–The accounting profession was one of the most prestigious activities in business
until the Enron scandal, which confirmed what Arthur Levitt had said in 2000 when
he was chairman of the Securities and Exchange Commission: “there is a potential
conflict of interest brewing in the accounting industry because the Big Five accounting
firms are offering consulting services to the same companies they audit. What
did you think then about that, and what do you think now in the light all that
has happened in 2002?
–Well, I´m glad you ask that. Actually our firm was a supporter of Arthur
Levitt´s proposal back in year 2000 and believed at that time that the firms
should not offer technologic consulting to their audit clients. We supported
him in the proposal he had on separating roles. But three of the big
five did not support it. We obviously still believe – and I´ve been public in
my comments — that the delivery of large consulting projects of the type that
Arthur Levitt was talking about is inappropriate.
Ernst & Young was actually a first mover in our profession and some three
years ago sold our consulting business to Cap Gemini French Technology. We did
that because some four or five years ago we looked ourselves in the face and
said, well who do we want to be? And we committed ourselves to being the first
audit firm that does tax as transaction firm provider. And we knew we couldn´t
also be the best consultans.
–But anyway there was such a strong lobbying campaign against Levitt´s
proposal — which was to bar accountants from also acting as consultants – that
it was eventually withdrawn.
–Let me make clear that that campaign did not include Ernst & Young,
–Don´t you think that if Levitt had succeeded, Arthur Andersen would still
exist?
— There´s a lot of speculation there. I don´t believe that the issues that
led to Enron or to other things were issues that the consulting had a real impact
on. So no, I don´t believe that that would be the case.
–From you own experience, do you think that the role of auditing firms
conflicts with that of consulting firms, and that doing both compromises credibility?
Well, it depends – in my judgement – on what you mean by consulting. Let me
expand on that. I believe that large information-technology- financial- systems
consulting is inappropriate to be delivered by audit firms as ours. I believe
that the delivery of proper tax service, the delivery of transaction advice
on merger & acquisitions due diligence for example, is very appropriate
and in fact helps audit quality; and that´s what the marketplace is saying.
It´s important to recognise the objective of the SEC, the objective of regulators,
the objective of our firms, the objective of auditor independence, but we cannot
let that lead to auditor ignorance. If auditors don´t have enough knowledge
of the risks of the vehicles, the issues basing the business, the organisational
structure of the company auditing, audit the quality goes down
–Let me quote Don Moore on this. He and a group of researchers say that
“unconscious bias in auditing and consulting is unavoidable. There is a
fundamental cognitive bias at the core of the auditing function because auditors
have a stake in the interpretation of the information they review. People process
information in a fashion that leads them to the conclusion they wish to reach.
To make matters worse, he says, people are typically unaware of the bias and
adamantly insist that they can be impartial. The way auditing firms operate
today makes auditing independence impossible even among the most honest and
well-intentioned auditors”. What do you think about this theory?
–I don´t know who the writer was…
–Don Moore, a university professor who wrote an article in the Harvard
Business Review.
I think there are a lot of people looking at the profession today. To me what
is important is that the market understand the profession´s commitment to delivering
quality, to delivering integrity and to being independent. If one wants to look
at the profession as concerned as Mr. Moore was about independence one would
also be concerned with the fact that the clients actually pay our fees for auditing;
so, the issue that Don is talking about is unavoidable in any relationship in
which that´s reckoned. It´s very independent directors of companies who receive
director´s fees. But Ernst & Young in the entire profession maintain the
highest standards of independence. We can have no financial interest in our
clients; we cannot own shares, we cannot be on boards, we cannot work together
on other business and so we maintain total financial and relationship independence
from our clients, and the only relationship we have with those clients is the
fact they pay us for the services we deliver.
I happen to believe from my experience that our profession – not just Ernst
& Young but the entire profession — operates with great independence, and
in fact consistently delivers to clients messages clients don´t want to hear.
If the marketplace could ever know the number of times we have made clients
change a reporting, the number of times we told clients that if they didn´t
do A, B or C we would resign or other things of that type, the marketplace would
have a total different view of the profession; but the marketplace will never
know that because these are all confidential matters that we discuss with our
clients.
–It doesn´t come out, all that doesn´t come out…
–Nor should it. It the nature of our business
–There seem to be two definitions of the accounting profession. There are
some people view the accounting profession as a science, where things can
either be right or wrong, black or white; and there
are other people who say it´s more like the art of reconciling – for example
now with globalisation, where you have different countries, with different accounting
practices – so auditing has to harmonise different ways of doing things. That
allows for a whole range of grays between black and white. How do you see it?
