An Interview with FEI President Philip B. Livingston

By James L. Craig, Jr.

In Brief

Controllers, Treasurers, and CFOs Choose a CPA

Last April, Philip B. Livingston, a CPA, became president and CEO of the Financial Executives Institute (FEI). Livingston had been active in FEI for almost 10 years while holding financial executive positions at a number of companies in California, Colorado, and Florida before FEI's search committee chose him to succeed P. Norman Roy and lead FEI into the next millennium.

FEI is a national organization of approximately 14,200 controllers, CFOs, treasurers, and similar executives from larger corporations. Its committees are active and respected in the financial reporting community and comment on proposed professional standards and regulatory rulemaking.

James L. Craig, Jr., editor-in-chief of The CPA Journal, met with Livingston to discuss his vision for FEI and some of the current professional issues in which financial executives and CPAs share a common interest.

The CPA Journal: The position of chief executive of a not-for-profit membership organization seems quite a departure from your previous role as deal maker and financial executive at public companies. What attracted you to the position?

Philip B. Livingston: FEI has such a fine reputation and brand name and such a prestigious group of members that I viewed the position as an opportunity to have a real impact on the financial community.

CPAJ: FEI is selective in who can join the organization. How does that work?

Livingston: Our eligibility and ethics committee reviews each application to see that our membership requirements are met. Each applicant must sign a commitment to adhere to our code of conduct.

CPAJ: Why would someone want to join FEI?

Livingston: One reason is pure networking. Our members are senior financial executives in major companies trying to drive shareholder value, trying to improve cash flows. Like many member organizations, we have chapters and committees that meet regularly and we hold conferences. These are great places to meet influential people, learn about successful practices, and develop friendships that can be mutually beneficial. It is quite helpful to be able to pick up the phone and speak with a colleague about a difficult problem.

A second major reason for joining is to keep current on emerging issues of interest to the financial executive. For example, our sister organization, the Financial Executives Research Foundation, sponsors research projects on topics of interest to our members. Two recent foundation publications are "Spin-offs and Equity Carve-Outs" and "Harvesting Investments in Private Companies." Our research is designed to give members practical ways of dealing with real-life issues. Each of the foundation's projects is done under the supervision of an advisory committee. S. Lawrence Prendergast, chair and CEO of AT&T Investment Management Corp., chaired the spin- offs report advisory committee. He was very much involved in AT&T's spin-off of Lucent Technologies.

We have three new projects under way--one on e-commerce, another on enterprise resource planning (ERP) systems, and a third on risk management. We try to put out three or four of these studies each year, with related education and training opportunities.

A third reason for joining is to be a part of and benefit from FEI's advocacy activities.

CPAJ: Can CPAs in public practice join? Can they become associate members?

Livingston: Only if at some point they were employed as a financial executive in a company that met FEI's requirements. Once you qualify, however, you remain eligible to be a member even if your job responsibilities change. Some chapters have "friends of the chapter" that can sponsor events and participate--many of those are CPAs.

CPAJ: What are your immediate objectives for FEI?

Livingston: I have a number of goals. First, I would like to form an Internet community of our members, who would share models, presentations, analyses, and other information online. We have yet to take full advantage of the capabilities that already exist for our members to interact and share.

Second, I plan to conduct an active campaign to enlist more members. Our membership has been flat for the last five years or so, but I feel there are many more CFOs that can benefit by joining. Awareness of FEI among financial executives is actually quite low. I hope to change that.

Third, the delivery of our products and services has to be tailored to meet the demands and schedules of very busy executives. For example, we just held a very successful one-hour teleconference about best practices for integrating business acquisitions. Our members cannot take the time to fly somewhere to attend meetings in person, and technology offers solutions. We want FEI in their offices and on their desktops.

Two or three years from now we are not going to communicate with our members on paper--all communication will be electronic.

