street wise BY GERALD ARANOFF, STEPHEN BARLAS, CHRISTOPHER DOWSETT, KATHY WILLIAMS, TOM WELSH

[NEWS]

Dennis R. Beresford Named to ATTMORE NAMED Hall of Fame | Kathy Williams, Editor GASB CHAIRMAN IMA MEMBER AND FORMER FASB CHAIRMAN DENNIS R. BERESFORD HAS BEEN Robert H. Attmore, elected to the Accounting Hall of Fame along with Gerald A. Feltham, internationally a former deputy state known accounting theoretician, and the late William J. Vatter, professor and writer on comptroller in the and related subjects. New York State Comp- Considered one of the leading experts in accounting standards, Denny Beresford, troller’s Office, began CMA, CFM, CPA, was chairman of the Standards Board from 1987 his term as chairman through June 1997. Before joining the FASB, he was a partner with Ernst & Young, where of the Governmental he originated the firm’s financial reporting developments publications and did extensive Accounting Standards work in the accounting standards area. Currently, he is the E&Y Executive Professor at Board (GASB) on July the University of Georgia’s J.M. Tull School of Accounting. He is active in IMA, Financial 1, 2004. Executives International, and other professional and business organizations. Gerald Feltham is professor of accounting at the University of British Columbia and is He formerly was one of accounting’s distinguished researchers. Some say he is best known for the books president of Attmore Cost Determination: A Conceptual Approach (with Joel Demski) and Economics of & Associates in Al- Accounting (with P.O. Christensen). Before joining the University of British Columbia in bany, N.Y., where he 1971, he was on the accounting faculty at Stanford University. was a consultant to William Vatter was an influential author and respected teacher and mentor. He is well government agencies known for his book The Fund Theory of Accounting and Its Implications for Financial and other entities. Be- Reports and a textbook that offered a new approach to teaching managerial accounting. His commissioned report to the U.S. comptroller general on cost allocation became the fore establishing his principal conceptual basis of the Cost Accounting Standards Board’s initial pronounce- firm in 2003, he ments. He served on the accounting faculty of the University of Chicago and the Univer- served the state of sity of California at Berkeley. He died in 1990. New York for 23 years. He was deputy Compensation Rises for Board Directors, Chairs state comptroller from Board compensation grew 13% to almost $176,000 in 2003 after being flat for two years, 1986 to 2003. compensation consultants Pearl Meyer & Partners found in a new study. Committee ser- vice saw the biggest jump, they said, growing by 35%. Audit chair fees grew by 47%, and Attmore succeeded compensation committee heads received a 24% pay increase. Tom L. Allen, who The group also noted that, “In a significant shift, the use of full value shares surpassed had served as GASB stock options for the first time since became an integral part of director compen- chairman since 1995 sation programs a decade ago.” More on this will be released in Pearl Meyer’s proxy- and wasn’t eligible for based report, which will be released this fall. ■ reappointment. ■

