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Serving the Public Interest

Promoting Better Government Reporting and Sustainable Corporate Governance

Richard H. Kravitz, MBA, CPA

When discussing accounting and financial reporting for governments, we need to acknowledge that corporations dominate the global economy. Fifty-two of the world's largest 100 economies are not sovereign nations, but multinational corporations. Con sequently, while governments are increasingly under pressure to act more like corporations, there are increasing calls for corporations to act more like governments.

There are many examples of corporations taking over government activities or partnering with governments in providing public services, such as prisons, schools, defense establishments, airports, toll roads, transit hubs, and parking meters. While there has been backlash against certain practices—for example, last year former Deputy Attorney General Sally Yates issued a memo directing the Federal Bureau of Prisons to reduce the use of privately run federal prisons—the overall trend seems likely to continue.

The comingling of private industry and government has become common. Edward Snowden, who famously blew the whistle on the government surveillance state, did not work for the federal government, but rather for an NSA contractor. One might argue that being the CEO of a multinational company is perfect preparation to being the top diplomat for the world's largest economy, or indeed, commander in chief of the world's largest military.

Governance

For all of their shortcomings when it comes to transparent accounting and reporting, governments mostly still remain accountable to their citizens at election time. But this accountability is not necessarily the case with corporations, and this is where CPAs come in.

In 1912, George May, an early partner at Price Waterhouse, advocated using “accounting as a social force in the zeal to protect the public trust.” May argued that, of the “high ethical obligations of the profession,” the greatest is “to the persons who are not his immediate clients.” This thought has been echoed by John Coffee, director of the Center on Corporate Governance at Columbia University: “The premise should be explicit, corporate governance does not work nor can management be held accountable in the absence of a system that makes gatekeepers reasonably faithful to the interests of investors” (Gatekeepers, Oxford University Press, 2006).

Today, I would add the interests of the stakeholders of the modern corporation—a broader group that includes employees; customers; suppliers; vendors; the communities where employees live; the local governments that provide health, education, and safety resources and depend upon employees' taxes; as well as shareholders and bondholders. For this last category, it is worth noting that direct ownership is in decline; stocks and bonds are principally owned indirectly by 93 million Americans through pension plans and 401(k)s. As such, these owners cannot vote on corporate proxies.

Given the increasing power of corporations today, I would argue that financial managers, outside advisors, and auditors (internal and external) have an even more critical fiduciary responsibility than ever before. We have an inviolate stewardship obligation to serve the public interest.

Sustainability

At the Foundation for Accounting Education's (FAE) annual sustainability conference last May, I had the pleasure of speaking with Mervyn King. Throughout his distinguished career, King has urged accountants to take on a leadership role that evolves corporate thinking from financial capitalism to sustainable capitalism and that protects corporate stakeholders, their families, and communities. King posits that businesses need to transform their focus from share value to shared values, because the democratization of the corporate process is essential to both long-term value creation by sustainable enterprises and our national democratic principles. We need only look at the city of Detroit to see how the decisions of a few multinational corporations can have a devastating impact on a large, metropolitan community.

For young CPAs, I would argue that there is no greater obligation than to help improve society. This belief is supported by an Association of Chartered Certified Accountants (ACCA) survey of 7,000 young accounting professionals in 153 countries, which found that the next generation believes they can make the world a better place though their work.

While our focus in this issue might be on making government accounting and reporting more closely resemble corporate reporting, it is also worth remembering that businesses can learn something from governments about being responsive to the needs of all citizens and providing stewardship of common resources. Here is where we can help develop leaders in this noble profession and mentor the next generation. There is no greater obligation of financial managers, accountants, auditors, and advisors than to protect the public trust—to help to restore confidence in our institutions, both corporate and governmental.

Richard H. Kravitz, MBA, CPA. Editor-in-Chief.

 

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