

The SEC has failed time and again to do something constructive by acting on detected fraud. We all remember that the Commission failed to follow up on years of complaints from Harry Markopolos, a Boston investigator, about Bernie Madoff’s financial activities. The SEC chose instead to treat him as a crank.

Now comes COSO’s recently updated ERM Framework, Enterprise Risk Management – Integrating with Strategy and Performance. Will it help to promote an ethical organization culture, the weak link in the internal controls of many companies that committed fraud in the early 2000s (i.e. Enron and WorldCom), Halliburton, and many financial institutions during the great recession?

The September 2017 revisions to the ERM Framework highlight the importance of enterprise risk management in strategic planning. According to COSO’s Chair, Robert B. Hirth Jr., COSO’s “overall goal is to encourage a risk-conscious culture.” PwC developed the framework and, according to Miles Everson, PwC’s Global Advisory Leader and Engagement Leader: “The Framework addresses the evolution of ERM, the benefits that can be achieved, and the need for organizations to improve their approach to managing risk.”

Drilling down on the Framework with respect to corporate culture, ERM suggests that each entity should link its culture – shared behaviors, emotions and mindsets in the organization – to its strategy and risk appetite. The problem here is the ERM framework does not place sufficient emphasis on the ethical dimension of making strategic decisions, opting, instead, for a focus on the entity’s “hunger” for risk in terms of its strategic objectives. This tail wagging the dog approach to developing an ethical culture allows management to create a culture in each situation after first determining its willingness to accept risk in developing strategic activities. This is ethical relativism at its worst.

The moral of the story is ethical behavior can’t be legislated. COSO can issue as many white papers as it wants, it still won’t guarantee an ethical outcome. Internal controls have limited value if management routinely overrides them. GAAP requirements are ignored when management’s goal is to tell its side of the story, rather than report the financial results in an accurate and reliable manner.

So, what’s the answer to the ongoing dilemma of getting management and the board of directors to establish a strong corporate governance system? There are no easy answers because ethical governance depends on an ethical culture and a tone set from the top that deviations from ethical standards will not be tolerated. This is the most effective way to embed ethics into the culture.

What about the accounting profession, in particular the auditors? Well, 2017 hasn’t been a good year for the profession. From Wells Fargo’s fake accounts to the ten-year investigation into accounting fraud at AIG, accountants and auditors were asleep at the wheel once again.

When will the profession live up to its responsibilities to put the public interest above all else, including the interests of one’s employer, the audit firm, and self-interest? This is an ongoing problem that hasn’t gotten better since the passage of SOX.

I fear we may be waiting for the other shoe to drop on the disclosure of another round of financial wrongdoing and failed audits. Why? Because at the end of the day, greed wins out over ethical decision-making by management, and soliciting, retaining, and building on client relationships has become the Holy Grail for the accounting profession.

Steve Mintz is a Professor Emeritus from Cal Poly San Luis Obispo. Steve blogs on ethics issues at ethicssage.com. Visit his website at stevenmintzethics.com.

Anthony Menendez, Accounting Exemplar

... is the recipient of the 2017 Accounting Exemplar Award of the Public Interest Section of the American Accounting Association (AAA). As a follow-up to his appearance at the 2017 AAA Ethics Symposium in San Diego, we asked Anthony to respond to four questions.

<1> For the benefit of our readers who didn’t attend our Symposium, how would you describe your career experience at Halliburton?

In 2005, during my interview with Halliburton's Chief Accounting Officer (CAO), he appeared to appreciate the importance of Sarbanes-Oxley (SOX) and the challenges facing the profession. He told me he wanted to hire “Smokey the Bear” to prevent accounting fires. However, by the time I got there, Halliburton was already engulfed in flames.

Halliburton accountants were ignorantly violating one of the most basic accounting principles, that you should not recognize any revenue before you actually deliver a product to your customer. This was a stunning revelation because bill-and-hold transactions are widely recognized as wrong and venal and have been perennial triggers for SEC enforcement actions.

I elevated the problem throughout the organization. My boss, the CAO, told me that the company was going to correct the problem and “get the company back within the lines of what is appropriate”. However, the magnitude of the error soon became apparent and a correction would have required a costly and embarrassing restatement of the company’s historical financial statements.

So what happened? Instead of correcting the problem, Halliburton and its external auditors went to extraordinary lengths to cover up their failures. At the height of the cover up, the external audit senior manager told me to “save it for the subpoena.” I told him that I could not do that and I “blew the whistle” to the SEC.

I spent the next ten years fighting for my dignity and my rights under the whistleblower protection provisions of SOX. In 2015, I finally prevailed in the Fifth Circuit Court of Appeals, and my case has had a significant positive impact on that body of law, lowering the legal burdens facing corporate whistleblowers.

<2> Are you optimistic about the future of our profession?

