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July 1993

A call for leadership. (interview with US Comptroller General Charles Bowsher)(includes related article) (Cover Story)

by Craig, James L., Jr.

    Abstract- US Comptroller Gen and General Accounting Office Chief Charles A. Bowsher calls for a new leadership in the accounting profession. He believes that such renewal of leadership requires a willingness and enthusiasm to make reports on internal controls in a broad manner. Bowsher advocates the inclusion of controls over securing assets against loss and misuse, and complying with rules and regulations on these reports. The new leadership also requires accountants to assure the public that they are following professional standards in the performance of their practice and that corporate governance over financial reporting and internal controls are improved. The Comptroller General also recommends an increase in the cooperation between regulators and independent auditors. Lastly, Bowsher encourages accountants to stop denying that they are facing an image problem. They should instead accept the fact and make appropriate changes.

His role of adviser to Congress has brought him and GAO into the thick of the major problems facing this nation: the Federal deficit, the savings and loan industry bail-out, solvency of the banking industry, waste and abuse in Federal programs, problems with procurement of defense weapons systems, and financial management of Federal operations.

These issues have also brought GAO and Bowsher face-to-face with the performance of the accounting profession in acting on behalf of the public interest in financial reporting. For example, Donald H. Chapin, Assistant Comptroller General, Accounting and Financial Management Division of GAO, in a speech at an annual conference of accountants, which was printed in The CPA Journal in December 1992, commented on the perceptions of the profession by regulators and Congress: "Expectations are so unbelievably low that some are questioning whether there is a role for a private sector profession."

Bowsher, speaking as part of a lecture series on changing public attitudes toward the profession, called for a new leadership in the profession in the spirit and likeness of Colonel Arthur Carter, managing partner of Deloitte, Plender, Haskins & Sens in the 1930s. Bowsher recollected that Colonel Carter appeared before the Senate Committee on Banking and Currency to express his views regarding the soon to be enacted Federal Securities Act. He proposed that the financial statements to be included in a registration statement should be examined by an independent public accountant who would express an opinion. Congress accepted Colonel Carter's idea and revised the legislation accordingly.

In the mind of Bowsher, that is an example of leadership needed today to return the accounting profession to a position of serving the public interest.

The CPA Journal had the opportunity to speak with Bowsher following his participation at the lecture series.

The CPA Journal. Before we discuss your views of the new leadership that must emerge in the profession, our readers would like to know why GAO operates and why it finds you as the champion for change.

Charles A. Bowsher: GAO was created in 1921 to be the eyes and ears of Congress at the point the budget process was turned over to the Executive Branch. We began as checkers of expenditure vouchers and have grown to be a far-reaching arm that finds its way into all the important fiscal areas of the Federal government.

CPAJ: Who decides what areas, the GAO will audit or investigate?

Bowsher: We have two ways of choosing our subjects: we can self- initiate, which we do about 20% of the time, and we take requests from the Congress, primarily the Committees. The Chairmen of Congressional committees - or ranking member of the opposition - make the contact with us. We meet with committees often, and in the course of our discussions, problems and programs are identified that they will subsequently ask us to investigate or review.

CPAJ: Having done an audit and issued a report, what happens? Whose decision is it as to what corrections will be made? Who makes that important cost-benefit judgment?

Bowsher: Our computerized tracking system shows that 70% to 75% of our recommendations are implemented within a four-year period. Typically a report is issued to Congress or an agency, followed by hearings before one or both houses of Congress. Ninety-five percent of our reports are public; the remaining 5% are classified for national security reasons. The subject of the report has 30 days to respond, either to disagree or to agree. If there is agreement, the agency has to respond as to what action it plans to take. In 1980, Congress passed a law which requires the audited agency to make a positive statement to our oversight and appropriations committees, either disagreeing or agreeing, about our findings and recommendations. Usually after we testify at a Congressional hearing, the agency appears and gives its response, which becomes a matter of public record.

CPAJ: You have no authority to require action?

Bowsher: Our role is strictly advisory. It is up to either the Executive branch to act or Congress to legislate to make the recommended changes.

CPAJ: What if there is a disagreement?

Bowsher: If important, we keep making our opinions known. Take for example the B-1 bomber. We reported there were significant operating and cost over-run problems, but the Air Force disagreed. We continued to report what we considered to be the issues. Unfortunately, we have been proven to be correct.

