The Future of Auditing

Last week, our contributing columnist Steven Mintz led off our three part series on audit quality by addressing the topic of mandatory audit rotation. This week, our columnist Sri Ramamoorti continues the conversation by discussing the Expectation Gap, the Information Gap, the need for non-GAAP measures, and the future of auditor education.

We acknowledge, and thank, The CPA Journal’s Editor In Chief Richard (Rick) Kravitz for permitting us to repurpose and reposition content that originally appeared in the February 2017 edition of his publication. The material appeared in an article entitled The Future of Auditing: A Roundtable Discussion; it is available online in its entirety.

Rick is a friend of the AAA Public Interest Section. He is a frequent presenter at our meetings and symposia, and is a contributing columnist to this blog as well.

Dr. Sridhar Ramamoorti, ACA, CPA/CITP/CFF/CGMA, CIA, CFE, CFSA, CGAP, CGFM, CRMA, CRP, MAFF, is an associate professor of accounting at the University of Dayton. Previously, he was an associate professor of accounting and director of the Corporate Governance Center at the Michael J. Coles College of Business at Kennesaw State University. Dr. Ramamoorti was also a principal in the Professional Standards Group of Andersen Worldwide, Sarbanes-Oxley Advisor for Ernst & Young’s National Advisory Practices, a Corporate Governance partner with Grant Thornton, and was a principal leading the governance, risk and compliance (GRC) practice of Infogix, Inc. In December 2016, Dr. Ramamoorti completed a three-year term on the prestigious Standing Advisory Group of the Public Company Accounting Oversight Board (PCAOB).

Why are we utilizing our blog in this manner? We are showcasing our perspectives in order to generate interest in our midyear meeting. If you would like to present your own work about accounting and the public interest, please keep in mind that the manuscript submission deadline is Monday, January 14, 2019.

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Sri, in our previous blog post, our colleague Steven Mintz suggested that mandatory auditor rotation may help address certain challenges that confront the audit profession. He cites KPMG’s 109 consecutive year audit relationship with GE as one that is ripe for rotation, in light of GE’s recent travails. What do you think?

You know, the medical profession’s lament applies to us, too—that the operation was successful, but the patient died. All we are able to assure as auditors are the standards and the processes that are the inputs to the audit. But we are unable to guarantee the outcome. Yet, the first thing that happens when there is the collapse of a company, perhaps because of poor governance or a terrible business model, is that the business failure is almost immediately equated with an audit failure. And we have to live out the consequences as a profession. I think this is also going to be part of the education of the public, that we can’t be held responsible for a mistake that is being really committed by company management and their governance.

Having said that, any century-old relationship between an audit firm and its client certainly raises questions about the lack of independence in appearance. The optics aren’t good, even if the client is growing and profitable.

But don’t users of financial statements expect auditors to be held responsible for such mistakes? And if there is an expectation gap, is there also an information gap?

On this issue of the expectations gap, as far back as 1988, the MacDonald Commission in Canada very systematically broke it down into three separate gaps. One was the standards gap, another was the performance gap, and the third was the communications gap. That’s one framework.

More recently, in 2012, the International Auditing and Assurance Standards Board [IAASB] talked about the information gap. There is a lot more information than what appears in the financial statements, and hence, the recent pressure on the profession to look in some way or the other at these non-GAAP measures. They’re just proliferating, and it’s clear that there is much more that investors and other stakeholders are demanding to know. In a world that is awash with information, I think these demands have gotten only worse. Herbert Simon, a Nobel Prize winner and a polymath, said, “a wealth of information creates a poverty of attention.” Simon perceptively noted that many designers of information systems incorrectly represented the design problem as information scarcity rather than attention scarcity. We don’t have information scarcity; we have information abundance. Attention scarcity is the real issue.

He went on to say what was really needed were systems that excelled at filtering out unimportant or irrelevant information. This is going to be one of the future jobs of the auditing profession, to serve as that filter in such a way that we define relevance to our stakeholders. That really allows us to become trusted as a profession, because people don’t know what’s relevant and what’s not. We are really becoming the curators of information in terms of its underlying quality, its relevance, and providing that decision context in which stakeholders can maximally use that information. The recent proliferation of non-GAAP measures, potentially more relevant but perhaps less reliable, is highlighting this perspective. In a way, I am merely expanding on what the AICPA’s Elliott Committee concluded in its 1996 Report.