The SEC and Earnings Management

CPAJ: You mentioned an eligibility and ethics committee and a code of conduct. Would the code of conduct address some of the concerns raised over the last year or so by SEC Chair Arthur Levitt on earnings management and booking immaterial fictitious amounts to achieve an earnings estimate?

Livingston: Please understand that a great deal of Chair Levitt's initiatives are directed at the executives of public companies themselves. CPAs are drawn into the picture at a secondary level. So we are taking his remarks very seriously. Our code of conduct says that our members have a duty to be objective and conduct themselves with integrity.

Some of Levitt's concerns, however, may be based on a very unscientific survey coming out of a conference, sponsored by Business Week, of what were thought to be financial executives. The attendees were asked whether they had ever been pressured by operating management to "cook the books." Twelve percent of them said that they had. We have heard members of the SEC staff make specific mention of this study.

We felt it advisable to determine who actually attended the conference and what specific questions they answered. We found that the group was not a good cross section of CFOs and that the questions were not well framed. So we think that the issue may have been blown out of proportion.

We also take note of the SEC's concern about managing earnings through the use of "cookie jar" reserves. I was a CFO of public companies for 10 years, and it was my experience that CFOs are heavily penalized when they are not conservative in providing for unexpected adverse consequences. Ten years ago the SEC would have been very critical of companies that did not provide on the conservative side of a range. Now such behavior is being criticized. The savings and loan industry collapse was about not providing enough loan loss reserves.

It has always been considered prudent fiscal management to put away a few pennies for a rainy day.

There are abuses, especially in a business combination where companies overaccrue the costs of the acquisition and bleed out the accruals in subsequent periods. Other examples have been found in accruing for costs when a restructuring occurs--the big bath approach of trying to get everything behind you. Those abuses needed to be addressed.

CPAJ: The SEC has just issued its staff accounting bulletin on materiality for evaluating the treatment of known misstatements of financial statements. How does the financial executive view this development?

Livingston: This is worrisome to the CFO. It is just not realistic or practicable to examine every little misstatement or error under a microscope. The amount of data and information flowing into a set of financial statements of a complex organization is not conducive to worrying about immaterial items. We can't throw out cost­benefit considerations.

I am pleased to say, however, that the SEC consults with our committee on corporate reporting when it issues new financial reporting regulations and things such as staff accounting bulletins. In this instance, the SEC wants to eliminate the intentional booking of a misstatement in order to meet earnings expectations. We have no problem with that whatsoever.

CPAJ: Another outcome of Levitt's initiative was the Blue Ribbon Committee report on improving the effectiveness of corporate audit committees. Does FEI agree with the recommendations?

Livingston: We issued a comment letter to Levitt and the chairs of the New York Stock Exchange and the National Association of Securities Dealers, which chaired the Blue Ribbon Committee. We strongly support strengthening the role of the audit committee in financial reporting. Much of what was recommended is already in place at many companies.

Our letter, however, expressed two major concerns. The first was the recommendation to exclude financial management from discussions between the audit committee and the outside auditor on the choice of accounting principles. Financial executives should be in the loop in any discussion on which accounting principles the company should employ. The second was the requirement for the audit committee to, in effect, give an opinion that the financial statements are fairly presented in conformity with GAAP. We think the expression of an opinion on the financial statements is way beyond what can be reasonably expected from an audit committee. That is the outside auditors' job.

We think that the final rulemaking will be revised in response to our concerns.

As an example of how FEI works, on the same day and from the same place as the announcement of the Blue Ribbon Committee's report, FEI held a conference call for all our members with James Schiro, Frank Borelli, and Charles Bowsher of the committee and SEC Chief Accountant Lynn Turner participating. We reviewed the recommendations, one by one, and responded to questions. Later FEI staff drafted a position paper, made it available to our members for comment, and then issued our comments to the parties.

CPAJ: In addition to Levitt's concerns about earnings management, the SEC is very wary of the possible effects on the independence, objectivity, and effectiveness of audits by firms that are deriving more and more revenue from non-CPA type services. This is a major reason why the SEC was instrumental in the formation of the Independence Standards Board (ISB) to look into these kinds of issues. How do financial executives view these developments? Do they have the same concerns?

