2005 Lyceum Speaker Series: Integrity

November 15, 2005
SEC Deputy Chief Accountant Says PCAOB and Corporate Boards Can Restore Faith in Accounting
by Kate McCann

Andrew Bailey, deputy chief accountant of the U.S. Securities and Exchange Commission, believes it is not easy for the public to forget a corporation’s poor behavior. After the downfalls of Enron and WorldCom, he recognized that “we are in a delicate situation and it wouldn’t take much to be pushed back into the WorldCom days.”

At the last installment of the 2005 Lyceum Speaker Series Nov. 9, Bailey said the effects of the Enron and WorldCom scandals are still being felt, even outside of the accounting profession. “Those revelations caused the public to lose trust in the accounting profession and the markets to go to hell,” he said.

If trust can be sustained by good behavior on a regular basis, why shouldn’t we be more confident in our business leaders, considering that the vast majority seem to behave well? The problem is that accounting only gets negative attention, and good work usually goes unappreciated, Bailey said.

“How do we communicate that the industry is getting better if the public doesn’t see the evidence of the 90 percent that are doing well?” Bailey asked. “Instead, they see the companies without effective internal control.”

Bailey believes that the newly established Public Company Accounting Oversight Board (PCAOB) may be able to restore public trust because it has a different role than the SEC. “The SEC doesn’t hunt; we sit in the blind waiting for someone to walk by,” Bailey said. “When something comes up, we apply all of the rules.” But the PCAOB, established by the Sarbanes-Oxley Act, takes an active role, inspects auditor performance and goes out on a hunt for the bad seeds.

Baily also suggested that to improve public perceptions of the accounting profession, corporate boards of directors should be the first line of defense against fraud, since they hire, fire and remunerate management. Boards should protect the public and their shareholders by taking on the responsibility of searching for unethical behavior, he said. Directors may assess which cases appear to be of high risk, and keep a close watch on them, which would increase the probability of finding problems.

Notable Soundbites

On the importance of good corporate government:  “This is a disclosure-oriented issue. Companies must understand, ‘do what you want, but disclose your actions.’”

On the auditing process:
“Managers prepare the statements, and if they did their jobs, we wouldn’t need the rest of the system. But, since they have incentives, we have the semi-independent boards and audit committees who have a level of conflict with the managers and different incentives. Finally, there are the independent accountants and auditors, who are meant to add trust to the system.”