I spent more than an hour with PricewaterhouseCoopers chairman Dennis Nally on Thursday, and I’m still trying to understand what he said.
This may be important because PwC is the biggest of the Big 4 accounting firms. But one of the biggest problems with accounting is trying to understand what the accountants are saying.
Nally, for starters, told me it was a mistake for the feds to shut down Arthur Andersen in 2002 after the Enron debacle. This “mistake” eliminated PwC’s largest competitor. But at what cost to the overall capital markets?
Large companies today have fewer accounting and auditing choices. This is a problem, Nally said, because what accounting firms care most about is serving capital markets.
I scratched my head. Who cares about an abstraction like “serving capital markets”? Isn’t making ungodly sums of money with an oligarchy of only four firms instead of five a pretty good gig?
Nally was in town to speak to the Denver Forum, a monthly luncheon designed to educate people on national issues.
His public-relations folks invited me to meet him in the presidential suite of the historic Oxford Hotel in Lower Downtown. He sat in a puffy leather chair and wore a starched white shirt with a monogram on the pocket. His gold cuff links were engraved with the logo of his firm.
A rash of corporate scandals has led to myriad new regulations, he said. Companies are spending big money to comply with the 2002 Sarbanes-Oxley Act.
That act – designed to prevent accounting abuses like those that occurred at Enron, WorldCom, Tyco and Qwest – is raising the ire of the U.S. Chamber of Commerce and other business groups, which say it is too onerous. And it may be, but it has also resulted in boom times for the accounting industry. So I’m confused as to why Nally would make it an issue.
Is he just trying to mollify his clients who are frustrated with the higher tab?
Nally said he is concerned that companies are overwhelmed with a “rules- based mentality” that spends too much time on compliance and not enough on strategic business decisions. He would prefer a mentality based on “principles.”
“In focusing so much on being in compliance with all of those rules, are we potentially missing the big picture here?” Nally asked.
In a recent study done by PwC and Corporate Board Member magazine, only 8 percent of corporate directors said their boards should spend more time on compliance and regulatory matters. By contrast, 58 percent said their boards should spend more time on strategic planning.
So should we get rid of the rules?
“I would argue that Sarbanes-Oxley is actually good,” Nally said.
This is where I got confused again.
Nally doesn’t want to get rid of the rules, but he thinks there are too many and says we should focus on principles.
When I got back to the office, I looked up the word “rule” in an online dictionary. It’s defined as “a prescribed guide for conduct or action.” Then I looked up the word “principle.” It said “a rule or code of conduct.”
Hmmm. Are the Ten Commandments rules or principles? Nally says they are principles. Anyone beg to differ?
“This is all rhetoric,” said Lynn Turner, formerly the chief accountant of the U.S. Securities and Exchange Commission who now works for investor advisory firm Glass, Lewis & Co. in Broomfield. “Whether principles or detailed rules, companies and their auditors have failed to follow either type of guidelines.”
PwC, like other Big 4 accounting firms, has had its share of audit failures. It served as auditor for companies that paid hundreds of millions of dollars to settle shareholder lawsuits alleging fraud – most notably a $673.4 million settlement involving Lucent and a $535 million settlement involving Raytheon.
“In any large organization … you are going to have individuals who do the wrong thing,” said Nally, speaking generally. “What kind of actions do you take when those kinds of issues surface?”
That, Nally says, is what he means by principles. I’m still confused. If accounting firms and some of their clients had followed principles in the past, wouldn’t they be faced with fewer rules today?
Al Lewis’ column appears Sunday, Tuesday and Friday. Respond to Lewis at , 303-820-1967, or alewis@denverpost.com.