It sounds like you’re calling for the development of Integrated Reports that include both GAAP and non-GAAP measures. Are we adequately educating auditors to perform assurance activities on such reports? Or do we need to modify our education practices in creative ways?

I’ve always wondered why ours is probably the only discipline—I won’t say profession—in which the word “creative” is a bad word. Creative accounting is not a bad thing. After all, as Albert Einstein famously remarked, “Imagination is more important than knowledge.”

H. G. Wells maintained that it is nature’s inexorable imperative that you either adapt or perish. One may choose not to change, however, because survival is not mandatory. Given all the change that we’re seeing, if we remain in the status quo, we’re finished. We have to be grabbing at these opportunities to become more relevant in a fast-changing world.

In my opinion, we are facing a human capital crisis in the accounting profession. However, the problem is not with the young people who are entering the profession. They are actually very smart. There are these very advanced and sophisticated technologies that are really putting the lie to what used to be big problems. They can be solved, but you’ve got to be creative. And you need to master some of these new technologies.

For instance, let’s think about the classic problem of finding a needle in a haystack. Pretty difficult, isn’t it? And yet, some of our young professionals might suggest that we wave an industrial grade magnet over the stack, and the needle will simply jump up.

To me, the need for being creative is fulfilled by having a diversity of experience, curiosity, and the ability to learn continuously. These are the kind of people we’re looking for, and the profession should be able to attract them. The worst type of auditor we could have in today’s world is the gullible auditor. We want the skeptical auditors who will not accept answers at face value. They’re always going to dig deeper. We want to attract these kinds of insatiably curious kids into our profession.

I think it’s going to require a different skill set, a different kind of ability among young people. I’m not sure we want the types of students who did really well only in accounting, as in the olden days.

Are we, as a profession, up to this challenge?

We started by talking about the past, the present, and the future. And that progression, to me, gives us the opportunity to use hindsight to get insight, which hopefully will allow us to get foresight.

Sigmund Koch, a very famous and distinguished professor of psychology at New York University, in 1985 observed that the mark of maturity of a profession is its ability to do soul-searching. And so the fact that we are doing this kind of [discussion] is itself evidence that this is a profession that has that capacity, that is willing to look at itself critically. The profession is a prestigious one with a glorious history. You cannot have true accountability without proper accounting, so I have tremendous hope for the future.

Should Auditors Rotate Every 109 Years?

Independence. Integrity. Objectivity. Professional skepticism. These concepts are bedrock principles of audit quality.

As audit failures continue to plague the accounting profession, the Contributing Columnists of the AAA Public Interest Section offer different perspectives about preserving these principles.

During the next few weeks, a number of our Columnists will present an online conversation about this critical issue. Steven Mintz will kick off our series (below) by addressing GE’s recent travails while raising the suggestion of auditor rotation. Sri Ramamoorti, Michael Kraten, and others will then approach the issue from different directions.

Why are we utilizing our blog in this manner? We are showcasing our perspectives in order to generate interest in our midyear meeting. If you would like to present your own work about accounting and the public interest, please keep in mind that the manuscript submission deadline is Monday, January 14, 2019.

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We are delighted to publish this “opinion piece” by Dr. Steven Mintz, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

A new rule adopted by the U.S. Securities and Exchange Commission requires disclosure of the tenure of a public company’s external auditor in the annual report. KPMG recently reported that it has audited GE since 1909. This raises the question whether there should be mandatory audit firm rotation after some period of service. Right now, other than the tenure disclosure, there are no requirements for mandatory audit firm rotation.

The fact that KPMG has audited GE for 109 years is coming under greater scrutiny, given that the SEC disclosed on January 24, 2018 that it was beginning an investigation of the company’s accounting practices. The regulators are investigating a $6.2 billion insurance loss from GE Capital, the troubled financial service business that the company is trying to wind down.

The SEC is also looking into “revenue recognition and controls” for the company’s long-term service agreements including insurance reserves. GE restated its 2016 and 2017 quarterly numbers to reflect new accounting standards. The company lost $9.8 billion in a single recent quarter. With the company’s stock down more than 40 percent during a recent twelve month period, the uncertainty of the accounting investigation raises troubling questions.

