IS THE CORPORATE AUDITOR A 'PUBLIC WATCHDOG'?

With the quality of American corporate management undergoing an increasing amount of criticism in recent years, a spotlight has been turned on an adjunct of management: the accounting companies that serve as outside auditors for major companies.

Three years ago, the Supreme Court ruled, in a case involving Arthur Young & Co., that accounting firms have a "public watchdog" role that transcends loyalty to clients. The decision was criticized by many in the accounting profession at the time, and auditors have been grappling with its implications ever since.

Last week, Washington Post staff writer Mark Potts interviewed Peter R. Scanlon, chairman of Coopers & Lybrand, another Big Eight accounting firm, about the ramifications of the Supreme Court decision, auditors' roles in corporate governance and other issues facing the accounting profession. Edited excerpts from the interview follow. Q What has been the impact on the accounting industry of the Supreme Court decision that suggested that corporate auditors should take a "public watchdog" role? A Well, not a lot at the moment. The Young decision was based on a tax case, and the access to work papers. My personal feeling, and I'm not a lawyer, is I think the court in its decision, while they were trying to give sort of a philosophical bent to the role of the auditor . . . I think they used pretty general language. I don't know what the "public watchdog" means, when you get down to a strictly technical definition. It can be used in a very wide range or variety of ways, which I'm not sure the profession is ready to accept. . . . are we responsible for fraud? Finding it? What kind of fraud? Those kinds of things.

I just think "public watchdog" is a term. I have a sense of what I think the spirit of it is, but lawyers don't deal in spirits, they deal in interpretation, and I thought for the top court in the land to throw loose language around like that was, I think, not very helpful to the profession. Q In addition to the Supreme Court decision, there have been some instances in the past few years where companies have turned out to be a lot worse off financially than their outside auditors had seemed to indicate. Whose fault is that? A There's been sort of a debate over the responsibility of the audit function for {measuring} the ongoing viability of a company. In other words, when an auditor gives an opinion on financial statements as of a certain date, what does that imply in terms of the health of that company? I believe there is inherent in the "attest" function an implication, unless it's stated otherwise, that the company is not going to go down the tubes tomorrow.

There's some debate over that. There are some in the profession who say, at a point in time, this is our responsibility. I think you have to look a little bit forward, look at the influences, understand the competitive factors and so forth. Otherwise, the audit process really brings not too much value to the shareholder and to the investing public.

That's not dealing with the issue of fraud, just viability, and there are analytic processes you can go through to reasonably determine the company's competitive position, its financial health, its cash flows, and so forth. If you had a serious problem, I think the auditor is obliged to say something. . . .

I'm not sure that all the banks in the savings and loan industry that went bankrupt in the last three years, 96 of them or so, were frauds. I think they're characterized as fraud and I think that's an emotional reaction. I think a lot of it is mismanagement. Q Would the auditors not catch that, or be able to see some of that? A Yes, in most cases you can look at a portfolio and determine the exposure, but if you're in the Southwest, and in December of that year there's an energy shortage and in June of the next year there's an energy surplus, which even the best economists in the country couldn't predict, I'm not sure you can blame the auditor. Q Is there a limit to how much an auditor can be expected to know about a specific business or market situation? A Well, I don't know that it's all that complicated. We're supposed to have reasonable judgment, business judgment, and if you're dealing with a company at a point in time that you're given a set of factors, and assuming you don't have blinders on, you know what's going on in the world around you and how the industry's doing.

There are certain industries that have more risks than other industries, there are certain economic environments that impact certain companies more than other companies. There are certain competitive factors that also have the same influence. . . . If something completely extraneous in the economic environment comes along, I don't want responsibility for that. I can't live up to it. Q There's been a lot of talk in the past couple of years on the general subject of corporate governance, with suggestions that American companies aren't really managed as well as they could be. What kind of a check and balance role can auditors play in the system? A {It's} a three-legged stool. Boards of directors are assuming much more importance in terms of the governance factor, and that's been helped along a bit by the viability crunch. Management certainly has the prime responsibility. And the audit function, coupled with the other two, I think, makes the stool. I think the audit function is significant in terms of raising issues, with both management and with the directors, that need possible attention or portray future difficulty, and I'd consider that one of our prime roles. Q How much different is your role when you work for a smaller company than it is with a bigger company?

A Big clients generally have more structure, and some self-sufficiency in various areas. They have their own treasury function, and so on and so forth. By the same token, the issues they deal with are often more sophisticated, so the counseling or consulting or advice that they need is usually just that. It's counseling, consulting, advice on a sophisticated concept, and less on the implementation.

The smaller businesses, many of them, are managed by people who are excellent marketers, with creative ideas, new products, things like that. They can't afford, and don't want and are not of a sufficient size to have the structure. So they would look to us for much more day-to-day advice on things like control of the operation, inventory control, things that maybe they don't have enough time to really spend with, to give a lot of attention to, because they're out in the marketplace.

Q When you go recruiting, what do you look for? A I'm looking for a broader-based person who has the requisite accounting requirements but who has also participated in a program that has helped them to develop the thought and thinking processes. It could be an MBA. It could be somebody that majored in accounting and minored in history. People who can think.

I don't want to see the profession go down a narrow technical road where a young person, as a sophomore in college, has to decide, "If I want to be a CPA, I have to commit myself to an extra year of almost pure accounting, and my options are better if I go for the MBA." And I think we're going to lose broad people. One thing this business doesn't need, if current history hasn't shown anything else, is we don't need narrow-thinking people.

{Recruiting} is very competitive for the top layer, as it is in any business. And the interesting part about recruiting now is that in the accounting programs, there's a feeling among academics that the accounting profession has not kept up salary-wise with the rest of the business community. It has some validity. Not a lot, but some. The typical academic compares our entry level {salary}, however, with investment banking and we can't compare with investment banking, we can't match investment banking. We don't have the profit margins, and it's just not realistic.

I don't think they're paying enough attention to the long-term career aspects. They're looking for the quick buck, you know, you read it in the magazine and {investment bankers are making} $250,000 a year and they're 30 years old. But there's only a handful. And there are thousands and thousands of kids coming out of the accounting programs.