September 2004 | STRATEGIC FINANCE 21 “WE ALERTED THE [BIG 4] FIRMS TO QUALITY CONTROL CONCERNS THAT WE HAVE FORMED,

READERS’ BOOKS INPUT Preventing Crime in

AT THE FOREFRONT Your Company I enjoyed reading Larry White’s ✷ DESPITE ALL THAT WE READ IN THE BUSINESS SECTIONS TODAY, column in the July 2004 issue we need to remember that occupational crime isn’t just limited to the Enrons of Strategic Finance.Of course, of the world. From the fraud that dominates the headlines to environmental I strongly agree. Management waste discharge, tax violations, antitrust, food and drug offenses, and more, accounting should be at the occupational crime can be found in companies of all sizes and types and at forefront. all levels—from the highest ranking executives to the lowest subordinate po- The goal of management ac- sition. In his book, Occupational Crime, published by CRC Press, Ernest counting comprises adding Blount delves into the federal guidelines that address occupational crime value to a business enterprise, and discusses how companies can help prevent it from happening. making it more profitable and Blount explains that once Chapter 8 of the United States Sentencing Guide- efficient and serving society bet- lines went into effect, it was possible for organizations to be convicted of ter. ’s criminal conduct. One very important detail to re- aim is to aid managerial deci- member is that an organization can be held crimi- sion making. Financial account- nally liable even if the individual employee in- ing’s aim is also to aid decision volved acted directly against company policy and making but by the external in- instructions. And though it may not be possible to vestors who cannot do as much stop every individual who might commit a crime in as internal managers. Manageri- your organization, an effective compliance pro- al finance has as its focus the gram is the best method to prevent most occur- adequacy of funding of a com- rences, as well as possibly mitigating any penalties pany. They are all important, but or sanctions if the worst does happen. managerial accounting is the According to Blount, the root of the occupational most important. crime problem draws into question many of the cur- The embarrassing scandals in rent attitudes and practices set forth by the leadership of companies today. financial accounting such as As with any other company-wide program or concept, management must WorldCom and Enron are caus- be fully committed to the cause for it to be effective. Management, Blount ing an upheaval in accounting says, has a powerful impact on whether the company’s culture discourages rules and in accounting teach- or enables criminal behaviors. Besides using their actions to show employees ing curriculums. The U.S. Con- their ethical and moral values, managers need to make their employees gress passed the Sarbanes- aware of the signs and possible indications of criminal behavior occurring Oxley Act. The FASB is contem- around them. plating major changes. Blount explains the seven criteria outlined by Chapter 8 of the U.S. Sen- I think that there is a good tencing Guidelines that are necessary for establishing a compliance pro- chance that the FASB will ac- gram. The seven basic criteria a company needs to have in place for an ef- cept the ideas Mano and fective compliance program are: the establishment of compliance standards Mouristen discussed in their and procedures capable of reducing the potential of criminal behavior; the article, “The Sensibility of involvement of high-level management in the oversight of the compliance Principles-Based Accounting program; due care in choosing the individual(s) who will have the discre- Standards” [Strategic Finance, tionary authority to address any problems or offenses that occur; effective continued on page 24 communication to all employees; taking reasonable continued on page 24

22 STRATEGIC FINANCE | September 2004 ON THE BASIS OF OUR LIMITED INSPECTIONS.” streetwise

[GOVERNMENT] Big Four Auditing Still Questionable? | Stephen Barlas, Editor THE FRONT PAGE PHOTOS IN JULY McDonough didn’t elaborate on ment’s conclusion is correct and, of Ken Lay as he was led to the what “quality control concerns” he therefore, fairly stated. A majority of Houston federal courthouse in was talking about, but Rep. Richard the corporations subject to SEC re- handcuffs brought back memories Baker (R.-La.), chairman of the porting opposed the PCAOB stan- not only the sad fate of Enron but House Financial Services Subcom- dard in good part because of how it also of its auditor, Arthur Andersen, mittee on Capital Markets, called is expected to increase auditing whose demise turned the Big Five McDonough’s reference “disconcert- costs. But the SEC said that the into the Big Four. But anyone who ing.” The open question now is PCAOB had taken those concerns thinks those kinds of auditing prob- whether the PCAOB will come up into account when writing the stan- lems are a thing of the past didn’t with the same kind of “concerns” dard and that it had no intention of hear what William McDonough told based on the full-scale inspections of making changes in the auditing stan- a House subcommittee in late June. the Big Four, which commenced in dard. SEC Chief Donald McDonough is chairman of the May and should finish in November. T. Nicolaisen said, “The standard Public Company Accounting Over- “We plan to review approximately strikes an appropriate balance by sight Board (PCAOB), which was 5% of the Big Four firms’ public providing sufficiently detailed guid- created on Andersen’s ashes. In company —that is, more than ance while at the same time allowing somewhat vague terms, McDonough 500 audits—and 15% of the next the auditor to exercise reasonable reviewed the results of the PCAOB’s four largest firms’ public company judgment. This standard is an im- “limited procedures inspections” of audits—or about 150 audits,” portant part of a much broader ef- Big Four audits done in 2003. The McDonough stated. fort by all parties—issuers, auditors, PCAOB had just sent the draft re- and regulators—to strengthen our sults around to the Big Four— SEC Blesses PCAOB system of financial reporting.” PricewaterhouseCoopers LLP, De- Internal Auditing loitte & Touche LLP, Ernst & Young Standard Stock Options Bill LLP, and KMPG LLP—and was get- A few weeks after McDonough ap- Closer to Passage ting their comments. So nothing was peared before the House Financial Legislation that would limit the final. “In numerous interviews, we Services Committee, the Securities & FASB’s reach on stock options ac- heard audit partners and staff ex- Exchange Commission (SEC) ap- counting is set for a vote on the press their perceptions of a renewed proved the PCAOB standard on how House floor. The Stock Option Ac- focus on audit quality,” McDonough accounting companies must attest to counting Reform Act (H.R. 3574) explained. “We have seen some evi- the accuracy of management’s evalu- passed the House Financial Services dence of this renewed focus in firm ation of the company’s internal con- Committee by a vote of 45-13 on policies generally and in internal trols. The auditor has to evaluate June 15 and is being pushed hard by firm communications about those management’s assessment process to the high-technology community. policies. Even so, we alerted the be satisfied that management has an The FASB issued a proposal in firms to quality control concerns appropriate basis for its conclusion. March to require companies to that we have formed, on the basis of Additionally, the auditor must test record the cost of stock options on our limited inspections, and we will and evaluate both the design and the their balance sheets. Current policy continue to look hard at whether the operating effectiveness of internal allows companies to choose whether firms’ conduct mirrors their words.” control to be satisfied that manage- to include continued on page 25