The obvious question is: Where were the auditors during the accounting scandals? The answer is: Nowhere To Be Found. In fact, two shareholder watchdog groups – Glass-Lewis and Institutional Shareholder Services — urged shareholders not to ratify KPMG as GE’s auditor at the company’s annual shareholders meeting last April. GE shareholders approved KPMG for another year, but only after overcoming substantial opposition in the wake of GE’s accounting issues. Only 65 percent of shareholders supported GE, an historically low percentage of support. Last year 94 percent of shareholders supported GE.

Let’s examine the potential costs and benefits of auditor rotation. The costs should be obvious. There is a learning curve during which time the audit may not be as efficient and increase the costs to the client. Moreover, a relationship of trust between the audit firm and client builds up over several years and any forced rotation may make it more difficult to build trust simply because of the lesser passage of time. In that regard, GE defended its decision to stick with KPMG, noting that the benefits of a “long-tenured auditor” include “deep expertise” and “familiarity” with the company’s vast business empire. GE also highlighted “independence controls” on KPMG, including “thorough” oversight from the board’s audit committee and requirements that the lead partner be rotated every five years.*

The benefits of forced rotation are subtler. After a period of service (say, 20 years), the auditors may become too complacent and close to the client, creating a familiarity threat to independence. Audit independence and objectivity may fall by the way side. And conflicts of interest may develop over time, making it more difficult for auditors to exercise professional skepticism in gathering and evaluating financial data to ensure that the financial statements do not contain any material misstatements.

The benefits of auditor rotation may also include getting a fresh look at the company’s accounting methods and financial reporting techniques. The new firm may not be biased by past audits, and may critically challenge accounting techniques that smooth net income or create earnings to meet or exceed financial analysts’ earnings consensus estimates. Glass-Lewis chimed in when it wrote to GE shareholders, saying that GE shareholders must beware that “a long-tenured auditor can become too close with a client,” while a new auditor can “uncover problems previously unidentified.”*

The accounting profession contends that the mandatory rotation of principal audit partners sufficiently protects the public interest and builds in the “fresh look” critics are looking for. The Sarbanes-Oxley Act created a five-year auditor requirement. The SEC enforces it through the Public Company Accounting Oversight Board (PCAOB). Critics contend that this is not enough, and that mandatory audit firm rotation is necessary to compensate for years of influence by audit clients over their auditors.

The key factor in evaluating the net benefits of mandatory audit firm rotation is the public interest. The problem is there hasn’t been sufficient research on this issue because the mandatory partner rotation requirement under Sarbanes-Oxley is relatively recent, and less time has gone by since the European Union first required a 10 to 20 year firm rotation.

I have a different perspective. The PCAOB conducts inspections of public company audits every year or so. Why can’t the PCAOB look at the retention issue based on noted deficiencies in audits examined? It’s true that the Board may not look at the same client each year. Still, some kind of overall evaluation of the ethics of the firms, based on audit inspections, might add value to the process of determining when audit firms should be rotated. Noted deficiencies such as a lack of independence, integrity, objectivity, and professional skepticism, the bedrocks of audit quality, should raise questions in the minds of shareholders about whether a firm should be rotated.

The presence of these factors suggests ethical failures in the audits. By making the evaluations public so that shareholders can consider them in their annual retention votes, the firms may take the noted failures more seriously. This may not be the perfect solution, but it does begin the process of holding audit firms accountable for their audits by having meaningful consequences for repeated failures in ethics, and it protects the public interest.

* Source: Matt Egan, GE pressured to fire auditor after 109 years. April 24, 2018.

Robin W. Roberts, Accounting Exemplar

Editorial Note: We are delighted to publish this interview of Professor Robin W. Roberts, our Accounting Exemplar. As always, when you read his comments, we ask that you keep in mind that the opinions expressed therein are those of Professor Roberts. They do not represent the position of the AAA or of any other party.

On Sunday, August 5th, Professor Robin W. Roberts of the University of Central Florida received the 2018 Accounting Exemplar Award during the Accounting Exemplar Luncheon held during the American Accounting Association Annual Meeting in Washington, DC.