I worry about the value of the audit today and the future of our profession. Congress mandated independent audits of public companies back in 1933 because members of the investing public were scammed out of their life savings, resulting in a catastrophe that helped usher in the Great Depression. At the turn of the millennium, the highly publicized financial scandals and the loss of public confidence in our profession forced Congress to reexamine the public company audit process. As a result, SOX was signed into law in 2002.

I believe that the public gave the profession a lifeline in the form of SOX. However, the 2008 financial crisis and the ensuing Great Recession gave the public little reason to believe that the current model is working well. As a profession, we need to evolve in an effort to serve the public interest. If we fail to do so, the public might decide that they don’t need private firms to provide public company audits.

<3> What role should our profession play in protecting the public interest?

Our profession exists to serve the public interest. It does not exist to serve public accounting firms’ own interests or the firms’ client interests. We are not Certified Professional Accountants. We are Certified Public Accountants, and that designation should only exist if we are serving the public interest.

<4> How well are we fulfilling that role?

Don’t get me wrong. There are many good CPAs out there, doing the right thing. But as a profession, we are not fulfilling the role of the public watchdog.

I see two obvious problems for our profession that need to be addressed. First, in the age of big data, predictive analytics, and social media, the audit report provides little to no value from an information standpoint. Second, the public expects external audits to identify and report financial statement fraud. I believe the so called “expectation gap” between what the public expects and what the profession provides should not exist.

Investors want to have assurance regarding the integrity of management and the reliability of the information that is provided by management. However, studies continue to highlight that the external audit is one of the least likely processes to help investors learn about financial statement fraud.

For example, the Association of Certified Fraud Examiners estimates that external audits report only 3% of all known fraud cases. And the PCAOB estimates that external audits are notoriously bad, producing an audit deficiency rate of 35% to 40%.

These findings must be considered in light of another recent survey result. CFOs have estimated that nearly 20% of companies manipulate their earnings by an average of 10%. These are truly shocking and disturbing statistics.

What do I believe is happening? Often, auditors don’t know of the existence of problems, or they don’t report them. Personally, I’m not confident that the profession can (or should) survive another wave of financial scandals. That is why, as a profession, we need to reexamine and challenge what we do and how we do it.

The Future of Carbon Emissions

How did you react when U.S. President Donald Trump announced America’s withdrawal from the Paris Climate Accord? Did it grab your attention?

And when Chinese President Xi Jinping declared his plan to develop the world’s largest market for carbon emissions? Did you take note of it too?

Many members of our Public Interest Section of the American Accounting Association perceived these developments as landmark events in the evolution of the fields of Corporate Social Responsibility, Sustainability, and Integrated Reporting. But how can our colleagues become more informed about the issue of carbon emissions?

They can attend the AAA’s Annual meeting, of course. Our Section will offer a series of concurrent session presentations regarding this issue.

For instance, Stephanie Liu of the Henley Business School of the University of Reading in England will present a study of the Financial Times Stock Exchange (FTSE) 100. Stephanie and her co-authors identified a number of intriguing relationships among carbon emissions, carbon disclosures, and financial performance.

Meanwhile, Chengzhang Wu of Rutgers Business School will present a study of A-Share Chinese listed companies. He and his co-author Junqin Sun from Xi’an Jiatong University in China found that governmental industrial policy and evaluation pressure yielded a positive impact on reduction performance.

In other words, Stephanie and Chengzhang are studying the effectiveness of different carbon initiatives from distant global regions with diverging approaches to achieving emission reductions. Whereas Stephanie is focusing on European market-based disclosure strategies, Chengzhang is addressing Chinese government-based policy strategies.

Will either approach succeed? And if both do so, will one eventually triumph over the other? You can bet that our colleagues in the audience will continue to debate these questions long after the conclusion of the Meeting.

In order to ensure that their opinions are well-informed, though, they’ll need to attend these presentations at the AAA Annual Meeting in San Diego CA. It might indeed be the ideal place on Earth this summer for accounting scholars from every region of the planet to come together and share their findings about carbon emissions.

The Public Interest

Welcome, colleagues! The members of the Public Interest Section of the American Accounting Association (AAA) are delighted to introduce our new social media platform.

Are you “… interested in the interface of accounting with social, economic, ethical and political consequences of corporate activity, and in exploring the social and ethical roles and responsibilities of the accounting profession …” ?

That’s a direct citation that we culled from the very first of our five Section Objectives. If you share our interests, you’ll certainly be interested in the content of our blog!

Furthermore, we take the “social” aspect of our social media platform very seriously. By subscribing to our blog, you’ll join a network of accounting professionals with a desire to engage in the full spectrum of meetings, publications, webinars, and other activities that the AAA promulgates about the public interest.

So we invite you to use the email app that is posted on our blog’s home page to subscribe to the platform. And we look forward to seeing you in sunny San Diego this August for our Ethics Symposium and other Annual Meeting events!