Creative Accounting?
When it comes to thinking outside the box, teacher, researcher and auditing expert
Kinney sets the standard.
By Dorothy Brady
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As a freshman at Oklahoma State University in 1959, Bill Kinney wasn’t showing much promise as an architecture student. Perplexed by his less-than-stellar performance, he took vocational aptitude tests, with telling results—he was color-blind and scored low on visual creativity. A guidance counselor told the despairing lad not to worry—there was a major that, color-wise, required only the ability to differentiate red ink from black, and in which lack of creativity was considered a virtue.
“Next term, I switched to accounting and have been there eversince,” Kinney laughs.
Today, Kinney, the Charles and Elizabeth Prothro Regents Chair in Business at the McCombs School, is one of the leading auditing experts in the world, serving as an advisor to the Securities and Exchange Commission (SEC) and the International Auditing and Assurance Standards Board (IAASB). Though he is grateful for that long-ago career insight, Kinney says his experience as a teacher, researcher and standard-setter has proven his college counselor wrong on one important point: “Creativity is a key ingredient for seeking to understand the important, subtle and complex business of public accounting,” he says.
New legislation, a new way of thinking
A societal crisis can provoke federal legislation in any area—including the world of auditing. Passed in 2002 following the collapses of Enron and WorldCom, the Sarbanes-Oxley Act (SOX) dramatically changed Kinney’s thinking about the auditing world. “Before, the auditing business was largely driven by market forces and by the profession itself,” he says. “But since 2002, the primacy of the political process is apparent.”
SOX created an independent body, the Public Company Accounting Oversight Board (PCAOB), to regulate key aspects of the auditing profession and established an important role for auditors in corporate governance. The law also mandates that public companies have their financial internal controls audited—irrespective of whether such audits are cost effective.
The legislation also has implications for the classroom. “SOX gives me more influence as a professor because I am now, in part, teaching federal law—not just nice things to do if you are an auditor,” Kinney says, a little cheekily. “On the other hand, if highly regulated auditors don’t add value in the longer term, then the political process will again demand change.” He feels an obligation to teach his students to question existing laws and professional rules, and to be advocates for changes in real world audits that will add more value than cost.
From SOX to the SEC
It was Kinney’s own desire to discover how best to implement SOX and balance the costs and benefits of auditing that led him to Washington, D.C. Through an academic fellowship with the SEC from September 2007 through February 2008, Kinney will help the SEC identify the best ways for it to oversee and conduct independent audits within the structure of U.S. laws.
“His expertise will be invaluable to the process,” says Zoe-Vonna Palmrose, deputy chief accountant at the SEC. “Professor Kinney has written and spoken about many of the public policy issues we work with day to day in the professional practice group in the Office of the Chief Accountant,” she says. “Needless to say, we are very pleased to have him join us.”
One question Kinney will surely encounter is how to manage the cost of auditing. While financial misrepresentations due to accidental error or intentional fraud are expensive, audits are also costly. “The regulatory and standards-setting challenge is how to develop the right policies for auditors to follow to protect investors and to facilitate capital formation in the U.S., while being mindful of costs imposed,” he says.
Kinney notes that while huge, the powers of the SEC and Congress are limited by competition from Europe, Asia and other regions. “The global marketplace for securities and corporate governance demands that companies report useful information that is verified by a competent and trusted third party,” Kinney says. “But the American way of government-prescribed practices isn’t the only way to do that.”
For example, in comparison with the hard and fast auditing legislation in the United States, European rules are, on the whole, flexible and voluntary. “There is some structure from government, but there is also a larger role for market forces—including investors, managers and professional practitioners of auditing—in trying to figure out the best rules of accounting and the best practices of auditing,” Kinney says.
No matter the means, in the end, he says, the public must be served.
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