The Public Interest Section’s Accounting Exemplar Award is given to an educator or a practitioner who has made notable contributions to the professional and ethical health of the accounting profession. The Exemplar represents a role model who has contributed to our profession in a manner that serves the public interest. Previous winners of this prestigious award have included Abe Briloff, Stuart Chase, Cynthia Cooper, Ralph Estes, Harold Langenderfer, Arthur Levitt, Eli Mason, Tony Menendez, Albert Meyer, Carl Devine, Tony Puxty, Bob Sack, Prem Sikka, and Art Wyatt.

Dr. Robin W. Roberts serves as the Al and Nancy Burnett Eminent Scholar Chair in Accounting and Pegasus Professor at the University of Central Florida (UCF). His research interests focus on accounting and business ethics, regulation, and social responsibility. Dr. Roberts serves on the Executive Council of the Center for Social and Environmental Accounting Research, which is housed at the University of St. Andrews, and is past editor of Accounting and the Public Interest. He has been instrumental in the development of the AAA Public Interest Section Emerging Scholars Colloquium and in promoting public interest scholarship in accounting.

We are delighted to publish this interview with Robin.

When you learned you were receiving the Accounting Exemplar Award, how did you react?

Pat Kelly emailed me and asked if we could talk by phone. I said of course, thinking, however, that I was about to commit to doing Pat a favor. I was so pleasantly surprised when Pat told me I was receiving the award. After finishing my talk with Pat, I called my spouse Sherron. During my call with her I got surprisingly emotional (and continue to be). The Public Interest Section has provided such a supportive and nurturing environment throughout my career. Receiving this honor is a very personal, significant career achievement for me.

I want to thank the Accounting Exemplar Award Selection Committee and my colleagues who conspired behind my back to nominate me, particularly Lisa Baudot, Charles Cho, Joseph Johnson, Pamela Roush, and Dana Wallace. And I have to give tremendous credit to my favorite colleague and life partner, Sherron. Sherron is an education professor and has been my personal teaching coach, professional advisor, and my editor for over 35 years. My career successes are due in large part to her counsel and encouragement.

How did you become interested in public interest accounting scholarship?

Like most public interest accounting scholars, my interest grew as I became more familiar with the AAA Public Interest Section and with public interest research. My original research interests were in governmental accounting and auditing, spurred in part by Dr. Michael Granof assigning our undergraduate class to read Aaron Wildavsky’s book, The Politics of the Budgetary Process. It was the very first time I found accounting really interesting.

Over time this evolved into a stronger interest in political science and in studying the politics embedded in the profession and practice of accounting. Researching and teaching accounting ethics, professionalism, and the public interest rescued me from a much more mundane and less satisfying academic career and I am grateful.

Why do you think you were chosen to receive the Accounting Exemplar award?

First, I will repeat how honored and grateful I am to receive the award. I know there are many others who have devoted significant time and effort to advancing ethics, professionalism, and the public interest in accounting. So, for one thing, I was lucky.

I view the award as a career achievement award. I don’t have a defining life episode when I faced tremendous pressure to stand up against unethical practices. I so admire our award recipients who took such personal risk to blow the whistle. Although I have published public interest accounting research, I think the award primarily reflects my interests and efforts in developing new public interest accounting scholars.

I served for 10 years as Director of the University of Central Florida’s Accounting PhD Program. Our program valued and supported doctoral students interested in public interest research. Also, I helped start the PIS Emerging Scholars Colloquium that is held in conjunction with our section’s mid-year meeting. The success of these two endeavors means the world to me.

What advice would you give to emerging public interest accounting scholars?

I believe that choosing to focus on ethics and public interest accounting research and teaching is a vocational calling. Dedicated ethics and public interest scholars are passionate, caring, and intellectually interesting people. We are the moral conscience of the accounting discipline and the accounting profession. Ethics, professionalism, and the public interest should be key aspects of our collective work as an accounting academy—in our teaching, in our research, and in our service to practice—and it is not. So, work to help these topics find their rightful place.

I will offer three pieces of advice. First, research without regret. Let your curiosity and passion drive your research program. If I had continued to study aspects of accounting that don’t resonate with me as a person, I would have failed miserably. Stand proud as an accounting researcher who cares about solving social problems such as discrimination, income inequality, access to health care, and environmental degradation.

