Chairman's Message to Graduating Students
“Do the Right Thing”
- speech given at Audit and Accounting Challenge 2011, NTU
Mr Arthur Levitt, the SEC chairman of the United States, gave a speech to CPAs, lawyers, and academics in New York about 12 years ago on earnings management. In spite of his warning, many continued to be involved in earnings management the wrong way. Since then, we have heard of infamous names such as Enron, WorldCom, and many others.
He roundly criticized the business community that greeted "accounting hocus-pocus" with nothing more than "nods and winks". Among the accounting tactics he blasted were improper revenue recognition, unjustified restructuring charges, the artifices called "cookie-jar reserves" and the abuse of "materiality". Accountants know all of these (and more) as "accounting irregularities" - intentional misstatements in financial reports, which Levitt regarded as the equivalent of fraud. When it comes to cooking the books, revenue recognition is the recipe of choice. Many of the cases involved small companies that packed the list when it comes to fraud of any kind. Singapore is not spared and had many of these too.
Lately, other earnings management techniques are being introduced like new cuisines - accounting for fair values, PPA, big write-offs, etc. Now that everything goes to the statement of comprehensive income affecting earnings, even fair value gains from your company's misfortunes can boost earnings (though this has recently been outlawed by an amendment to the FRS on FV regarding gains on own borrowings and day one profits).
In our office seminar, I was watching a video clip by Sir David Bell of Pearson plc recollecting his experience as a reporter. He indicated to the young reporters that there are always temptations to do things that are morally or ethically wrong because of competitive pressures. He concludes that it is better to always do the right thing.
In our daily work as accountants, in practice or commerce, we face pressures of many kinds - competitive pressure, time and fee pressure, peer pressure, pressure from our superiors, and pressure from our clients, employers and families. It is not uncommon that we are tempted to make decisions that are not morally correct.
In a survey conducted some time ago in the United States, the findings revealed the following wrong doings - auditors skipping a program step, signing off the program without doing the work, guessing or being speculative in their work when they are not supposed to do so, or indicating that they have sighted a document when they have not done so, or saying they have made inquiries with client personnel when they have not done so. These are the things we should not be doing because they result in the loss of trust and confidence. When we do guess work or we are speculative in our assignments, we run the danger of fraud and error that we could have identified had we performed the required procedures.
It could also include the drawing of a conclusion for a client prematurely. We have seen examples of this in the news about doctors doing so. The doctor, in his defence, may say it was in the best interests of the patient, or that the patient would not have understood anyway even if he was consulted.
We watch movies - Chinese, Korean, Indian and Western. We see that bad news is kept hidden from spouses, parents, employers or the regulators - why? Often in the scripts, the actor will try to justify his actions - it is only a white lie; or it is a happy occasion so let us not spoil it; the recipient will be badly affected; it will go away; or I can sort it out myself first before having to reveal the truth. Do our values get shaped by these movies, so that we fail to report the wrongs we see from time to time?
Revealing any irregularities or misconduct promptly is the right thing to do, no matter what.
This was clearly not observed by those involved in the case with Raj Rajaratnam, the chief of Galleon Group, the billionaire investor who once ran one of the world's largest hedge funds, and who was found guilty of fraud and conspiracy in New York. His conspirators came from the same Ivy League. One was also a director of the famous consulting firm and another was a board member of an investment banking and securities firm.
Typically, an employee will not aim to be dishonest at first, only to dodge a few rules.
His fraudulent act, initially small, will build up because the exit that he thought is just around the corner never appears. In time, a subordinate may discover the fraud committed by his superior but he won't muster the courage to blow the whistle, allowing the fraud to live on.
Even when you are tempted to hide details, dig deep and do what is correct.
With increasing demands from the regulators for professionalism and guarding of public interest, I hope you always have the good luck to be somewhere where you can confront competitive pressures and be free to do the right thing to maintain the kind of integrity expected of you. I hope you will not feel pressured to keep your job or financial support and lose your integrity in the process. When you do the right thing and make the right choice despite pressures to do otherwise, it becomes ingrained in you. Even before you are showed the rules of professional conduct, the values about morality that your families and mentors imparted to you would by then have already helped you define your own values.
However, in life and in business, there are always competitive pressures to do certain things and you will always be tested morally. It might cross your mind to say that even if I do not take advantage of the situation, someone else will do it anyway. You may appear to lose out but if it is not the right to do, don't do it. Ultimately you benefit from it because people will come to trust you. These are some of the many moral dilemmas that we face all the time.
Mr. Kaka Singh
Chairman