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From the May-08, 2002 issue of Credit Union Times Magazine • Subscribe!
Erasing `perception' of conflict of interest in audit, accounting alliances key to avoiding Enron/Arthur Andersen calamity
<p>WASHINGTON - As the Securities Exchange Commission takes a harder look at analysts that do business with investment firms because of potential conflicts of interest, some are asking whether credit unions have enough safeguards in place to prevent a Enron/Arthur Andersen debacle from happening and if "cozy alliances" need revamping. On top of the SEC's investigation, are, at last count, more than 200 companies, including Equifax, Delta Air Lines, Walgreen's and Sara Lee that have severed their ties with Arthur Andersen, many choosing to disassociate themselves from the ongoing federal investigation involving the firm's shredding of Enron documents. While the pendulum of opinion in the credit union industry continues to swing on whether the Enron/Arthur conflict of interest debacle could potentially happen here, most generally agree even the hint of a conflict of interest should be reviewed and revised. Jim Blaine, president/CEO of State Employees Credit Union in Raleigh, N.C. is also a certified public accountant and is "strongly opposed to the accounting profession putting its very good reputation at risk by having multiple roles." "Whether the conflict of interest develops, the perception is there," Blaine said. "You can be pure as the driven snow, but human nature factors come into play," adding that certain situations should be avoided to erase any doubt. Where it starts and has always been the case is with culpability at all levels.The Institute of Internal Auditors, the 75,000-member trade group has long said that the independence of the external auditor is impaired when internal auditing is totally outsourced to the auditor of the financial statements, said Bill Bishop, IIA's president. "The IIA has maintained that some level of contract audit work is acceptable if it is clearly defined in scope, properly approved, managed and monitored from within the organization, and clearly disclosed," Bishop emphasized. The federal government gave the accounting industry the authority to audit companies that sell shares to the public after the stock market crash of 1929. In theory, auditors are supposed to be independent watchdogs and do their best to make sure investors can trust corporate financial statements. Over the years, accounting firms have done increasing amounts of consulting work for their clients. Former SEC Chairman Arthur Levitt feared that auditors would be reluctant to get tough with clients and risk losing lucrative consulting work. Indeed, in 2000, Levitt tried to ban auditors from providing information technology and consulting services, and from conducting internal audits for their clients. The issue of outsourcing the internal audit function has been a sore subject to internal auditors for many years, said Brian Sears, author of Internal Auditing Manual and an expert on the subject. "The Enron situation will be viewed by many current internal audit professionals as poetic justice. At the same time, I could argue that even if Enron had a totally independent internal audit function, there would be no assurance that the internal auditors would have uncovered the alleged transgressions," Sears said. "Since most internal audit departments try to avoid any duplication of effort, they defer to the external auditors for financial statements and related audits." Indeed, many credit unions have used outsourcing tasks such as internal audit to outside vendors. In the process, they've lost day-to-day control over a department to a professional service firm and often gained new problems, Sears said. Still, some argue that co-sourcing is another way to get a company into shape, trimming costs while maximizing internal audit capabilities and still retaining control. Co-sourcing with outside vendors allow the in-house auditors to retain responsibility for the internal audit process while relying on the outside entity for specialized technical skills and personnel. "Co-sourcing is more of a partnership, and it can be ideal depending on the credit union size and its needs," said Ennio Cavuoto, director of internal audit at Bethpage Federal Credit Union in Endicott, N.Y. and vice chairman of the National Association of Credit Union Supervisory and Auditing Committees. Cavuoto said unfortunately some credit unions may be doing business with a firm because of the cost breaks, but the bottom line is "they may be missing the big picture of what has happened with Enron" as a lesson. "Education and regulation, of course needs to start at the top," Cavuoto added. "We can look to the SEC as a guide because even though most of the changes being examined are applicable to banks, the NCUA can certainly use that regulator (implementations) as a model." Even if increased regulation of accounting, auditing and other-related operational alliances never comes to pass, most agree that the onus should always start with the credit union's supervisory and auditing committee. It's here that red flags are spotted and partnerships that may raise a few eyebrows are caught early and rectified accordingly. "Mergers are necessary because everyone is looking for economy of scale," said Cliff Dias, president/CEO of Portland Teachers Credit Union. "It's important as clients that we clearly understand what potential conflicts of interest exists when the merger is complete. The burden is on us, the credit union, to proceed with caution especially in areas of risk management and even in more scrutinized legal review of contracts. The key is to be proactive as possible." Dias added what's happening with Enron/Arthur Andersen probably won't happen with the credit union industry because the parameters are "significantly different." "We don't get involved with foreign entities like off-shore banking," Dias explained. "We gather loans, do investments and while there is the risk of bad loans and operating losses, they are really mitigated compared to the different types and number of businesses Enron got into." Credit unions' accountability to members alleviates many of the pressures that companies like Enron face, Dias said. "When you deal with other people's money, millions of dollars of transactions everyday and you are a publicly traded company like Enron, there are a number of pressures here. Credit union don't face some of those pressures but that doesn't shirk the industry of being vigilant." -</p> <p>firstname.lastname@example.org</p>
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