Second, be bold in pushing the ethical envelope in your classes. Accounting is much more than a technical practice. It is a social practice that affects the lives of employees, customers, suppliers, citizens, and all living things. Bring the ethical aspects of decision-making and reporting into all of your classes. I have found students very receptive. Collectively, we can make difference, and it starts with you.

Third, become involved in the AAA Public Interest Section or another group of like-minded scholars. It is very difficult to go it alone as a public interest accounting scholar. If you become involved, you will find encouragement, support, and potential collaborators. Reach out if I can do anything to help!

KPMG Knowledge of PCAOB Inspections: A Good Business Decision or Violation of Ethics?

Editorial Note: We are delighted to publish this “opinion piece” by Dr. Steven Mintz, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

With this piece, we are launching our “Contributing Columnist” series at AAAPublicInterest.org. It is adapted from a 2018 article that appears in the CPA Journal.

We thank the New York State Society of CPAs, the publisher of The CPA Journal, for permission to publish this essay. Richard Kravitz, the Editor-In-Chief of the Journal, will join Dr. Mintz as session panelists during the AAA’s upcoming 2018 Ethics Symposium.

Recent revelations that KPMG had help in its quest to prepare for audits from the PCAOB
raises the question whether it was a good business decision to hire a former PCAOB staffer to help it determine the target of audit inspections by the PCAOB or an unethical act. I would say while it may have seemed to be a good business decision at the time, KPMG’s actions to gain access to possible PCAOB inspections was unethical because it violates the public trust. The key ethical issue is intent. The intent of KPMG was to “cheat the system” by gaining an unfair advantage. In this regard it reminds me of the Volkswagen defeat device case.

Why did KPMG do it? It is because their audit deficiency rate was the highest of all the Big Four firms. The average audit deficiency rate for the Big Four since the inception of the inspection process has ranged between 30-to-40 percent. The rate for Big-4 firms has gotten as low as 21 percent (Deloitte) and gone as high as 54 percent (KPMG). In the case of KPMG, it was determined that the firm too often failed to gather enough supporting evidence before signing off on a company’s financial statements and internal controls.

Let’s look at the indictment against KPMG’s partners. After being hired by KPMG, Brian Sweet, the former PCAOB staffer, was asked by three KPMG partners, knowing his background with the PCAOB, whether there were any plans to inspect a client of theirs. Reluctant at first to respond, David Middendorf, KPMG’s former national managing partner for audit quality and professional practice, is said to have later told Sweet to “remember where [his] paycheck came from” and “to be loyal to KPMG.” Sweet was asked about the plans again a few days later, this time by Thomas Whittle, former national partner-in-charge of inspections, who implied that his position within the firm was not secure. Sweet showed Whittle the inspection list later that day. The audit partners used this information to analyze and review audit workpapers relevant to the inspection and suggested revisions to avoid possible findings of deficiencies by the PCAOB.

A CPA’s loyalty should be to the public, not the firm. Otherwise, the public cannot trust that CPAs and their firms will act in the public interest, not those of the client or the firm.

There is an issue to consider with respect to quality controls. Quality controls relate not only to audit engagements but ethics as well. One such example is independence. Firms have quality controls to ensure their staff are independent of clients. I also believe quality controls should extend to integrity issues. KPMG’s actions lack integrity because they were unprincipled and violate the public trust. I believe KPMG’s actions border on being an act discreditable to the profession. Just imagine if all firms acted this way. The audit inspections would be relatively useless because the ethical rule that the audits selected by the PCAOB should not be known in advance by the inspected firm would be compromised.

I’m also troubled by the contingent fee issue. KPMG hired Palantir, the data analytics firm, to help it predict which of its engagements would be inspected and agreed to pay it $250,000, contingent on a certain rate of success. While contingent fees are acceptable in non-audit engagements, with certain exceptions related to tax practice, it is not unreasonable to evaluate the arrangement from a broader lens. Again, it smacks of being an act discreditable to the profession. It has elements of insider trading, in my view.