–It´s important to recognise that companies deal with many different judgements,
many different policy choices, many different estimates in preparing their accounts
and these judgements and estimates do provide a range of acceptable results.
One of the great positives that has come out of the turmoil of the last year
is the open dialogue that independent boards are having with audit firms and
with management as to where companies are in their judgements and estimates
of policy choices and, if you will, how conservative or not less conservative
the reporting of the accounts is. There´s been a real increase in diligence
by audit committees who are working with audit firms and the company´s
board of directors.
–Could there also be a linguistic question behind the confusion some of
the times? If you go to the dictionary and look up income, profit, earnings,
revenue; if you look at the definitions you find that one term is defined in
terms of the other term. You find that perhaps one company talks about earning
when it is really income… Could that lead to confusion when balance statements
are analysed? Could there also be a linguistic element adding to the problem?
— I think it´s worse than linguistic. Let me give you a perspective. The definitions
are much more clear in the regulatory and business contexts as to what the various
terms mean. What net income is, what operating profit is, and the like. Where
I think that there has been some confusion is more companies began, while they
reported in accordance with the rules and definitions that are very clearly
set out by the regulatory bodies in other discussion they would have what´s
called “pro forma” earnings or “pro forma” information,
which attempted to isolate out one-time events or other non recurring charges
or costs to show kind of a different view in their financial statements. I do
believe that there became in late 1990s and early 2000s a substantial increase
use of pro forma disclosures and something that the SEC is focused on very heavily.
–On what grounds is Ernst & Young preparing its defence concerning
the PeopleSoft case?
PeopleSoft is a matter that is very different from all the other situations
you read about. There are no financial statement issues, no re-statement issues,
no share and loss issues…… What the SEC is alleging is that E &
Y lacked independence because our consulting division helped install Peoplesoft
systems. And that is something that our consulting department says it is a matter
that the SEC new about at the time and we´re optimistic it will be resolving.
–In corporate America – and elsewhere – nobody today believes in balance
statements even if they have been revised and approved by the most prestigious
auditing firms. Trust was lost because of lack of transparency and lack of security.
Those are the three pillars on which modern capitalism rests; how can they be
restored?
It is without question that trust and confidence have been lost,. Not just
in companies but in the directors, in audit committes and in the audit firm.
I think while many are desirous of having a quick, quick –.say a fast silver-bullet
solution — to restore confidence, I think there is only one way. Confidence
is going to come back when all these parties: companies, management, boards
and audit firms, all commit themselves to exceeding high quality, to unbelievable
integrity and to consistent excellent performance for the long term. What I
am very pleased with is from my discussions with all those members: companies,
audit-committed boards, management – and I can tell you E&Y is deeply committed
to the quality that is necessary in the marketplace today. You´re seeing a level
of diligence as I said earlier by all these members who were touching the financial
markets that is very positive. E&Y has always been a firm committed to quality.
Some seventeen, eighteen years ago we actually had a firmwise position, a motto
if you will: quality in everything we do . Timewise mottos change from time
to time, but the core promise never changes. We brought back the position about
quality in everything we do about two months ago and it´s interesting that today
you haven´t seen us placing advertisements or you haven´t seen us doing anything
we normally do. The issue is not about marketing. This is about who we are,
it´s about the clients we work with, it´s about all the services we deliver
and the message is for our people. It´s making sure that 110.000 of our people
around the world know everyday that quality is everything we do.
We have quality built into everything.
Now, having said that, I think it is critically important that all CEOs set
the tone in their organisation. One of the things that I think characterised
this lead up, if you will, to the problems we saw in the marketplace is that
this is a society coming off a 10- year- run of unbelievable performance in
growth, in share price growth; and I think at times like that people tend to
suspend their disbelief and I think too many CEOs and too many CFOs even in
some cases, became more focused on being chief marketers and boosting the share
price instead of being the conscience of their organization. And setting the
direction around quality and integrity so that everyone of their employees knew
what whas expected, what was right or wrong. It is, I think my most important
responsibility in Ernst & Young is to make sure that our 110.000 people
know our commitment for quality.
–Can unethical behaviour be uprooted with more stringent legislation? Congress
has just passed the Sarbanes-Oxley Act. Do you think that means a serious intent
to purify the scenario or is it just another instance of “everything changes
but nothing really changes”?