Livingston: What CFOs are concerned about are quality audits at a fair price, along with the added value of high-level advisory services. They also see the audit committee as an important control over whether a given auditor is independent with respect to a given company. Some audit committees, in order to avoid any question or doubt, are saying that the company's auditor should not provide consulting services. That's quite a jump from recent practice, where audit committees would look at the balance between the value of audit services and other services provided to the company. But there are CFOs that would want the freedom to engage their auditing firm for a special project or consulting engagement if it makes sense from a business perspective. They would say that there is a structure that can be effective in allowing that while providing assurances about preserving the integrity of the audit. That will be the challenge to the Independence Standards Board.

CPAJ: There are no financial executives on the ISB. Presently, there are four members from the accounting profession and four representing the public. Do you feel left out?

Livingston: At this moment I don't feel strongly that a financial executive is needed on the board. The people on that board are in a good position to look at conflicts of interest. At the board's request, FEI members serve on some of the project teams and task forces that the ISB has established to address various items on its agenda. FEI will also comment on all ISB proposals.

CPAJ: The SEC and its staff, led by Levitt, continue to apply pressure on the system to tighten up and eliminate all abuses and threats. As recently as October 18, 1999, Levitt commented on the self-regulatory role of the AICPA and the profession and expressed an interest in somehow forming a super self-regulatory body. What is your reaction?

Livingston: I think it is important that the SEC not so discredit the process as to bring it all down. In my view, we are not experiencing an epidemic of problem financial reporting cases. Relative to the total value of all the companies traded in the capital markets, the impact of the problem cases remains small. The problems attract a great deal of attention, as they should, but they must be kept in perspective. The truth is that the U.S. markets are the most transparent in the world and all the players--the financial executives, the auditors, and the regulators--contribute to that. The rest of the world would love to be in our position. There is no need to throw the baby out with the bath water.

Current Developments from the AICPA

CPAJ: The single largest AICPA membership category is CPAs in industry, comprising about 43% of total membership. To accommodate and create value for CPAs in industry, the AICPA has initiated things such as the Center for Excellence in Financial Reporting and a competency model for the "new finance" executive. Is this a threat to what you are trying to do?

Livingston: I don't believe we are in competition. We have a unique niche of high-level financial executives. There is room for both of us.

CPAJ: The latest version of the Uniform Accountancy Act from the AICPA and the National Association of State Boards of Accountancy would eliminate the need for a CPA to have actually worked for a CPA firm. How will the financial executive view this?

Livingston: I personally think my three years' experience was very important in preparing me to be an effective financial executive. When a financial executive builds an organization and employs staff he or she, in my opinion, looks at the CPA credential as an indication of knowledge and experience that can help the organization. If the experience requirement is watered down, the executive will have to look beyond the credential itself and see what kind of work the CPA has actually performed. I assume there will still be some good people going into public accounting that will get the training and experience that helps make a good financial executive. If the change results in fewer qualified people going into public accounting, that would be a problem.

International Accounting Standards

CPAJ: Your international organization has a seat on the International Accounting Standards Committee (IASC). How did FEI get involved?

Livingston: The International Associates of FEI represents financial executive institutes throughout the world. Right now the person attending the IASC meetings is from our organization, the North American FEI. We are a fully participating, voting member of the IASC.

CPAJ: Has FEI officially commented on the proposed restructuring of IASC?

Livingston: Our committee on corporate reporting issued a position paper on our own vision of what it takes to develop high quality standards. Like FASB and the AICPA, we think the process needs a truly independent body, free of political pressures. The existing structure allows for political influence. Although the proposed changes attempt to limit the potential for political interference, the structure is not satisfactory to FASB and the AICPA, nor is it to us. But the Europeans may not be quite ready for anything more. I sense, however, that the compromise that seems to be coming from the IASC in response to comment letters will lead to a structure with which we can at least move forward.