Another ethical issue is fairness. If we consider that all the other firms, including the non-Big-Four, may not have access to former PCAOB-staffers, or may have a higher ethical standard than KPMG, those firms are not being given the same opportunity to know in advance which audits might be inspected by the PCAOB. Simply stated, they are not playing on a level playing field because KPMG had a competitive advantage, albeit one based on improper actions. The result could have been that other firms wound up with a higher deficiency rate than KPMG because of its advantage and the steps it took to capitalize on it.

At the end of the day, KPMG’s actions should lead to a state board of accountancy investigation whether the firm violated its ethical commitment to standards of professional behavior and protecting the public interest.

Dr. Steven Mintz is a Professor Emeritus at Cal Poly San Luis Obispo. You are welcome to visit him at StevenMintzEthics.com.

Lise Valentine, Deputy Inspector General

Editorial Note: Dr. Lise Valentine is the Deputy Inspector General for Audit and Program Review for the City of Chicago. As a follow-up to her plenary appearance at the 2018 AAA Public Interest Section Midyear Meeting in Chicago, we asked Lise to respond to four questions.

With our Annual Meeting less than four weeks away, we hope that the quality of Dr. Valentine’s responses will remind our Section members of the value of our intellectual content. You are welcome to join us at our Section Business Meeting, at the Ethics Symposium, and at our research presentation sessions during the Annual Meeting in order to enjoy more such content.

(1) How much control do you maintain over defining your own audit and investigatory priorities? Are they strictly defined by statute and regulation? Or do you enjoy some latitude in applying resources where you believe they would do the most good?

Our jurisdiction, which is established by the Chicago Municipal Code, extends to all employees and elected officers of City of Chicago government performing their official duties, as well as contractors providing goods or services to the City. Interestingly, although City Council voted in 2016 to place itself under our jurisdiction, it limited our oversight authority—we have the power to investigate allegations of wrongdoing by aldermen and their staffs, but we may not audit their activities.

With respect to City entities under our jurisdiction, we have complete control over our audit and investigatory priorities. Our investigative staff receives and triages tips from the public, and we often open cases on the Inspector General’s own initiative. Each year we publish an audit plan identifying potential projects selected using our prioritization criteria. We thus have great freedom, but also great responsibility to apply our resources where we believe they will best promote economy, effectiveness, efficiency, and transparency in City operations.

(2) To what extent has budget pressures changed the nature of your procedures? Do you ever feel pressure to “find money,” as taxation authorities in certain jurisdictions are sometimes asked to do?

As a watchdog for the taxpayers, we take very seriously our responsibility to be good stewards of public funds. We apply the same critical eye to our own spending that we do to other departments; the sort of pressure you describe is primarily self-imposed. While we’re not a revenue-generating function, our audits and investigations often identify savings opportunities or result in restitution of City funds.

Pursuant to the Municipal Code, our annual budget is no less than 0.14% of the total City budget. This funding floor largely insulates us from budget cuts. However, we don’t have complete freedom. Our line-item budget is subject to City Council approval, and we cannot fill vacant positions without approval from the Mayor’s budget office.

(3) What kind of student should consider a career in the public sector? How can professors identify such students, and how should we encourage them to consider exploring such opportunities?

Students who are more motivated by mission than by money are the best candidates for the public sector.  While a public sector career won’t make you rich, you will generally have a reliable middle-class income and you’ll be serving the greater good. We all need and use government services—from ambulances to expressways to economic policy—and we all pay taxes. So, proper accounting for these expenditures and revenues, and their accurate reporting, is in everyone’s interest.

All levels of government need accounting and finance experts who will safeguard our shared public assets and promote economy and efficiency in governmental operations. Of course, no job is perfect; everyone has some bad days at work. But in a public sector career you can get through those days by remembering the positive contribution you are making to society.

Governments don’t spend money on advertising and recruiting the way accounting firms do. Professors play the critical role of helping to bring these public service career options to their students’ attention, since they may not even know the jobs exist. Professors can invite public sector accounting professionals to speak to their classes. They can reach out to professional organizations like the Government Finance Officers Association, the National Association of State Auditors, Comptrollers, and Treasurers, or the Association of Local Government Auditors to solicit speakers and collect information on internships or jobs.

