May You Live In Interesting Times

Does the phrase “May you live in interesting times” apply to accountants? Without a doubt, these times are anything but dull.

It appears the accountant, that bastion of public trust, that pillar of ethics, is destined to become the veritable goat of the new millennium. Already, reams of jokes, anecdotes, comics and unflattering metaphors have assailed our profession. For decades, surveys of public opinion regarding trusted advisors consistently ranked accountants at or near the top. Given the multitude of the people who are now poorer, allegedly from relying upon the opinion of an accountant, the next such survey may produce somewhat different results.

Accountants, or more appropriately auditors, are charged with the ominous responsibility of ensuring public companies fairly report their financial position and results of operations. By their unqualified opinion, the auditors represent that the financial statements contain enough information to enable the reader to discern whether the company is deserved of his hard earned investment dollar. The reported earnings should be credible evidence of the company's ability to produce a return on investment. The assets shown on the balance sheet should have tangible value and be of enduring future benefit to the company. If the information is complete, accurate and understandable, a reasonably sophisticated investor should be able to make an informed decision.

Accounting, however, is not an exact science. In its quest to balance the interests of the investor with those of business (read…management) the accounting profession has developed a somewhat subjective set of standards for the treatment of financial transactions.

The subjectivity of generally accepted accounting principles, however, has been tempered with the objective concept of “professional judgement”. It is this professional judgement that allows an auditor a certain degree of license as he considers accounting treatments that push the envelope of economic reality.

Regulators are speculating that the professional judgement of some auditors is subject to the pressures of the economic realities faced by the auditor themselves. Given that a company can lose billions of dollars of market value depending upon the choice of an accounting treatment, and given that an auditor can lose millions of fee dollars if it stands its professional ground, is it conceivable that the accounting treatment accorded certain transactions may favour the interests of management rather than the shareholder and general public?

Perhaps the regulators are right. Perhaps an auditor cannot be completely objective when his livelihood depends upon the very company with which he may have a major professional disagreement. When a substantial portion of an auditor's annual revenue comes from one or two clients, can he truly be objective in the exercise of his professional judgement?

While we morally and ethically despise the corrupt corporate culture that could perpetrate a fraud as reprehensible as Worldcom or Enron, we cannot comment on the failings or negligence of their auditors. We do not know the circumstances that caused them to move the borders of their professional judgement. It does appear, however, that Arthur Anderson was well aware their position would not be defensible. By shredding evidence and obstructing justice they have put a blotch on our profession that will take many washings to remove. And given the number of voluntary earnings restatements hitting the pavement, it seems that the ramparts of more than one public company and their Big Five auditors are held up by flimsy logic rather than economic reality.

While we at VMSW do not audit any public companies, we do conduct audits of privately held businesses and various not-for-profit enterprises. None of these clients would themselves constitute any more than 2 or 3 percent of our total fees. We are, we believe, objective in the application of our professional judgement, and the financial statements on which we render an unqualified opinion do represent the financial position and results of operations of our clients. It seems to us that generally accepted accounting principles, properly applied, will provide a fair representation of the financial success or failure of a business enterprise.

Despite the media's portrayal otherwise, we are very proud of the ethics of our profession, and particularly those of our firm. We believe our relationships with our clients are based upon mutual trust. We also believe the users of our clients' financial statements take comfort when the VMSW name is attached. We adhere to the Rules of Professional Conduct of the Institute of Chartered Accountants of Ontario because they characterize the way we do business.

Well before Enron or Worldcom we began the process of codifying the values and mission that guide the operations of our firm. We have included the VMSW Core Values in this edition of the Business Advisory Letter to show our clients and others the enduring tenets by which we strive to live. These Core Values are embodied within our Mission Statement which gives our people a common cause and sense of direction. Through these documents we are accountable to our clients and to every other member of our team. Perhaps you will recognize some of these values as being your own.

Brent VanParys

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