October 31, 2002
Alcalde Magazine Runs Q&A with Professor Michael Granof
by Avrel Seale
Editor's note: This article is reprinted with permission from the November/December 2002 edition of Alcalde, the Texas Exes' bimonthly magazine for friends and alumni of The University of Texas at Austin.
Michael Granof freely admits that the collapse of Enron and subsequent implosion of Arthur Andersen is the best thing that ever happened to him.
As the Ernst & Young Distinguished Centennial Professor of Accounting and the author of four accounting text books, he certainly was no slouch before what he calls "Enron/Andersen." But for the last nine months, the professor has been in near constant demand. He has written two op-ed pieces for the New York Times, one for the Los Angeles Times, which led to his appearances on MSNBC and CNNfn. In May, he went to Paris for five days to give an Enron talk to a think tank that is the equivalent to the French Council on Foreign Relations. The day he got back he left to give another talk on Enron in Colorado. He says he now spends at least two hours a week with reporters discussing the accounting scandals of 2001-02. Our hour came on August 28.
Granof grew up in a middle-class Jewish neighborhood in the shadow of Yankee Stadium. He says, with the diction of Mayor Giuliani and a slight stutter, "in a sense, I represent the American dream." In his 20s, his father emigrated from the Ukraine in the early 1920s, speaking no English. He delivered newspapers in New York City and went to night school at City College, eventually becoming a CPA who worked into his 80s. His mother also emigrated from Russia, but as a girl, and went on to teach school. "Between the two of them, I got my appreciation for accounting and my appreciation for teaching," he says, adding, "My brother and I have had the most fantastic opportunities. We went to the best of colleges and universities. We could have done anything. We were limited only by our abilities."
But it wasn't as if he wanted to follow in his father's footsteps. "The irony of it was that I certainly would not have wanted his type of practice [an independent practice]. He worked extremely hard and that sort of lifestyle certainly had no appeal." Granof went to Hamilton, a small liberal arts college in upstate New York, and studied economics. "When I graduated, I wasn't sure what I wanted to do, so business school seemed like a good opportunity. And what do you study in business? I thought that accounting had the best opportunities." After he got his MBA from Columbia, he still didn't know what he wanted to do, so, after a one-year stint in the Coast Guard Reserve in Baltimore (mostly aboard a docked ship), he figured he'd give in and try accounting. "It's a nice profession to leave because you can do whatever you want," he says. Granof went to work for the CPA firm Lybrand, Russ Brothers & Montgomery, now PricewaterhouseCoopers. "I enjoyed working there, but what I found I really enjoyed was reading the accounting literature. And I always thought I might like to teach."
The moment of truth came while stuck during his daily commute. "Every day that train would get stuck between 42nd Street and Wall Street, and it was hot as could be. And I was thinking, 'There's got to be a better way to live than this.' That's when I decided to go into teaching."
He got his PhD at Michigan and almost immediately was recruited to Texas, in 1972. At last, teaching seems to have been the right choice: He is a member of UT's Academy of Distinguished Teachers and is the winner of several McCombs School teaching awards. As his specialty is governmental and non-profit accounting, he also teaches at the LBJ School of Public Affairs. His wife, Dena Granof, is a lecturer in the Department of Communication Sciences and Disorders.
On the first day of the fall semester, virtually every swivel seat in his 8 o'clock financial accounting class is filled with an MBA student. After a gracious welcome and a 20-minute review of the syllabus, office hours, etc., he pauses and steps into the middle of the classroom. Every student has brought his or her name card that now faces the professor. He chooses his victim. "Mr. Baker," he reads, his voice modulating up dramatically. "Would you say that accounting is a pretty straight-forward enterprise?" And, like a prosecutor cross-examining a hostile witness, he leads, perhaps bullies, Mr. Baker into making assertions about accounting that he then spends the next hour tearing down. Calling on one student after another in a highly adversarial, highly entertaining Socratic dialogue, it becomes clear that what they have signed up for is an ethics class that uses numbers instead of words. "I enjoy the teaching more than anything else," he says.
In 1978, he took this act to Hebrew University in Jerusalem as a Fulbright professor. Since 1983, he has been an Erskine Professor at the University of Canterbury in Christchurch, New Zealand, and since 1989, a visiting professor at the Helsinki School of Economics and Business Administration.
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His books include How to Cost Your Labor (1973), Financial Accounting: Principles and Issues (1977), Accounting for Managers and Investors (1983), and Government and Not-for-Profit Accounting (1998).