For example, the U.S. Government Accountability Office and the Government Accounting Standards Board have excellent intern and fellowship programs. Students should also consider following @ChicagoOIG on Twitter or connecting with the Office of Inspector General on LinkedIn, where our office regularly posts job vacancies. We also publish reports and promote our work, which helps students better understand what we do and discover that they may want to be a part of it. Our office regularly recruits interns, for both legal and IT roles, so be sure to visit our website for those details.

(4) Why did you leave the academic world for your current position? Was it more of a personal decision, or a professional one? And do you ever miss the opportunity to teach and to engage in research?

It was more of a professional decision. During my five-year Ph.D. program I had the good fortune to publish a single-authored article in a major journal, to design and teach 10 stand-alone courses, and to serve on several committees. I appreciated having these experiences while still a student because they made me realize I didn’t want an academic career. To be frank, I burned out on undergraduate teaching and I wasn’t motivated by the publishing race.

But my love for learning, teaching, and service persisted. Happily, my current role provides me with ample opportunities to teach and train others, to research ways to improve government, and to serve on committees working to advance OIG and the profession. What I miss most about academia is roving the real and virtual library stacks, marveling at all there is to know.

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Dr. Lise Valentine is Deputy Inspector General for Audit and Program Review for the City of Chicago. To support the Inspector General’s mission, her office conducts independent evaluations of municipal programs and operations, and makes recommendations to strengthen and improve public services. She has taught Public Finance for the Master’s in Public Administration Program at the University of Illinois at Chicago, and is an instructor for the Inspector General Institute®.

Prior to joining OIG, Valentine served as Vice President and Director of Research at the Civic Federation, a non-partisan governmental research organization, where she led research on government efficiency, transparency, and tax policy. She was elected to the post of Commissioner and Treasurer of the Park District of Oak Park, IL and served on advisory task forces for the Governmental Accounting Standards Board.

Dr. Valentine is a Certified Public Accountant, a Certified Internal Auditor, and a Certified Inspector General Auditor®.

Introducing Our Contributing Columnists

In the early days of the global economic meltdown of 2008 and 2009, Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute, declared:

Fair value accounting is clearly the reigning orthodoxy among accountants, but is that the right test? Accounting is simply a measurement system. What we want to know determines what and how we measure.

Which is more important, the balance sheet or the income statement? Do we want to measure financial strength or earnings per share or cash flows? Is the purpose to inform equity investors or creditors and counter parties? Does one measurement system meet all of these objectives?

Given its impact on institutions and whole economies, common sense suggests that we consider whether one means of measurement is the only one we should be looking at. The world view of accountants at a particular time should not determine the answers to these questions. It is important to recall the famous remark of Clemenceau that war is too important to be left to the generals.

Many such issues impact the public interest. We, the Public Interest Section of the American Accounting Association, believe in addressing such topics with vigorous and spirited discussion in a social media forum.

Accordingly, we are proud to announce the introduction of a new feature for our social media network. Five distinguished thought leaders have agreed to serve as Contributing Columnists for the Section’s blog, newsletter series, and web site.

The five Columnists are:

Steven Mintz, Emeritus Professor, California Polytechnic San Luis Obispo, USA; Prem Sikka, Emeritus Professor, University of Essex, UK.

Michael Kraten, Associate Professor, Providence College; Richard (Rick) Kravitz, Editor-In-Chief, CPA Journal; Sri Ramamoorti, Associate Professor, University of Dayton.

Each of these individuals has agreed to contribute two editorial essays per year for publication by the Public Interest Section. Our current plans include the distribution of two guest editorials per year from other colleagues, resulting in a full year of monthly thought pieces.

We are immensely grateful to these individuals for supporting our growing presence in social media. Please join us in welcoming their contributions to our intellectual content.

Source Credits: We thank Sri Ramamoorti for suggesting the quote by Peter J. Wallison. It appeared in the April 30, 2008 edition of the Financial Times, in an article entitled “Judgment too important to be left to the accountants.”

Unintended Consequences of Supreme Court Whistleblowing Decision

Editorial Note: We are delighted to publish this “opinion piece” by Dr. Steven Mintz, a frequent contributor to our social media blog. As always, when you read his contribution, we ask that you keep in mind that the opinions expressed therein are those of the author. They do not represent the position of the AAA or of any other party.

