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The numbers game.

In a recent interview, Ed Nusbaum, CEO of Grant Thornton LLP, shared his thoughts about the accounting and auditing industry's troubled past, SOX reform and the pressing accounting issues threatening to make headlines in the future.

You were named CEO in 2001 after the firm had gone through three CEOs in as many years. Did you ask yourself, "What have I gotten myself into?"

On a personal level, I enjoyed it, because you prove your capabilities not leading through great times, but leading through tough times and making tough decisions. During the boom in systems implementation consulting, we had gotten into consulting--along with many other firms. A lot of conflict evolved as a result of having these huge system implementation projects, as well as the audit business and tax business, and that took a toll and hurt us financially. In 2000, we finally sold off our consulting practice, but then the tech market went bust and 9/11 hit. It was a tough time to be taking over as a CEO of an accounting firm, or probably any organization. A first decision was to be true to what we are--to focus on accounting and auditing, and on tax and on financial-related consulting that fits in with those things. Since then, we've expanded into doing special projects, tax work and internal controls work.

CEOs say that accounting companies were so fixated on the consulting side that they just let the audit side glide in whatever trajectory it was going.

There's an element of truth to that. If you can bill $5 million in consulting, you are not as worried about how much time you spent on the audit or your fees for it. So you might discount the audit more than you should have. It was very competitive, and people were doing less than they probably should have been doing. Now SOX and the [regulatory bodies] are saying, "You have to do more work" to the chagrin of CEOs, because when we do more work, it costs more. Some corporate CEOs may want us to go back to the way it was, but I don't think the investors want to have scandals again.

[ILLUSTRATION OMITTED]

How much of a boon was Sarbanes-Oxley for you?

A tremendous boon. SOX required us to do more work. Also, the collapse of Andersen was bad for the profession, but it was an opportunity for us. We were very aggressive in going after quality partners. We picked up 60 partners and 500 people from Andersen, about a 20 percent increase in personnel. We also expanded geographically, adding offices in Charlotte, Greensboro, Columbia and Raleigh in the Carolinas; and in Orlando, Albuquerque, and Tulsa, Oklahoma; and dramatically expanded our Houston and Cleveland offices. We went from 250 partners to 480 and grew our revenue dramatically. We were around $300 million. Now we're close to a billion.

Is SOX a cure that's worse than the purported disease?

The SEC didn't really provide much guidance with Section 404, so control auditors felt they had to test every single control out there, which is how things got ridiculous. We need to fix that, and I think the new SEC and PCAOB rules will. They won't solve all the problems, but they will make it more focused, more efficient, and make it more logical, particularly for the midsize companies, who get hurt the most.

Some CEOs say accounting companies benefit from SOX, and therefore have no incentive to reform it.

I don't think you'll hear an accounting firm say, "Let's repeal all the laws that require people to be honest and companies to have good controls." That opens the door to big frauds, exposes us to major litigation and makes us look bad. But we are certainly sympathetic and care about the overall cost structure. The biggest cost associated with 404 is not the audit firms; it's the internal cost.

Historically, big companies have found it a point of pride to have the big accounting firms do their accounts. Has recent history blown that away?

The world has changed, not only in terms of the clients, but in terms of recruiting on college campuses. Fifteen years ago, we had a tough time recruiting. Today we get the best students. In terms of clients, two things the scandals did was say that none of the firms are perfect and change the perception of accounting firms. That enabled us to get opportunities that, frankly, we weren't getting seven, eight, ten years ago.

What current accounting issue should be on a CEO's radar screen?

Lease accounting. It's a backward area that hasn't really changed since the 1970s, when a rule that resulted in most leases being treated as leases. Recently, the U.S. and international accounting standards center bodies started a joint project to look at the accounting for leases, which makes sense because lease accounting today is this crazy formula. It follows general accounting principles [GAAP], which have nothing to do with the economics of the lease, nothing. That is a potentially huge issue. There was a slew of restatements about a year or two ago on leases that woke everybody up to the fact that we had the problem. But this joint project could blow away a lot of balance sheets.

Critics say that current GAAP accounting doesn't capture true economic profit. In fact, some say it will be history within 15 years.

I don't believe GAAP accounting will disappear. In 1999, someone told me the auditing profession would be irrelevant within five years. Five years turned out to be post-SOX when the auditing profession was stronger than ever. The fact of the matter is accounting is not a perfect picture and never will be; it's the best we can do. For a true economic picture, you have to value all kinds of intangibles that would be such pure estimates--such as the value of the brand Coca-Cola--nobody would feel at all comfortable with them. As accountants, we can't do that. We can only come up with some information.

What challenge does Grant Thornton and the industry face today?

Both in the profession and at Grant Thornton, we can't look back. We must look forward to what we can do to dramatically improve financial reporting. We must look at it from a lot of different perspectives, from the investor's perspective, from the audit committee's perspective, from the CEO's perspective and from the CFO's perspective, as well as from a regulator's perspective.
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Title Annotation:CEO WATCH
Publication:Chief Executive (U.S.)
Article Type:Interview
Date:Jun 1, 2007
Words:1078
Previous Article:Who says loyalty pays?
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