Illinois Business Journal - Execs ponder status, future of corporate accountability

Illinois professionals from an array of sectors - banking, insurance, public finance, accounting, trade associations and the clergy - agree that the summer's heat is being felt in a whole new way when it comes to individuals and boards caught with their hands in the corporate cookie jar. The accountability crisis continues, they say.

Mark Altadonna is executive vice president of the State Bank of Waterloo, an institution with assets totaling $63 million. What the public has seen, he says, is that some large, publicly traded companies have been keeping bad books. Altadonna's bank, as an example, has five different auditing agencies looking over its corporate shoulder.

"It's incomprehensible to me that large corporations don't hold to the same standards," he said. "The declining stock market has hit the balance sheets of our customers. Our bank is now flush with cash, with demand deposits up about 67 percent from a year ago. People are seeking safe havens and keeping liquid."

The Illinois Teachers Retirement Fund, based in Springfield, reported $22.8 billion in assets, as of March 31. The fund suffered an investment loss of just over $1 billion last year. In 2001, Illinois teachers contributed $644 million into their pension funds, with the state of Illinois contributing another $724 million, according to ITRF assistant executive director Jim Day.

"Our pension fund ranks among the top 50 in the world," Day said.

ITRF manages the pension for public school teachers in Illinois, outside the city of Chicago. The fund is unlike a 401(k) plan, Day said; it is a defined benefit plan, meaning that teachers are paid according to their contract, regardless of the investment results of the fund.

"I want to emphasize that we diversify our investments and invest for the long term," Day said. "We have to do that, because some of our teachers are in their mid 20s."

Day said the ITRF is suing telecommunications giant WorldCom. Some $34 million in WorldCom bonds comprises only .14 percent of the retirement fund's total assets.

"We were outraged by the misinformation that our managers were given," he said, "and we want to see a restoration of honesty and integrity in corporate boardrooms."

Bloomington-based State Farm Insurance is the largest home and auto insurer in the U.S. and the world, reporting $116.1 billion in assets as of Dec. 31.

Kim Brunner, executive vice president and general counsel, heads the legal department for State Farm.

"This corporate accountability issue is not going to die," Brunner said. "It is too closely tied to our free enterprise system."

The question of who is to blame for the coast-to-coast accountability crisis, Brunner said, is a tough one to answer. He said the answer comes from multiple viewpoints.

"First, I want to distinguish State Farm from stock-owned companies," Brunner said. "We are a mutual company, owned by our policy holders. We don't have the pressure to meet quarterly objectives. But publicly traded companies are indeed under such pressure, and this creates incentives to play fast and loose with quarterly earnings reports."

Enron and WorldCom were young companies seeking to grow, he said, and they wanted to impress the banks and investing community with good numbers.

"Secondly, over the past 10 to 20 years, we've seen the largest CPA firms develop ancillary businesses, such as consulting, that are quite profitable," Brunner said. "Put yourself in the position of an auditor wondering about an off-book transaction, and recalling that his company earns $26 million a year in consulting income. Price Waterhouse Coopers, for example, is now splitting out its consulting business, and I think that is wise."

Third, in terms of corporate governance, there are three roles to consider, according to Brunner: management, auditors and directors.

"The executives must run the company for the benefit of the stockholders, not creating partnerships for their own personal gain. That's clear," he said. "As far as the auditor is concerned, he must be independent, willing to dig into the books and records, willing to disclose the good, bad and ugly. As for the directors, they must be inquisitive, to satisfy themselves that the executives and CPAs are presenting the full story."

There are a lot of checks and balances in existence, Brunner said. "People will go to jail, and huge fines will be collected according to current law," he said. "Today in Washington there is a frenzied effort to crack down on business...but that can be a game of diminishing returns."

Another perspective through which to view the accountability crisis, he said, is through the eyes of investment companies. They are a step removed from the process, Brunner said, but their investment decisions determine the price of stocks and bonds. "They've gotten caught up in the excitement of a rising market, and have not asked enough questions," he said.

Certified public accountant Duane Suits is chairman of the board of directors of the Illinois CPA Society. He is also a partner of Sikich Gardner & Co. LLP, a CPA firm with offices in Springfield and Aurora. Suits has been practicing accounting for 30 years and remembers well when Arthur Andersen was "the crème de la crème."

"CPAs once had such a golden reputation that they were given the responsibility of counting the votes for the Miss America contest," Suits said. "I'm not sure if they still do that. They might have goofed up some measurements."

Suits said the end result of the current corporate accountability crisis won't be known for a while, and that the story is a long way from being over.

"One big issue with both Enron and WorldCom is that they used off-balance sheet financing," Suits said. "Actually, this has been a trend over the past 15 to 20 years. It started with leases, and then companies began leasing capital assets, and doing sale-leaseback transactions. Enron and WorldCom were simply doing very sophisticated forms of off-balance financing," he said.

Financial Accounting Standards Board #13 was the regulation governing the reporting of off-balance sheet financing, Suits said. FASB #13 is now about two inches thick.

"You can approach accounting standards from the rule approach or the principle approach," Suits said. "Because of the complexity of American business, we have collectively gravitated to the rule approach. The rule is developed, and then the financing transaction is structured to meet the rule."

International accounting is done more according to the principle approach, he said. In the cases of Enron and WorldCom, the companies' financing was structured to meet a rule, Suits said. "In my opinion, we need to remember the (accounting) principles and ask the question, 'What is really being done here?'"

After the stock market crash in the early 1930s, there was a big debate about whether the auditing profession should be regulated, Suits said. Accounting was deemed a profession, and told by the feds that it should self-regulate. "The system has worked fairly well since the 1930s," Suits said. "In fact, the U.S. financial markets have been regarded as the pride of the world, in terms of honest disclosure of financial information."

There is tremendous pressure in a publicly traded environment to produce good earnings, and to please the investment community, banks, executives and employees, he said.

"It was rational and well-intentioned to create compensation arrangements for executives, based on the performance of the stock, but you can see the tremendous pressure to produce earnings," Suits said. "And the auditor must stand against this pressure, to report the earnings accurately. But it becomes difficult, especially when three Arthur Andersen partners, and nearly 200 staff members work on nothing but the Enron account. And Arthur Andersen makes a $27 million audit fee. Did it cloud the auditor's judgment? The jury is still out on that one."

A proposed U.S. Senate bill is still on the table, one that would create a regulatory commission to supervise firms that audit publicly traded companies - probably the 11-12 largest CPA firms in the U.S. The bill also calls for changes in how the Financial Accounting Standards Board is funded. This proposed federal legislation, Suits said, would also require giant corporations to change independent auditors every so often.

Mike Walters, executive director of the Southwestern Illinois Employers' Association, represents employers and lobbies on their behalf in Springfield.

"I fear that the pot is calling the kettle black," he said. "WorldCom fails to report $4 billion, and that's a lot of money, but the books of the federal government are far more 'cooked' than those of publicly traded firms."

The Rev. Anthony J. Casoria, pastor of Center Grove Presbyterian Church in Edwardsville, said that in terms of legal standards, God has his "top 10" list.

"When considering Enron and WorldCom, the Eighth Commandment (stealing) and Ninth Commandment (bearing false witness) come to mind," Casoria said. "When men don't have a moral compass, legislatures have to pass laws that spell things out in detail.

"Today, many judges and politicians don't want the Christian religion or the biblical moral code in the public square. They don't want the Ten Commandments on the wall. But if we can't agree on that, what do we agree on? When I see this failure of ethics, I remember Hosea 8:7, 'For they have sown the wind, and they shall reap the whirlwind.'"