The U.S. Supreme Court may have turned whistleblowing on its head with the decision on February 21, 2018 in the case Digital Realty Trust, Inc. v. Somers. The ruling is likely to encourage employees, managers, and compliance officials to blow the whistle on retaliation as soon as it begins, and not after a sometimes-lengthy process plays out to convince superiors to change the accounting and financial reporting. Essentially, employees who choose to inform the SEC of financial wrongdoing under the Dodd-Frank Financial Reform Act must now inform the SEC while the issue with the employer is unfolding to be eligible for Dodd-Frank protections.

The key issue in the Digital Realty case is the interpretation of who is a whistleblower under Dodd-Frank, and when does a would-be whistleblower qualify for protection against retaliation. The statute defines a whistleblower as a person who reports potential violations of the securities laws to the SEC.

The SEC had been interpreting the Act with respect to the retaliation provision broadly, thereby allowing the protections to apply to internal company reporting even if the individual did not report to the SEC. The Supreme Court disagreed with that interpretation. Writing for the Court in its 9-0 unanimous decision, Justice Ruth Bader Ginsburg put it this way: “A whistleblower is any person who provides … information relating to a violation of the securities laws to the Commission” [emphasis added]. “That definition,” she added, “describes who is eligible for anti-retaliation protection if the individual engages in any of the protected conduct enumerated in the [Act]. Moreover, she observed, “this interpretation is consistent with the ‘core objective’ of Dodd-Frank’s robust whistleblower program,” … [which] is ‘to motivate people who know of securities law violations to tell the SEC.’”

Ginsburg also made an interesting observation about the Sarbanes-Oxley Act. She said: “By comparison, SOX had a broader mission to “disturb the ‘corporate code of silence’ that ‘discourage[d] employees from reporting fraudulent behavior not only to the proper authorities, such as the FBI and the SEC, but even internally.’”

One thing that Ginsburg failed to address is that SOX retaliation claims must be filed within 180 days of discovering the act, not much time to get the information straight. Dodd-Frank, on the other hand, has a three-year period to file. The reality is that very few SOX filings have been successful, in part due to the fact that filings go to the Department of Labor whereas Dodd-Frank filings go the SEC. We may not be a fan of the SEC’s regulatory speed and efficiency. but it’s light years ahead of the DOL.

Prior to the ruling in the Digital Realty case, employees would almost automatically first report the alleged violation internally and take the matter up the chain of command all the way to the board of directors before going to the SEC. Informing the SEC was seen as a last resort. A typical scenario is: an employee jumps through the hoops internally, fails to induce change, may be demoted, treated badly, or fired, and then files for whistleblower protections under Dodd-Frank. If successful under the SEC process, the whistleblower could be reinstated and receive back pay. There is even an award if the SEC brings a lawsuit based on original information voluntarily provided to the SEC that leads to sanctions in excess of $1 million. The award is between 10%-30% of the total sanctions. This provision does not seem to be disturbed by the ruling since the SEC, presumably, would have first been informed of the retaliation.

Here’s the problem in a nutshell. Let’s assume an employee reports wrongdoing. Will that employee go to the SEC first before informing his or her supervisor? If I were the CEO and found out one of my managers went straight to the SEC without giving me a chance to first fix the matter, well you fill in the blanks. Just imagine an employee goes to the SEC to qualify for whistleblower protections, the organization finds out because the SEC starts investigating, the employee is then fired. What should the employee do next? Go back to the SEC and say, “Now look what you’ve done.”

The Supreme Court ruling is counter-productive to the intent of Dodd-Frank, which is to protect whistleblowers, but also to encourage internal reporting. In fact, the SEC has openly promoted internal reporting, especially for compliance officials. The bottom line is that the ruling will have unintended consequences, whether it is to heighten the pressures internally on an employee who wants to do the right thing and must now first report to the SEC, or to create a floodgate of reports that the SEC won’t be able to handle because its resources are limited. Either way, the ruling is a loss for whistleblowers and, most likely, companies because more employees will run to the SEC.

Dr. Steven Mintz is a Professor Emeritus at Cal Poly San Luis Obispo. His website is stevenmintzethics.com.