The economic woes of the S&L industry is another. We said in 1987 and 1988 there were serious solvency problems in the industry. The regulators did not agree. Eventually, in 1988 when regulators were forced to try and save the industry with "deals" for survival at a substantial cost to taxpayers, the debate was over.

CPAJ: Your warnings fell on deaf ears for a while. That makes me wonder about the criticisms made of the accounting profession that if it had sounded an earlier alarm, billions of taxpayer's dollars would have been saved. How much would have been saved if Congress and the regulators had listened to the GAO?

Bowsher.:You can never be sure when and how fast the Congress and the regulators would have acted, or in what manner. However, there is no doubt that earlier action would have saved substantial money.

CPAJ: Your role in improving what Federal agencies do is not unlike that of the independent public accountant You uncover problems make recommendations, and depend on those with the authority - the Executive Branch, Congress, or the agency itself - to take the recommended action And you provide information to those with the authority as to which of your recommendations have not been implemented

Bowsler. That's basically it.

CPAJ: How do you communicate to the general public what you are up to?

Bowsher. We issue an annual report that summarizes our activities and reports. By the way, the report includes our financial statement and an independent public accountant's report on the financial statements, our system of internal control, and compliance with laws and regulations. The report by our outside auditor is the kind we think should be required of all entities in the public sector.

With a change in administration, we recently issued for the second time a series of transition reports which identify the areas we feel require President Clinton's and the new Congress' attention. Some of the reports deal with broad issues of concern to government as a whole, such as the budget deficit, financial management, and program evaluation. Others are agency specific.

For the first time, we have just issued a "high risk" series of pamphlets setting forth details of what we consider particularly vulnerable areas. We are trying to lay it all out to enable the Administration and Congress to focus on the nation's critical needs.

CPAJ: But the general public is not going to read your transition and high-risk reports, are they?

Bowsher. Many will because more than 10,000 copies will probably be requested. But also, that's where the media come in. They take our material and help tell the story to the public. For example, according to a recent study, we get more press coverage in The New York Times, The Washington Post, and The Wall Street Journal than any other Federal agency except the Defense Department. And don't forget the coverage of Congressional hearings on cable television.

I also think that our materials and views are reaching the decision makers. All told we issue approximately one million reports and other documents a year to the public, over and above what we issue to Congress.

CPAJ: There are 5,000 employees of the GAO. That's quite a large group of auditors.

Bowsher: Not when you look at the size of the Federal government. And our size has remained virtually unchanged over the last 30 years. Consider the increase in Federal spending over that time and the increase in size of the accounting profession. We are also issuing significantly more reports. And all our staff does not do auditing. We provide legal services to Congress, assist in drafting legislation, and review legislative proposals.

We are also responsible for establishing Government Auditing Standards in what is often referred to as the "yellow book." A revision is currently underway.

Of particular interest to CPAs, we have developed what we consider to be a simplified and more direct form of auditor's report. It removes some of the mumbo jumbo. Our outside auditors for 1992 used this approach in our annual report.

CPAJ: You are a big advocate of better financial reporting on the part of the Federal Government and are heavily involved in the implementation of The Chief Financial Officer's Act of 1990. When are we going to have GAAP financial reporting for the Federal Government as an entity? What can you do to make it happen?

Bowsher: As background, The CFO Act creates CFO positions with broad financial management powers in 23 major agencies and requires annual reports on the financial condition of government entities and on the status of management controls. It also requires Inspectors General to arrange for annual audits of financial statements for many of the government's operations. In response to this requirement, GAO undertook three pilot audits. We completed the audit of the Air Force in 1990 and the Army in 1992 and are in the process of auditing the IRS and the U.S. Customs Service. But there is still no requirement for financial reporting and auditing for the Federal government as a whole. I am still campaigning for that, through testimony before Congress, by keeping the topic alive in the financial and political press, and by talking it up with key officials, such as the Secretary of the Treasury.

Our last Secretary of the Treasury did not view financial reporting reform as a major need, and so we lost impetus. I expect to see a stronger response from Secretary Bentsen. Presently we are meeting all the new cabinet officers to discuss the financial problems in their areas, we are meeting with the new members of Congress, and we continue to do a lot of testifying before Congress.

CPAJ: Wouldn't we get a much better handle on our problems if the Federal Government did what The City of New York did almost 20 years ago in putting its financial statements and requiring a balanced budget on a GAAP basis? You were there. And then a proper cut can be made about whether we are borrowing to pay current expenses - a major no-no - or borrowing for capital items that will benefit the future.