With the afternoon sun streaming through his window that overlooks the rest of the McCombs School of Business and classical music playing low on his desk radio, the subway line between 42nd and Wall Street seems like a long way off...
First, how glad are you that you're the Ernst & Young Distinguished Centennial Professor in Accounting and not the Arthur Andersen Distinguished Centennial Professor in Accounting?
Very glad! I kid my colleague across the hall, who is the Arthur Andersen professor [Robert Freeman]. He's taken a lot of kidding from people at his country club.
Can you remember another time when the field of accounting was so scrutinized?
Oh, no. Absolutely not. When I started in accounting, if there was ever a mention of accounting in a newspaper or a magazine, radio, or TV, everyone knew about it. If it was an article, we would pass it around. Any kind of mention. If you had ever told us that there would be a time when accounting would be on the front page of every paper in the country, including small-town rural papers, day after day for virtually six or nine months, we would have never believed it. Of course, 30 years ago, we would have loved some kind of publicity. And the message is, be very careful what you wish for.
Historically, have there ever been accounting scandals of this magnitude before?
Absolutely not. We talked about some accounting scandals from the 1930s, '60s, or '70s; they're trivial compared to today. Unquestionably, Enron/Andersen, defined in its broader sense to include the other corporations, is the most cataclysmic event that the accounting profession has ever faced.
What is the importance of accounting?
The capital markets could not operate without financial information. It's the role of the accounting profession to provide that information and to assure that it's credible information.
Most lay people, until recently, probably thought that accounting was just math, and that it was black and white. Where does the interpretation or the creativity in accounting come in?
Accounting clearly requires any number of estimates, assumptions, and choices among accounting principles. That's the very nature of accounting. So that does create a gray area of judgment. It's true that the books have to balance. Assets have to equal liabilities plus owner's equity. If the accounting equation is out of balance, you know there's an error. But being in balance is a necessary but hardly sufficient condition for accounting statements to be reliable and credible.
The question on everyone's mind is not only, how many more Enrons could there be, but how many more Andersens. Are the other, now, Big Four thinking, there, but for the grace of God, go I?
Several months ago, that's what I was saying. I'm not sure that's true, though. What events subsequent to Andersen have revealed, is that there was something in the culture of Arthur Andersen that allowed for this many massive failures. That's not to say that the other firms can come to the table with perfectly clean hands. But you're not going to find the same meltdown that you did at Andersen.
The culture at Andersen wasn't terribly different than that at other firms, it's just that they were all the way to one end of the curve.
What accounts for that culture?
When I came to Texas 30 years ago, a sense of responsibility to investors and to society was inculcated into every new accountant. We were told: "Your client is not the party that pays you; your clients are the readers of the financial statements, and you are responsible to them." This was told to us in speech after speech. When the leading partners of the CPA firms came to the University, that's what they emphasized in their talks. Over the years we've seen a change. Starting maybe 20 years ago, when the senior partners came to speak to our students, they talked about how successful their firms were, what sort of market share they had in particular industries. Then, as time evolved, they talked about how much money their firms made, and how well their partners were compensated. It's a major shift in emphasis. Two years ago, for example, the CEO of one of the Big Five firms came, and he said, "Greed is good." In case one missed it the first time, he said it a second time, with no sense of irony that those were the words of Gordon Gekko in [the movie] Wall Street. And I think that's what accounting evolved to. There was a focus on making money. In fact, if you go to the home pages of the major firms, you won't even find the term CPA. They talk about "financial service professionals" or whatever. They've become an industry, not a profession. They've lost the sense of professionalism. That was a major change in the culture.
What exactly happened at Andersen? Does it just take one bad high-profile job to take a giant firm down?
With Andersen, it turned out that there was more than one high-profile client. What differentiated Arthur Andersen from the other firms was that the consulting division split off. And as a consequence, the remaining auditors were under tremendous pressure, not only to boost audit profits, but to develop a new consulting division as well. I think that's what led to lax auditing.
So was it a sort of conflict of interest within Andersen?
I would characterize it as a desire to increase profitability as rapidly as possible, to get rich quick. They had to recover from this major split. The auditing arm hoped to recover several billion dollars from the consulting arm, which split off. That never happened; they got virtually nothing. They were disappointed, and that put tremendous pressure on them to increase profit.
I've heard it said that as far as annual audits go, a firm really has only "one whack" at the books, and that's the first year that they take over an account, and that every subsequent year, they can't come down hard on the books because they'd be slamming their own work. How do you get past that?