–I think that things have already changed., I don´t think they have necessarily
changed because of the Sarbanes-Oxley Act. I think they changed because auditors,
companies and audit firms all realised that we have to commit ourselves to integrity
in a way that is touchable, that is feelable, in order to accomplish the return,
and I think that it is a positive move by all the players in the financial markets
. I think we have seen and will see things change.
–On the other hand there are those who say that you can´t change behaviour
with legislation.
–Legislation was necessary; but on balance it will help if it bans the delivery
of services by our profession, which should have been banned. It also enables and
allows us the delivery of those services I mentioned earlier – tax services,
transactions services, — that enhance quality , but it allows the delivery
of those services under the watchful eye of independent audit… . So I think
it was a good piece of legislation on that dimension.
By itself it won´t create commitment to quality in organizations if the leadeship
of those organizations is not commited to it. The tone within a company will
not be set by Congress. The tone within a company is set by by the CEO and his
or her direct leader.
–And what about the creation of a body to watch the watchers, this special
body that the SEC was trying to create?
–The board you are referring to is the Public Company Accounting Oversight
Board. It is an important body, a body that I look forward to working with
this profession and see that it oversees our profession because I think there´s
significant work to be done and I´m looking forward to the Board being
in place.
–What´s to be done in the future?
–What´s to be done if for the profession, for directors, to account of this
to be hundred percent committed to quality and integrity and to delivering that
to the marketplace consistently. It is what our firm is focused on, it is what
our firm has been focused on, it is what this profession is all about.
–Anything else you would like to add?
–I just want to let you know how pround I am of our practice here in Argentina
and the Sourthern part of South America, the Southern Cone. Jorge Verruno, the leader
here, is just great. We have combined former Ernst & Young and former Andersen
practices in six out of seven countries in the Southern Cone of this region,
and have leading practices throughout the region. Also committed to the quality
to the service that we were speaking about . I wear a couple of hats in this
firm. I wear the global chairmanship and I also wear the chairmanship for the
Americas. And I can tell you how focused the Americas is on working together
with Argentina and the rest of South America to help create and continue to
invest in practices here.
–The accounting profession was one of the most prestigious activities in business
until the Enron scandal, which confirmed what Arthur Levitt had said in 2000 when
he was chairman of the Securities and Exchange Commission: “there is a potential
conflict of interest brewing in the accounting industry because the Big Five accounting
firms are offering consulting services to the same companies they audit. What
did you think then about that, and what do you think now in the light all that
has happened in 2002?
–Well, I´m glad you ask that. Actually our firm was a supporter of Arthur
Levitt´s proposal back in year 2000 and believed at that time that the firms
should not offer technologic consulting to their audit clients. We supported
him in the proposal he had on separating roles. But three of the big
five did not support it. We obviously still believe – and I´ve been public in
my comments — that the delivery of large consulting projects of the type that
Arthur Levitt was talking about is inappropriate.
Ernst & Young was actually a first mover in our profession and some three
years ago sold our consulting business to Cap Gemini French Technology. We did
that because some four or five years ago we looked ourselves in the face and
said, well who do we want to be? And we committed ourselves to being the first
audit firm that does tax as transaction firm provider. And we knew we couldn´t
also be the best consultans.
–But anyway there was such a strong lobbying campaign against Levitt´s
proposal — which was to bar accountants from also acting as consultants – that
it was eventually withdrawn.
–Let me make clear that that campaign did not include Ernst & Young,
–Don´t you think that if Levitt had succeeded, Arthur Andersen would still
exist?
— There´s a lot of speculation there. I don´t believe that the issues that
led to Enron or to other things were issues that the consulting had a real impact
on. So no, I don´t believe that that would be the case.
–From you own experience, do you think that the role of auditing firms
conflicts with that of consulting firms, and that doing both compromises credibility?
Well, it depends – in my judgement – on what you mean by consulting. Let me
expand on that. I believe that large information-technology- financial- systems
consulting is inappropriate to be delivered by audit firms as ours. I believe
that the delivery of proper tax service, the delivery of transaction advice
on merger & acquisitions due diligence for example, is very appropriate
and in fact helps audit quality; and that´s what the marketplace is saying.