Bowsher: I agree and hope the new Administration will be interested in financial reform. With its strong emphasis on investment, having financials on a GAAP-like basis would help make the distinction. But the Federal government has a complex problem to solve, and the Federal Accounting Standards Advisory Board is addressing it. Broadly speaking, investment for the Federal government includes long-lived physical assets like aircraft carriers which do not have measurable economic returns or useful lives. Investment also includes Federal funds for such things as roads and other physical infrastructure, R&D, and human capital for which economic values are very difficult to measure.

CPAJ: What's going on with the COSO Report, Internal Control - Integrated Framework. The report was three years in the making. The process included an exposure draft on which I'm sure you commented. And yet after it came out in final form last October, your office, over Donald Chapin's signature, issued a highly critical letter listing six reasons why it doesn't do the job. Are we at an impasse? Are you going to go your own way on internal control?

Bowsher: There is useful and helpful material in the report, but its shortcomings are just too great.

On a broader level, if you reflect on the Cohen Commission, the Commission on Auditors' Responsibilities, the profession has not come very far along the path outlined in its report. Many of the issues are still unresolved. The COSO report is the latest of the responses that just doesn't get the job done.

CPAJ: Is the document useful in any way?

Bowsher. Yes, if all that was suggested in the report were actually performed. But it also can be used in a negative way to justify a management's decision to ignore internal control evaluation and reporting.

If all the report does is promote an evaluation of internal controls at the financial reporting level with no coverage of safeguarding and protecting assets or compliance with laws and regulations, I think we have fallen short.

Take the issue of safeguarding Assets from the perspective of the financial institution. Perhaps the greatest need for effective controls is in the loan portfolio area. The controls over the process, from initiation of the loan to monitoring performance and valuing collateral, are the life-blood of survival and solvency. Controls of this type are specifically excluded from the COSO definition of financial reporting controls. A financial institution's report on internal control that says nothing about the loan portfolio is not doing the job. What I really need to know about has been written out of the definition.

I have heard many war stories about examiners and prospective purchasers visiting insolvent thrifts only to find loan portfolio records in shambles. Some prospective purchasers have had to walk away because they had no way of knowing what they might be buying.

CPAJ: Does that mean that when it comes to reporting on internal control for the Federal Deposit Insurance Corporation Improvement Act of 1991 you are going to recommend the COSO report not be used as a basis?

Bowsher: Yes, that's what we are recommending. I'm not saying that is the way it will end up.

CPAJ: On the matter of leadership in the profession, you have said there is an urgent need for the profession to step forward, assume greater responsibility, and close the expectation gap by doing more to meet expectations. What is it exactly you think the new leadership should be getting the profession to do?

Bowsher: First and foremost, there should be a willingness and enthusiasm on the part of the profession to report on internal controls in a comprehensive way that also speaks to controls over safeguarding of assets against loss and misuse and to compliance with laws and regulations.

Second, the profession has to provide additional assurances to the public that it is performing its work in accordance with professional standards, their substance as well as their form. The public needs to know that professional skepticism and independence are alive and well. The profession, when it applies flexible accounting principles, needs to seek to express economic reality. When it reports on internal controls, it needs to lay out significant weaknesses in a forthright fashion. One thing that can be done to make this happen is to strengthen the second partner review process.

Somehow the right people, with the right knowledge and judgment, have to be on the scene of the audit to understand what really is happening. I remember the time the large banks were making huge loans to third world countries. A smart auditor was needed to realize a bank official's statement, "sovereign nations never default," needed to be challenged.

When we dissected the failed S&Ls, we saw no real evidence the auditors were keeping up with the changes occurring right before their eyes. The way S&Ls did business had changed, but the way audits were conducted had not.

Third, we need improved corporate governance over financial reporting and internal controls. in the failed savings and loans we examined there was a strong board of director/audit committee presence on paper. But when we looked at those groups we found an appalling lack of knowledge of what they were supposed to be doing and what was really happening at the institution. We need a better definition of the role and responsibilities of the audit committees and a better definition of the auditor's relationship to the audit committee. If that relationship is truly primary, and the auditor's responsibility to the audit committee is stronger than his or her relationship with the company management, then the independence of the auditor will be enhanced. The independent auditor will be more inclined to think of the needs of the users of financial statements and will be more inclined to be critical of management when criticism is warranted. The time has come to take a look at the promise of the Cohen and Treadway Commissions and see where that promise has not been fulfilled. But the time has also come to look anew at the role of the profession in today's world.