September 2004 | STRATEGIC FINANCE 23 [BOOKS] cont’d from p. 22 [LETTERS] cont’d from p. 22 the pie! One can imagine an accounting steps to be in compliance with May 2004]. Financial Accounting would world with more cops than there are citi- the law, including providing a be more accurate if there were fewer zens to monitor. safe system for whistleblowers rules—including fewer rules for evaluating Business financial managers generally who report suspected offenses; stock options. have to allocate resources among four consistent enforcement of the I hope that the FASB accepts my sug- objectives: standards and disciplinary mea- gestions in “Improving Disclosure and 1) Processing the transactions of the sures within the compliance pro- Transparency in Nonprofit Accounting” business, gram; and taking reasonable [Management Accounting Quarterly, 2) Fair presentation of the financial re- steps to respond to violations and Spring 2003]. Disaggregated funds-based sults and condition of the business, to prevent similar offenses in the reporting is an essential supplement to 3) Budgeting and forecasting, future. nonprofits’ financial statements. A hypo- 4) Decision support for tactical and While these federal guidelines thetical case analysis illustrates improve- strategic issues. give only a general framework, ments to nonprofits’ financial disclosure. While external or internal forces drive Blount goes into very specific de- On the teaching level, my guess is that the first three objectives, only the fourth, tails designed to help companies financial accounting will suffer a decline decision support, can actually make develop a program that would in prestige and interest for students. All money. Unfortunately, most of the skills not only help prevent crime from the more as Larry White writes: “Let’s and expenditures of business financial occurring, but also minimize any move Management Accounting to the departments are absorbed in communi- penalties or sanctions if the com- Forefront.” cating what has happened or could hap- pany is found liable for an of- Dr. Gerald Aranoff, CPA, Ph.D. pen rather than making things happen. It fense committed by one of its Professor of Accounting is by direct influence on pricing, purchas- employees. The College of Judea & Samaria, ing, and investing decisions that financial This is merely the tip of the ice- Ariel, Israel information contributes to business value. berg. Aside from going into far Financial talent focused on audits and greater detail about these issues, “PERSPECTIVES” HITS THE MARK won’t be available to help with Blount takes a close look at the Larry White’s “Perspectives” column day-to-day business activities. Operating costs of occupational crime—from (August 2004) on accounting profession managers resort to artwork decision mak- how it affects all of us in general, balance in the Sarbox age was quite time- ing without knowing which products, ca- to the kind of data a company ly and hits the mark with financial man- pacities, or customers are profitable. Fi- would need to calculate the cost agers of operating businesses. Informal nancial staffs driven by external require- of occupational crime. Also in- discussions with other CFOs and con- ments become isolated within their cluded is an entire section devot- trollers present some typical views: organizations. ed to support materials that man- 1) The financial reporting scandals that Sarbanes-Oxley and intensified auditing agers might find useful in effec- spawned Sarbanes-Oxley were conceived tips a scale that was already out of bal- tively planning, developing, and by the upper management of the affected ance. Management will have implementing a compliance firms and executed using legal structuring to sell the importance of providing eco- program. or simple journal entries. Few were related nomic information along with financial Blout’s ideas and concepts are to internal controls on transaction statements. Internal controls must be suf- presented in a straightforward processing. ficient. However, applying management ac- format that makes it easy to skim 2) Compliance with any external report- counting concepts such as economic quickly and find the topics you ing requirement siphons resources away value analysis, activity-based costing, and need. This book would be of inter- from creating financial information needed constraint theory is the way to ultimately est to everyone concerned about to improve real business performance. increase business value. It is hard to sell the affect occupational crime As he noted, the emphasis is now on performance management in an audit- might have on their company. inspection rather than prevention of quali- crazy world, but it is worth the try. And after all, how could we ty problems. Cost of quality concepts were Tom Welsh afford not to be?—Christopher apparently overlooked. Praise audit firm CEO Dowsett lobbyists for grabbing a bigger piece of Sunrock Group Holdings Corporation

