Some CEO's are intolerant of hearing bad news. That's not just a problem for internal
accountants, but also for operating managers. Once the intolerant boss' people start down the road of reporting rationalization - for example betting that slow-moving inventory will move next quarter, say, or loan or receivable collections or actuarial trends will improve, etc - there's usually no digging out. It only gets worse, and by then everyone is implicated. So yes, there is a CEO-culture issue. It more often starts out as unrealistically demanding rather than malevolent. It just evolves that way.
At the next level, the problems for external accountants arise when too-clever CFO's aren't forthcoming with what they've done to squeeze out those few extra quarterly pennies they unfortunately promised the boss. The CFO often enough started out his career in the local CPA office conducting the audit on his current employer; if so, he has some automatic credibility with the guys auditing his folks' work, and he knows the hot buttons to avoid.
From an outside auditor's point of view, with major CPA firms the problem is usually at the local level. The local Andersen guy in Houston or thePeat Deloitte(*) guy in Omaha is too dependent on that client to go to the mat on an issue - for example, on how those extra earnings are eked out. The 'home office' guys at the major firms aren't usually so complicit - their 'risk/reward' assessment of the client and a situation is completely different. They're more likely to step up to an Enron or Berkshire on principle - if they have the relevant information (and if their local guy isn't sugar-coating things in advocating the client's stance). But the national guys can misjudge also, of course.
Charlie Munger's repeated complaints about auditors leave out one seemingly teflon-caped group, though: attorneys. While there's plenty of blame to go around, I'm not going to be convinced that Enron's off-balance-sheet entities came into existence without the help - guidance even - of some bar-member attorneys. Looking at this whole national real estate debacle - who was the smartest, best educated guy in the room at every closing? And consumer loans? Virtually every business transaction that occurred had some facilitation by an attorney. But if things go south, attorneys seem to easily claim ignorance of the business aspects of the contracts or transactions they're actually strategizing and authoring.
Put a company's CEO, attorney, and CPA in a room, and chances are that the attorney will be at least equal to the other two in his grasp of the legal boundaries and strategic issues of the business at hand -- unless things go bad and it serves his purpose to have been just a scribe.
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(*) We'll remember that Berkshire canned Peat when Peat's New York office foolishly 'went to the mat' with Buffett and refused to concede to the Berkshire CEO on a (non-cash-impact) accounting point. The auditors forced their adjustment on him, but were fired soon after. Berkshire's CFO at the time was a former Peat employee, but that still didn't mean they could stick to their guns and get away with it.
http://michaelservet.blogspot.com/2010/03/munger-on-accountants.html
accountants, but also for operating managers. Once the intolerant boss' people start down the road of reporting rationalization - for example betting that slow-moving inventory will move next quarter, say, or loan or receivable collections or actuarial trends will improve, etc - there's usually no digging out. It only gets worse, and by then everyone is implicated. So yes, there is a CEO-culture issue. It more often starts out as unrealistically demanding rather than malevolent. It just evolves that way.
At the next level, the problems for external accountants arise when too-clever CFO's aren't forthcoming with what they've done to squeeze out those few extra quarterly pennies they unfortunately promised the boss. The CFO often enough started out his career in the local CPA office conducting the audit on his current employer; if so, he has some automatic credibility with the guys auditing his folks' work, and he knows the hot buttons to avoid.
From an outside auditor's point of view, with major CPA firms the problem is usually at the local level. The local Andersen guy in Houston or the
Charlie Munger's repeated complaints about auditors leave out one seemingly teflon-caped group, though: attorneys. While there's plenty of blame to go around, I'm not going to be convinced that Enron's off-balance-sheet entities came into existence without the help - guidance even - of some bar-member attorneys. Looking at this whole national real estate debacle - who was the smartest, best educated guy in the room at every closing? And consumer loans? Virtually every business transaction that occurred had some facilitation by an attorney. But if things go south, attorneys seem to easily claim ignorance of the business aspects of the contracts or transactions they're actually strategizing and authoring.
Put a company's CEO, attorney, and CPA in a room, and chances are that the attorney will be at least equal to the other two in his grasp of the legal boundaries and strategic issues of the business at hand -- unless things go bad and it serves his purpose to have been just a scribe.
_________
(*) We'll remember that Berkshire canned Peat when Peat's New York office foolishly 'went to the mat' with Buffett and refused to concede to the Berkshire CEO on a (non-cash-impact) accounting point. The auditors forced their adjustment on him, but were fired soon after. Berkshire's CFO at the time was a former Peat employee, but that still didn't mean they could stick to their guns and get away with it.
http://michaelservet.blogspot.com/2010/03/munger-on-accountants.html