We would expect that financial executives would have a seat at the table in whatever structure emerges.

FEI and the Accounting Profession

CPAJ: At times the preparers of financial statements--financial executives--and auditors and regulators do not see eye to eye when it comes to increased auditor involvement in the financial reporting system. For example, they have resisted mandatory auditor reporting on internal control and auditor involvement in nonfinancial information.

Livingston: Right now financial management has a good feel for the kinds of nonfinancial information that its users--other management, directors, shareholders, and the investment community--can benefit from. In the opinion of some, if you bring the auditor into the loop, it puts a damper on the flow of the information, leading to boilerplate and inhibited disclosures. CFOs don't see added value, and there has not been any pressure from users to get the auditor involved.

On the internal control aspect, CFOs think the present system works just fine. The auditors review controls as part of the audit and issue a management letter. That letter truly brings added value to the process. CFOs are ultimately responsible for internal control, and they want to know where it can be improved. They don't see a need to get a "certification" of controls. That becomes a mechanical, almost check-the-box process.

Financial Accounting Standards

CPAJ: A few years ago FEI, in response to a request from FASB, recommended certain changes to the organization of the Financial Accounting Foundation and FASB that troubled the SEC and ultimately led to a greater number of public members on the foundation. Some saw the matter as FEI attempting to take over FASB's agenda. Any comment?

Livingston: I have not revisited those events, and I think at the moment there is no need to do so. I do know that as a result FEI now only appoints one member to FAF, whereas before it appointed two.

Let me make it clear that both FEI and CFOs strongly believe accounting standards setting should be the jurisdiction of the private sector through an independent board of highly qualified members. We do think, however, that FASB and the other standards setters should clearly identify the problem or issue that needs fixing before they set out to develop new standards. "What is the real problem?" is the question that FASB needs to ask. Sometimes the process gets off target.

I am a member of the Financial Accounting Standards Advisory Council (FASAC), and the more I see FASB in action the more I appreciate the hard work it does under very difficult conditions. Having said that, an example of our concerns is in the stock option area. Sometimes we think the issue is more about management compensation than quality accounting standards. We have a great system and we cannot let minority factions with a political agenda drive the accounting agenda.

CPAJ: How do financial executives feel about the elimination of poolings of interest in FASB's proposal for new standards for business combinations?

Livingston: I come back to the question I noted earlier. What problem is FASB trying to solve? We hear that a pooling covers up the economic reality of a business combination. But I would ask, "Do the balance sheets of most companies represent the economic reality of their operations and value?"

CPAJ: What about a company with an inflated market value using that stock to acquire another company?

Livingston: I think we should let the marketplace of buyers and sellers seeking to combine set the values. A company that is being acquired in a stock deal will factor in the likelihood that the stock will hold its value. Changes in accounting should not be made because some feel that businesses are making irrational decisions that are covered up by the accounting method chosen.

Getting back to the issue, FEI believes that poolings of interest accounting should be retained, especially where there is a merger of equals. There is a need to tighten up the requirements that would permit a pooling, but we think the concept should remain.

CPAJ: Do you think you have any chance of salvaging poolings?

Livingston: The conventional wisdom is that poolings are dead. But those that would attempt to revive poolings should not be underestimated. Part of the problem is the amount of time and effort the SEC spends in reviewing proposed pooling transactions, which gets back to the need to revisit the rules while keeping the concept. The SEC sees companies trying to conform transactions to meet the rules: It doesn't care for all the finagling. We need better rules.

CPAJ: FASB's proposed treatment of goodwill arising in a purchase seems to water down the effect and make a road map for analysts to ignore the effects of the amortization of goodwill. Will that make the detractors such as FEI object less strongly?

Livingston: Perhaps. We will be watching to see how FASB responds to the comment letters on the proposal.

CPAJ: It has been a pleasure speaking with you. Your energy and enthusiasm and first-hand knowledge as a CFO hold great promise for your organization. *

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