Universal disagreement – Auditing
WHEN UNIVERSAL HEALTH Services Inc. asked CFO Kirk Gorman to resign in February at the urging of its auditor, KPMG LLP, analyst Nancy Weaver of investment-banking firm Stephens Inc. downgraded the stock, but not because she thought the ousting hinted at accounting problems at the King of Prussia, Pa.-based health-care provider. Rather, she thought the company-had lost one of its vital components.
“He is an incredibly capable CFO,” says Weaver. “I have profound respect for him!’ Other analysts speak just as highly of Gorman. “He’s the straightest shooter in the industry,” says B. Kemp Dolliver, managing director at SG Cowen Securities Corp.
Despite Gorman’s sterling reputation, KPMG refused to endorse Universal’s quarterly financial statements until he was removed.
The dispute arose over the signing of the management representation letter, verifying that the company’s financial statements were prepared in accordance with generally accepted accounting principles. Gorman agreed to sign the letter, but noted his anxiety in a letter to the and it firm. “I’m neither a certified public accountant nor a securities lawyer,” wrote Gorman. “I do review and analyze the financial statements and disclosures in our 10-Q and 10-K filings, but I can’t personally verify that all of our accounting is in accordance with GAAP.” He asked the firm to also sign a representation letter attesting to its review of the disclosures. KPMG not only refused, it went to Universal’s board and argned that it couldn’t approve the company’s financial statements as long as Gorman was CFO. The company later accepted Gorman’s resignation over what it called “philosophical differences.” (Gorman did not return calls from CFO seeking comment.)
Gorman confessed to KPMG what other CFOs admit only in private: that personally attesting to the accuracy of every detail of the financial statements is difficult. “It’s a bummer that you can’t tell it like it is these days,” says Dolliver. “What he is really doing is pointing out the quasi-absurdity of the situation.”
One CFO, speaking anonymously lest he too be forced to resign, says that he empathizes with Gorman. “I don’t know every nuance of GAAP,” he admits. “I don’t think the individual auditors know everything there is to know about GAAP. But the reality is that at times we rely on their input!’
Arthur Bowman, editor-in-chief of Bowman’s Accounting Report, says that Gorman’s departure highlights problems with the certification requirement demanded by the Sarbanes-Oxley Act. “It’s a stretch of the imagination to think that every CEO and CFO really understands [the documents] to that level of detail;’ he says. “It’s a weakness in the legislation.”
Weaver agrees. “In most cases, executives just hold their breath and sign [the certification].”
Dolliver attributes the escalation of the dispute to a new rigidity among audit firms, which are being extra careful not to suffer the fate of Arthur Andersen. “There is a hard-ball attitude on the part of auditors, even on accounting technicalities,” he says. “That is why they reacted so harshly.”
Others say KPMG’s actions were proper, not harsh. “There is no question that the auditors were right in this case:’ says John C. Coffee Jr., a law professor at Columbia University. “It is very clear that the auditor is supposed to be the watchdog of the manager, not an agent of the manager,” he says.
Edward Terino, CFO of ATG Inc., says that the answer is for companies to improve controls. “We rely on accounting staff and legal counsel for assurance,” says Terino, who is in the process of reviewing and improving internal controls at the $100 million Cambridge, Mass.-based software firm. “The CEO has a responsibility to assure that financial statements are prepared in accordance with GAAP and that there is an adequate system of internal controls in place;’ he says. Still, Terino identifies with the difficulty that Gorman faced. “Our business just isn’t that complex. I don’t know how I could ever certify everything with certainty at a large multinational company.”
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