Anthony Menendez, CPA, CFE is the recipient of the 2017 Accounting Exemplar Award of the Public Interest Section of the American Accounting Association (AAA). As a follow-up to his appearance at the 2017 AAA Ethics Symposium in San Diego, we asked Anthony to respond to four questions.
<1> For the benefit of our readers who didn’t attend our Symposium, how would you describe your career experience at Halliburton?
In 2005, during my interview with Halliburton’s Chief Accounting Officer (CAO), he appeared to appreciate the importance of Sarbanes-Oxley (SOX) and the challenges facing the profession. He told me he wanted to hire “Smokey the Bear” to prevent accounting fires. However, by the time I got there, Halliburton was already engulfed in flames.
Halliburton accountants were ignorantly violating one of the most basic accounting principles, that you should not recognize any revenue before you actually deliver a product to your customer. This was a stunning revelation because bill-and-hold transactions are widely recognized as wrong and venal and have been perennial triggers for SEC enforcement actions.
I elevated the problem throughout the organization. My boss, the CAO, told me that the company was going to correct the problem and “get the company back within the lines of what is appropriate”. However, the magnitude of the error soon became apparent and a correction would have required a costly and embarrassing restatement of the company’s historical financial statements.
So what happened? Instead of correcting the problem, Halliburton and its external auditors went to extraordinary lengths to cover up their failures. At the height of the cover up, the external audit senior manager told me to “save it for the subpoena.” I told him that I could not do that and I “blew the whistle” to the SEC.
I spent the next ten years fighting for my dignity and my rights under the whistleblower protection provisions of SOX. In 2015, I finally prevailed in the Fifth Circuit Court of Appeals, and my case has had a significant positive impact on that body of law, lowering the legal burdens facing corporate whistleblowers.
<2> Are you optimistic about the future of our profession?
I worry about the value of the audit today and the future of our profession. Congress mandated independent audits of public companies back in 1933 because members of the investing public were scammed out of their life savings, resulting in a catastrophe that helped usher in the Great Depression. At the turn of the millennium, the highly publicized financial scandals and the loss of public confidence in our profession forced Congress to reexamine the public company audit process. As a result, SOX was signed into law in 2002.
I believe that the public gave the profession a lifeline in the form of SOX. However, the 2008 financial crisis and the ensuing Great Recession gave the public little reason to believe that the current model is working well. As a profession, we need to evolve in an effort to serve the public interest. If we fail to do so, the public might decide that they don’t need private firms to provide public company audits.
<3> What role should our profession play in protecting the public interest?
Our profession exists to serve the public interest. It does not exist to serve public accounting firms’ own interests or the firms’ client interests. We are not Certified Professional Accountants. We are Certified Public Accountants, and that designation should only exist if we are serving the public interest.
<4> How well are we fulfilling that role?
Don’t get me wrong. There are many good CPAs out there, doing the right thing. But as a profession, we are not fulfilling the role of the public watchdog.
I see two obvious problems for our profession that need to be addressed. First, in the age of big data, predictive analytics, and social media, the audit report provides little to no value from an information standpoint. Second, the public expects external audits to identify and report financial statement fraud. I believe the so called “expectation gap” between what the public expects and what the profession provides should not exist.
Investors want to have assurance regarding the integrity of management and the reliability of the information that is provided by management. However, studies continue to highlight that the external audit is one of the least likely processes to help investors learn about financial statement fraud.
For example, the Association of Certified Fraud Examiners estimates that external audits report only 3% of all known fraud cases. And the PCAOB estimates that external audits are notoriously bad, producing an audit deficiency rate of 35% to 40%.
These findings must be considered in light of another recent survey result. CFOs have estimated that nearly 20% of companies manipulate their earnings by an average of 10%. These are truly shocking and disturbing statistics.
What do I believe is happening? Often, auditors don’t know of the existence of problems, or they don’t report them. Personally, I’m not confident that the profession can (or should) survive another wave of financial scandals. That is why, as a profession, we need to reexamine and challenge what we do and how we do it.