That is a problem. And that obviously discourages firms from correcting their own errors. Notice how that's changed though. This year, of course, you find firms tripping over themselves to correct the errors of the past.
Has this led to a greater turnover in auditors?
Obviously, you have one of the Big Five firms being eliminated, so there's been a major reallocation of the accounting resources. But the audit, in a sense, doesn't provide very much information to a well-managed company. An auditor reassures outsiders that the statements fairly present the results of operation and the financial position of the company. The result is, an audit doesn't add very much value to the company itself. One Big Four/Big Five auditor, assuming he has an impeccable reputation, is as good as any other. When consulting became more profitable, auditors were under tremendous pressure to do two things: One was to sell consulting services, and the other was to add value to the audit. Now, what do you do when you add value to an audit? In effect, you add some kind of consulting service under the guise or the name of auditing. Combine the two, and the auditors were no longer independent. That's one of the causes of the problems today, a loss of independence.
Another way of adding value might be to give turn-of-head approval of improprieties so that you'd be retained again next year. It wasn't so much not noting impropriety.
As I said, there are all sorts of accounting judgments that are involved. Rather, it's hard to go into a CEO or chief financial officer's office and say, "You know, I really disagree with the way you want to account for that transaction. And, by the way, would you like to purchase some additional services from us?"
Why did they split?
Prior to the 1970s, the then-Big Eight firms were primarily audit firms. They also did tax work and did some consulting, but consulting wasn't the driving force in the firms. Then, in the 1970s, computers were introduced and that gave the firms tremendous opportunities for consulting, and consulting became extraordinarily profitable relative to auditing. And the consultants wanted a greater share of the firm's pie. And that's what led to the split.
People have an idea of what accounting and auditing are, but 'consulting' is so vague. What is 'consulting' in this context?
Consulting could be any time when you give some advice or service to firms. In accounting, it's virtually any advice other than auditing or tax advice. On the one hand it could mean very strategic advice, when you sit down with the president and help him develop a long-range strategic plan. But that's a relatively small portion of it. The major part of it is helping firms to install and implement accounting systems of one sort or another. Much of it today is data-processing oriented. Arthur Andersen was known for doing turnkey projects where they virtually installed an accounting or related system for a client. Hardware, software, the whole thing.
What responsibility does the government bear for the accounting scandals?
A great deal, especially with respect to accounting principles. Accounting standards in this country are set by the Financial Accounting Standards Board. It is an independent board under the aegis of the Financial Accounting Foundation, which funds the FASB and receives its funds from book sales, publications, and private contributions, mainly from corporations and CPA firms. The SEC has the authority to set accounting principles, no question about it. But it has delegated that responsibility to this independent board. Over the years, though, Congress has put pressure on the FASB to back away from pronouncements that they've issued. As a result, financial accounting standards have not been as rigorous as they should have been. And the congressional pressure, I might add, has been bipartisan. It's gone from Senator Lieberman through the political spectrum to Senator Gramm.
Why has Congress done that?
Congress represents the interests of their constituents, especially those constituents that make major contributions to their campaign funds.
What action has Congress taken since all of these scandals have surfaced?
As you know, Congress has held all sorts of hearings. From an accounting standpoint, those hearings were clearly an embarrassment to the accounting profession. I think they were also an embarrassment to Congress. Never have we heard congressmen pontificate as they did. In many instances, they demonstrated not only complete ignorance of accounting and business practices, but also considerable hypocrisy.
Has the department here seen any fallout yet over the scandals, as in enrollment?
It's too early to tell. Our accounting enrollment has held up very well. In large part it's because we've adapted to changing conditions. But also I think it's our reputation. You know, we are recognized in certain polls as being the No. 1 program in the country, and that means we're less subject to economic or sociological changes than other schools. And we have made considerable improvements in our programs over the years.
To what do you attribute those high rankings?
The faculty that preceded me were nationally known. When I arrived here 30 years ago, we clearly had one of the top accounting programs in the country. When you have a solid reputation you can just build on it. The younger faculty we have now are just terrific. They're among the best in the country.
Nationally, there's been a major decline in accounting enrollments. I would think that the latest scandals will only make the situation worse in the short-run. But there's a certain irony in all of this, because what these scandals have demonstrated is the importance of accounting, the need for more accounting, and the need for more auditing. That means that this is a great profession for people to go into now. If they can get by the kidding from their peers, they'd be making a wise choice to major in accounting now.
