he takes a positive approach, he will be in a stronger position when he comes to a point where he must tell the company that they cannot do a certain thing or present financial data in a certain way. The point, which was clearly made, is that if the auditor is constantly negative about insignificant things, then it is unlikely that the client will listen to him on important matters. The whole thrust of the comment is that the auditor has a responsibility to say no when he disagrees with a client's approach but he should not cast himself as a negative factor with respect to all matters just for the sake of being negative. Mr. Gladstone also states that being imaginative is not wrong since there are many instances where being imaginative in business or accounting is proper. Using imaginative ideas does not mean using improper, illegal, or immoral ideas. "The independent auditing relationship should be used to market management advisory services to clients". This quote also misquotes Forbes, which itself misquoted our partner. In discussing management advisory services to clients, the point was made that anything auditors can do to advise on strengthening controls makes a stronger client company and a better audit. No statement was made that the auditing relationship should be used to market management advisory services. The point made was that a large percentage of such work comes from our audit clients. This is a very positive situation since it enhances the auditor's ability to help improve controls. Enclosed is a letter to Mr. James Michaels My partners and I are disturbed and shocked that you would allow such irresponsible journalism. I know that you are in the business of selling magazines but even FORBES should adopt minimum standards of accuracy, if not fairness. Enclosure Very truly yours, William L. Gladstone William L. Gladstone EXHIBIT A "Real life" is that FORBES has written an irresponsible, distorted and biased article relating to a discussion between me and your writer Geoffrey Smith. This article is damaging to the reputation of the accounting profession, my firm and to me personally. FORBES has taken out of context portions of a 75-minute interview and twisted my comments, thoughts and philosophy on a most important subject for the purpose of supporting negative conclusions about directors which Mr. Smith is so anxious to depict. Even a casual reading of the material I actually discussed with Mr. Smith would show my strong support and respect for the efforts of boards of directors. I have made it clear that the auditors report to the shareholders and to the board. Fortunately, I can support my position unequivocally since I have a taped transcript of this interview. Through this letter, I am offering FORBES readers a copy of excerpts from that transcript so that they will know what I actually said about the relationship between auditors and boards of directors. They may write to me at 277 Park Avenue, New York, New York 10017. Since the article also questions the independence of auditors, I would like to point out to your readers that Arthur Young & Company are the auditors and tax consultants of FORBES. We deeply feel our independence and do not hesitate to call to the attention of your readers your extremely misleading approach to a serious subject. CC: Malcolm Forbes Very truly yours, William L. Gladstone William L. Gladstone A COMPARISON OF EXCERPTS FROM: A FORBES ARTICLE, MAY 15, 1976: "BUT THAT ISN'T REAL LIFE" AND A TAPED INTERVIEW OF: William L. Gladstone 277 Park Avenue New York, N. Y. 10017 BY: Geoffrey Smith, Senior Editor 60 Fifth Avenue New York, N. Y. 10011 On February 27, 1976 1 2 3 If you ask an outside auditor whom he reports to, he's apt to waffle a bit. "THEORETICALLY, it would be great to have the stockholders pick the outside auditors, and the auditors are at arm's length with management, and everything is very independent, and everybody gets a comfortable feeling," remarks William Gladstone, managing partner of Arthur Young & Co.'s New York office. "But that isn't real life. "Realistically," he goes on, "management selects the auditors." The fact that outside auditors are appointed by boards of directors with stockholder approval has become a legal fiction, says Gladstone. "Real life" is also that outside auditors report to management-not to boards of directors as they are sup posed to. While most boards now have an audit committee (generally added-at the urging of outside auditors-in the past six or seven years), it usually meets with these outside auditors for only four or five hours twice yearly. Says Gladstone: "Ninety-nine percent of all problems that come up are settled with management. It's very, very unusual to go to, the board with a problem." Belatedly, some boards now wish the outside auditors had come to them with those problems. One of those boards is an Arthur Young client named Lockheed Aircraft. For obvious reasons, Gladstone doesn't want to talk about Lockheed. But he defends the way his competitors at Price, Waterhouse & Co. audited Gulf Oil, which has confessed to equally massive overseas payoffs. 92 "I don't think a typical audit is de signed to uncover even things of that Nevertheless, the recent publicity "You can't be an adversary and do an audit of a company," he asserts. "Primarily, a board's information about a company should come from management. If the board members don't think they've got management who will give them the information, then they ought to get other management. You shouldn't find out what's going on in a company from the auditors unless the company's withholding something. And then, of course, you have this contact with the auditors at least twice a yearyou can call them anytime you want." What's The Point? Then why bother hiring an independent outside auditor in the first place? If you're never going to be in an adversary relationship with management, then your independence is worthless, isn't it? "When you get close to management," says Gladstone, "it doesn't hurt your independence, it enhances it." How's that again? "It's not wrong to be imaginative, say, in helping management account for an acquisition," he goes on. "That's proper. If you're constantly finding out how you can do things for them, and they know you're not a 'no' fellow but somebody who's positive, then when you say, "Well, you just can't account for something that way-that's wrong. they say 'O.K., we won't.' But if your position is one of an adversary all along the way and you're always say ing, no, no, no-and you say 'no' again on an important point, they'll say. The hell with him! We're just going to do it and if he doesn't like it he can qualify his report. So the better relationships are where you're a plus to the company-helpful to them." For such obliging auditors with a "positive attitude, management can be equally helpful. It can, say, chan nel lucrative corporate business to the auditor's tax and management consulting associates. Gladstone concedes that "a very large percentage of Arthur Young's tax and consulting busi ness is with its audit partners. Isn't that a conflict of interest? "We don't view it that way," says Gladstone. "Because anything we can do to improve controls makes it a better audit." Of course, it is not the independent auditors who are to blame for loving the hand that feeds them. The fault lies with the board of directors for abdicating its oversight function to such an extent that its hired invest gators, the auditors, look upon thea allegiance to the board as a polite fic tion. Under such circumstances it is a frail defense to cry, as did the outside directors of Gulf Oil: "We weren't kept fully informed" They could have asked the auditors. ■ FORBES, MAY 15, 1976 16 |