It´s important to recognise the objective of the SEC, the objective of regulators,
the objective of our firms, the objective of auditor independence, but we cannot
let that lead to auditor ignorance. If auditors don´t have enough knowledge
of the risks of the vehicles, the issues basing the business, the organisational
structure of the company auditing, audit the quality goes down
–Let me quote Don Moore on this. He and a group of researchers say that
“unconscious bias in auditing and consulting is unavoidable. There is a
fundamental cognitive bias at the core of the auditing function because auditors
have a stake in the interpretation of the information they review. People process
information in a fashion that leads them to the conclusion they wish to reach.
To make matters worse, he says, people are typically unaware of the bias and
adamantly insist that they can be impartial. The way auditing firms operate
today makes auditing independence impossible even among the most honest and
well-intentioned auditors”. What do you think about this theory?
–I don´t know who the writer was…
–Don Moore, a university professor who wrote an article in the Harvard
Business Review.
I think there are a lot of people looking at the profession today. To me what
is important is that the market understand the profession´s commitment to delivering
quality, to delivering integrity and to being independent. If one wants to look
at the profession as concerned as Mr. Moore was about independence one would
also be concerned with the fact that the clients actually pay our fees for auditing;
so, the issue that Don is talking about is unavoidable in any relationship in
which that´s reckoned. It´s very independent directors of companies who receive
director´s fees. But Ernst & Young in the entire profession maintain the
highest standards of independence. We can have no financial interest in our
clients; we cannot own shares, we cannot be on boards, we cannot work together
on other business and so we maintain total financial and relationship independence
from our clients, and the only relationship we have with those clients is the
fact they pay us for the services we deliver.
I happen to believe from my experience that our profession – not just Ernst
& Young but the entire profession — operates with great independence, and
in fact consistently delivers to clients messages clients don´t want to hear.
If the marketplace could ever know the number of times we have made clients
change a reporting, the number of times we told clients that if they didn´t
do A, B or C we would resign or other things of that type, the marketplace would
have a total different view of the profession; but the marketplace will never
know that because these are all confidential matters that we discuss with our
clients.
–It doesn´t come out, all that doesn´t come out…
–Nor should it. It the nature of our business
–There seem to be two definitions of the accounting profession. There are
some people view the accounting profession as a science, where things can
either be right or wrong, black or white; and there
are other people who say it´s more like the art of reconciling – for example
now with globalisation, where you have different countries, with different accounting
practices – so auditing has to harmonise different ways of doing things. That
allows for a whole range of grays between black and white. How do you see it?
–It´s important to recognise that companies deal with many different judgements,
many different policy choices, many different estimates in preparing their accounts
and these judgements and estimates do provide a range of acceptable results.
One of the great positives that has come out of the turmoil of the last year
is the open dialogue that independent boards are having with audit firms and
with management as to where companies are in their judgements and estimates
of policy choices and, if you will, how conservative or not less conservative
the reporting of the accounts is. There´s been a real increase in diligence
by audit committees who are working with audit firms and the company´s
board of directors.
–Could there also be a linguistic question behind the confusion some of
the times? If you go to the dictionary and look up income, profit, earnings,
revenue; if you look at the definitions you find that one term is defined in
terms of the other term. You find that perhaps one company talks about earning
when it is really income… Could that lead to confusion when balance statements
are analysed? Could there also be a linguistic element adding to the problem?
— I think it´s worse than linguistic. Let me give you a perspective. The definitions
are much more clear in the regulatory and business contexts as to what the various
terms mean. What net income is, what operating profit is, and the like. Where
I think that there has been some confusion is more companies began, while they
reported in accordance with the rules and definitions that are very clearly
set out by the regulatory bodies in other discussion they would have what´s
called “pro forma” earnings or “pro forma” information,
which attempted to isolate out one-time events or other non recurring charges
or costs to show kind of a different view in their financial statements. I do
believe that there became in late 1990s and early 2000s a substantial increase
use of pro forma disclosures and something that the SEC is focused on very heavily.
–On what grounds is Ernst & Young preparing its defence concerning
the PeopleSoft case?
PeopleSoft is a matter that is very different from all the other situations
you read about. There are no financial statement issues, no re-statement issues,
no share and loss issues…… What the SEC is alleging is that E &
Y lacked independence because our consulting division helped install Peoplesoft
systems. And that is something that our consulting department says it is a matter
that the SEC new about at the time and we´re optimistic it will be resolving.
–In corporate America – and elsewhere – nobody today believes in balance
statements even if they have been revised and approved by the most prestigious
auditing firms. Trust was lost because of lack of transparency and lack of security.