The word 'reputation,' when talking about this department, makes me think of the profession in general, because isn't it true that that's all a firm has?
That's right, and that's what Andersen lost.
How have -- or how will -- the scandals affect the way you teach?
Tomorrow's the first day of class, and I'm a little apprehensive, because it's a new ballgame out there. Up until last year, I had a shtick. I could predict how things are going to go. This year it's totally different. I don't know what's going to happen. On the first day of class, I used to come into the room, and my goal was to make students a little bit skeptical of accounting numbers. They came in thinking that accounting is math. It's exact, it's correct, that if you get the numbers to balance that that's it. I try to disabuse them of that notion. Indeed, that's the theme of my course. Tomorrow I'm going to face 140 MBAs who are going to be cynical as can be toward accounting. So my role is reversed now. I have to convince them that accounting information can be credible, can be reliable, that accountants are neither incompetents nor are they corrupt.
Our department has been doing for many years many of the things that people have recommended. A major concern articulated in the last few months is that accounting departments are teaching people a bunch of rules but they're not teaching them principles. That's not our department at all. We have over the years emphasized understanding of principles. We don't have a rules-based curriculum. In many of our courses we try to make sure the students know how to get an answer, not what the answer is. So we train them in research techniques, not in memorizing a bunch of accounting standards.
Because standards are always changing, right?
It's not only that they're changing, but there is such a massive amount of them that nobody could hope to be familiar with them.
What's the public's biggest misconception about accountants?
People may have thought of us as lacking in personality, or as being totally humorless, but at least they thought we were sound, we were honest. Dull as dishwater, for sure, but incorruptible. Enron, et al., has changed all that. Now we've got to convince the public that there were a few -- many -- bad apples, but the profession itself has people of high integrity for the most part. Some of us have exercised terrible judgment in the past, but we're capable of reform.
How did you decide to come to Texas?
I was very impressed with the balance at Texas at that time between research and professional activities. I accepted a job here thinking I'd be here only a couple of years. My wife's from New Jersey, and I met her at Michigan. We loved Ann Arbor. We said, if we ever get the opportunity to go back to Ann Arbor, we're gone. We were here about a year and a half, and I got a call from the chairman of the accounting department at Michigan asking if I'd like to come as a visiting professor, but he made it clear that if it worked out it would be a permanent appointment. We just agonized over that for a weekend and finally decided that the future lies in Texas rather than in Michigan. The University and the community have been very, very good to us. We've never regretted coming down here.
Why did you think the future was here rather than there?
Because there's no question that the economy was moving southward, that Texas, the Third Coast, was the place to be. That's where the dynamism was, whereas Michigan was the Rust Belt. I think we were half right, in that Texas has changed entirely in 30 years. You go back to Michigan, it's still pretty much the same. The part we were probably not right on is that Michigan has become a top-notch public university, and who could have predicted that?
What did you see yourself growing up to be?
Depends on what age. After it was made clear to me that I wasn't going to be a basketball player (laughs), I was never sure. When I went to college, I didn't have any idea of what I wanted to be. Maybe a lawyer. At one point I wanted to be an economist, a philosopher.
So you always had white-collar aspirations.
Definitely. In the last two years, my sixth-grade class has become very close over the Internet [P.S. 114 in the Bronx]. And it's very interesting to see what has happened to everyone. Of that class of 25 or so, I'd say the majority have either MDs or PhDs. Most are in one profession or another.
Why do you think that is?
First, at that time, they used to segregate kids by I.Q., so they had class 6.1, 6.2, so it was selected to begin with. But it was all a very middle-class Jewish neighborhood. Why so many of them go into academics or the professions is because, when you think about it, there were really few other realistic choices. They could go into business, but business at that time for the most part meant small businesses -- ma-and-pa stores. There were still considerable vestiges of discrimination at that time, or at least that was the view -- that you couldn't get a job at a bank or an insurance company or one of the big manufacturers. So what was left then? It was the professions or academe.
When you're not teaching or talking about Enron/Andersen, what do you do?
I jog a good bit. My wife and I went on a seven-day bicycle trip in Holland. And last weekend, I did something absolutely insane. We went to Wichita Falls, and I bicycled in the Hotter Than Hell 100. It was 108 when I finished. The good riders do 100 miles in four hours and finish when it's 90 degrees. I'm lucky if I finish in the middle of the afternoon!
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