Bob MacDonald on Relationship Between Boards and Auditors
I had interviewed Bob MacDonald, a former insurance industry CEO and current member of some corporate boards, about the changes in the relationship between boards and outside auditors. This was to be for a piece in Directorship Magazine, but after I had the assignment,the publisher nixed the idea of actually paying for an article, then apparently fired the entire editorial staff, supposedly to move the operations from NYC back to Boston, where he was based. It's a pity - the former editor, Bill Holstein, is one of the best editors of business material I've worked with. But he's on to doing books now and I thought it would be good to get some of this material somewhere.
ES: You've been public in the past about problems in the relationships between boards and outside auditors. What was the state of things a year or two ago?
BM: We had seen the relationship between independent auditors and management of public companies move from cozy to animosity and outright conflict.
ES: How did things go between them before?
BM: If you had an issue, you worked with [the auditor] to try to determine what was the best solution What that evolved into [at some companies] was any solution that you could get away with was the right solution, which I thought was [bad].
ES: How did things change?
BM: The government changed its approach to handling problems with (financial) numbers. Never before were audit firms held liable, then it basically said if something goes Wong, it’s your fault. The independent auditors developed a head in the shell mentality: sacrifice everything you can and anyone you can for us to survive. [It] went from [a cooperative and helpful relationship] to literally no help from the independent auditors. They took the most conservative of possible roads. [For example, if you asked a question about a tax interpretation], that response was deemed to be inappropriate and the audit firm said there was a material weakness in the management of the firm because it relied on the opinion of the audit firm.
ES: And now?
BM: Now it’s swinging back to a more reasonable management of the process. I’ve seen it over the last year or so it get much better. It’s settled down – still with a sharper edge, and that’s good.
ES: How do you avoid future problems?
BM: The way you avoid it is that you don’t have humans running companies. Some companies are going to slip back. But that’s human nature and you’re going to have to live with it. Overall, we’re going to be better than we were. We’ve just raised the bar. Under the system they’re able to nip these things in the bud. In the past there was no incentive to see these things be brought before the board or discussed. Now there is the incentive to do that, and because of that the issues don’t become big before they’re resolved. What this has caused is an earlier recognition of the possible problems or conflicts and then the resolution of those things quickly. No one ever knows that you always pay your bills; [they only know] when you don’t pay your bills. A lot of these issues don’t become issues because you now have a relationship that encourages people to bring up the issues and get them resolved.
ES: You've been public in the past about problems in the relationships between boards and outside auditors. What was the state of things a year or two ago?
BM: We had seen the relationship between independent auditors and management of public companies move from cozy to animosity and outright conflict.
ES: How did things go between them before?
BM: If you had an issue, you worked with [the auditor] to try to determine what was the best solution What that evolved into [at some companies] was any solution that you could get away with was the right solution, which I thought was [bad].
ES: How did things change?
BM: The government changed its approach to handling problems with (financial) numbers. Never before were audit firms held liable, then it basically said if something goes Wong, it’s your fault. The independent auditors developed a head in the shell mentality: sacrifice everything you can and anyone you can for us to survive. [It] went from [a cooperative and helpful relationship] to literally no help from the independent auditors. They took the most conservative of possible roads. [For example, if you asked a question about a tax interpretation], that response was deemed to be inappropriate and the audit firm said there was a material weakness in the management of the firm because it relied on the opinion of the audit firm.
ES: And now?
BM: Now it’s swinging back to a more reasonable management of the process. I’ve seen it over the last year or so it get much better. It’s settled down – still with a sharper edge, and that’s good.
ES: How do you avoid future problems?
BM: The way you avoid it is that you don’t have humans running companies. Some companies are going to slip back. But that’s human nature and you’re going to have to live with it. Overall, we’re going to be better than we were. We’ve just raised the bar. Under the system they’re able to nip these things in the bud. In the past there was no incentive to see these things be brought before the board or discussed. Now there is the incentive to do that, and because of that the issues don’t become big before they’re resolved. What this has caused is an earlier recognition of the possible problems or conflicts and then the resolution of those things quickly. No one ever knows that you always pay your bills; [they only know] when you don’t pay your bills. A lot of these issues don’t become issues because you now have a relationship that encourages people to bring up the issues and get them resolved.
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