24 STRATEGIC FINANCE | September 2004 [ETHICS] cont’d from p. 20 [PERSPECTIVES] cont’d from p. 6 If you’re interested in finding out survey showed that clients also a disciplined form of activity- more, IMA will be creating a new E- feel strongly that their consultants based costing, were published in the mail Exchange called “New Costing.” should have a long-term commit- April and May 2002 issues of Strate- We have signed up some people ment to consulting and a client- gic Finance.An introductory article knowledgeable about GPK and RCA verified track record in their was published in the Fall 1999 issue to participate in the online commu- field. of Management Accounting nity, and you are encouraged to re- Reflecting the greater concern for Quarterly.And IMA’s Annual Con- view back articles and start a dia- questionable ethics of consultants, ference in Chicago featured “The logue on these innovations in cost 40% of client respondents felt that Battle of the Cost Accountants,” management. professional service firms would lie where three world-class North Please let me know your thoughts. to protect themselves, while slightly American cost management special- You can reach me at fewer (39%) felt their own employ- ists debated the merits of GPK, ABC, [email protected]. ■ ees would lie for the same reason. and RCA. Additional ethical concerns brought We have more planned: Two re- up by the clients include: search projects will yield Strategic [GOV’T] cont’d from p. 23 ● The professional service firm Finance articles supplemented with options in their balance sheets or would overpromise expected results detailed reports in Management Ac- just as footnotes that don’t count or benefits (46%), counting Quarterly;a case study on a against financial bottom lines. H.R. ● The firm would allow the scope trial implementation of RCA will be 3574 delays the FASB’s proposal of the project to expand or “creep” published in the October issue of until the SEC can determine the true (25%), and Strategic Finance;Paul Sharman is value of options. Then, once an ● Consultants wouldn’t serve the preparing a case study on a large FASB standard is imposed, H.R. best interests of the client organiza- German service company with the 3574 requires companies to tion (32%). current editor of the GPK textbook, stock options for only their top five Management accountants and fi- Kurt Vikas; and IMA Chair-Elect executives. Small companies would nancial managers should be aware of Carl Smith will be publishing a case be exempt, and newly-public compa- these critical aspects of their rela- study of a GPK application by a Ger- nies would get three years after their tionships with any professional ser- man subsidiary based in the U.S. establishment to comply. ■ vice providers their organization may engage. ■

William Donaldson’s speech is online at www.sec.gov/news/speech/spch 032403whd.htm. The Booz Allen articles can be found at its website, www.boozallen.com.IMC USA’s white paper is available at www.cmc- global.org/Docs/IMCEthicsSur- vey2003.pdf.

Curtis C. Verschoor is the & Quill Research Professor, School of Accountancy and MIS, DePaul Univer- sity, Chicago, and Research Scholar in the Center for Business Ethics at Bent- ley College, Waltham, Mass. His e-mail address is cverscho@ condor.depaul.edu.

September 2004 | STRATEGIC FINANCE 25