Those are the three pillars on which modern capitalism rests; how can they be
restored?
It is without question that trust and confidence have been lost,. Not just
in companies but in the directors, in audit committes and in the audit firm.
I think while many are desirous of having a quick, quick –.say a fast silver-bullet
solution — to restore confidence, I think there is only one way. Confidence
is going to come back when all these parties: companies, management, boards
and audit firms, all commit themselves to exceeding high quality, to unbelievable
integrity and to consistent excellent performance for the long term. What I
am very pleased with is from my discussions with all those members: companies,
audit-committed boards, management – and I can tell you E&Y is deeply committed
to the quality that is necessary in the marketplace today. You´re seeing a level
of diligence as I said earlier by all these members who were touching the financial
markets that is very positive. E&Y has always been a firm committed to quality.
Some seventeen, eighteen years ago we actually had a firmwise position, a motto
if you will: quality in everything we do . Timewise mottos change from time
to time, but the core promise never changes. We brought back the position about
quality in everything we do about two months ago and it´s interesting that today
you haven´t seen us placing advertisements or you haven´t seen us doing anything
we normally do. The issue is not about marketing. This is about who we are,
it´s about the clients we work with, it´s about all the services we deliver
and the message is for our people. It´s making sure that 110.000 of our people
around the world know everyday that quality is everything we do.
We have quality built into everything.
Now, having said that, I think it is critically important that all CEOs set
the tone in their organisation. One of the things that I think characterised
this lead up, if you will, to the problems we saw in the marketplace is that
this is a society coming off a 10- year- run of unbelievable performance in
growth, in share price growth; and I think at times like that people tend to
suspend their disbelief and I think too many CEOs and too many CFOs even in
some cases, became more focused on being chief marketers and boosting the share
price instead of being the conscience of their organization. And setting the
direction around quality and integrity so that everyone of their employees knew
what whas expected, what was right or wrong. It is, I think my most important
responsibility in Ernst & Young is to make sure that our 110.000 people
know our commitment for quality.
–Can unethical behaviour be uprooted with more stringent legislation? Congress
has just passed the Sarbanes-Oxley Act. Do you think that means a serious intent
to purify the scenario or is it just another instance of “everything changes
but nothing really changes”?
–I think that things have already changed., I don´t think they have necessarily
changed because of the Sarbanes-Oxley Act. I think they changed because auditors,
companies and audit firms all realised that we have to commit ourselves to integrity
in a way that is touchable, that is feelable, in order to accomplish the return,
and I think that it is a positive move by all the players in the financial markets
. I think we have seen and will see things change.
–On the other hand there are those who say that you can´t change behaviour
with legislation.
–Legislation was necessary; but on balance it will help if it bans the delivery
of services by our profession, which should have been banned. It also enables and
allows us the delivery of those services I mentioned earlier – tax services,
transactions services, — that enhance quality , but it allows the delivery
of those services under the watchful eye of independent audit… . So I think
it was a good piece of legislation on that dimension.
By itself it won´t create commitment to quality in organizations if the leadeship
of those organizations is not commited to it. The tone within a company will
not be set by Congress. The tone within a company is set by by the CEO and his
or her direct leader.
–And what about the creation of a body to watch the watchers, this special
body that the SEC was trying to create?
–The board you are referring to is the Public Company Accounting Oversight
Board. It is an important body, a body that I look forward to working with
this profession and see that it oversees our profession because I think there´s
significant work to be done and I´m looking forward to the Board being
in place.
–What´s to be done in the future?
–What´s to be done if for the profession, for directors, to account of this
to be hundred percent committed to quality and integrity and to delivering that
to the marketplace consistently. It is what our firm is focused on, it is what
our firm has been focused on, it is what this profession is all about.
–Anything else you would like to add?
–I just want to let you know how pround I am of our practice here in Argentina
and the Sourthern part of South America, the Southern Cone. Jorge Verruno, the leader
here, is just great. We have combined former Ernst & Young and former Andersen
practices in six out of seven countries in the Southern Cone of this region,
and have leading practices throughout the region. Also committed to the quality
to the service that we were speaking about . I wear a couple of hats in this
firm. I wear the global chairmanship and I also wear the chairmanship for the
Americas. And I can tell you how focused the Americas is on working together
with Argentina and the rest of South America to help create and continue to
invest in practices here.