The Public Oversight Board seems to have done that in developing its recently issued document, In the Public Interest. Some of what we are recommending is in there. We are still in the process of studying that document and are not prepared to say it has all the answers. We are looking at independence issues, public interest needs, oversight of the profession, and other matters suggested by the Public Oversight Board's report. We are preparing ourselves to play a part in actions that hopefully will take place as a result of the stimulus provided by the POB report.

CPAJ. What I am hearing does not appear to be all that dramatic a change. Are you saying, just do a better job of what you have been doing and report on internal controls?

Bowsher: No, not at all. I don't want to get into a discussion of the adequacy of accounting standards and the present financial reporting process and the profession's involvement in that area. Staying focused on internal controls, what we are saying is that the cornerstone of the new audit process is true independence coupled with a thorough understanding, there should be a forthright report on assurance about the effectiveness - or disclosure of significant deficiencies - of the controls over the entity,'s operations. That's a heck of a big difference. The heart of this approach is to take the auditor out of the single track of looking at a piece of paper. If I were going to audit a big commercial bank, I might want to take as many systems people out on the audit as I would trained auditors.

CPAJ: Your approach would only seem to apply to large businesses and financial institutions with highly sophisticated systems.

Bowsher. Yes, in large measure. In the smaller, privately-held organization, I think the auditor is typically more involved with the entity. He or she has continuing contact with the owner/managers, knows their operations, and knows if management has a handle on what's happening.

At the large international financial institutions, such a working knowledge is not possible for the auditor, and therefore the emphasis has to be placed on the system and the controls.

CPAJ: Are you saying if the audits of The S&Ls had been more systems oriented, a more effective early warning would have occurred?

Bowsher: The CPAs would have put on the record the lack of controls or their horrible state. Auditors spent too much time trying to sort out and pull together financial information about entities that were out of control. Even if they were able to put their arms around the numbers at one point in time, things were happening so rapidly, that without proper controls, the entity, could collapse shortly after the audit was completed.

CPAJ: In the 80s there was fierce competition over the audits of S&Ls. The result was low-balling of fees. Do you think that affected audit quality?

Bowsher: I can't comment on that. The issue is continually, being raised, so there must he something to it. But our analysis of what went wrong did not focus on this issue.

But I do not understand why the profession has allowed low-balling to happen. With the huge risks in a financial institution audit, it makes no sense to charge less than standard rates. Unfortunately some of the large firms have learned the hard way about those risks.

CPAJ: Did generally accepted accounting standards fail to reveal and report the problems of the S&L industry in a timely manner? Would some sort of fair value accounting have helped?

Bowsher: We're not saving that mark-to-market is necessarily the answer. We are thinking about that question. We do think an approach to bringing current value into the financial reporting picture is needed. The job is not as awesome as some would like to make it appear to be. But progress is still not being made.

CPAJ: Is there an opportunity for cooperation between regulators and independent auditors?

Bowsher: We think better cooperation between the bank supervisor, the auditor, and the Federal Reserve is essential. We see how it works in other countries. Right now each of the three groups does its own thing. The expertise of the regulator and the independent accountant needs to be brought together and focused on our banking problems. Our recent report on the work being done by the various Federal bank regulators - basically there are four, plus the Federal Reserve - shows that none of them are doing it well. If you add the state examiners and the CPA firms, you would expect everything to be found. The banks complain about overkill, yet we see holes in the process.

I see a huge opportunity for cooperation and improved results.

CPAJ: About the huge judgments and awards currently being made against accounting firms. Their very survival is threatened. Do these extreme consequences to the profession justify legislation for tort reform such as the elimination of joint and several liability?

Bowsher: This may surprise you, but I think there is merit in some sort of relief. Recent testimony has shown that many parties who have been convicted of culpability, other than accountants, are not paying their fines or making restitution. But there will be a price to pay to get legislative relief. Legislators are looking for some assurance that they are not going to be faced with another S&L-type bailout. They see the sudden collapse of large institutions and wonder about the accounting that the auditors have approved.

CPAJ: Will the trade off be some sort of whistle-blowing legislation?

Bowsher: No, I don't see whistle-blowing legislation as the ultimate solution of all the problems. The present professional standards, if followed, lead to the public being put on notice about illegal acts. I keep coming back to internal control reporting and true indedpendence as the keys.

CPAJ: A Self-Regulatory Organization (SRO) has been proposed as a way for the profession to achieve the necessary reforms. Do you believe this is the way to go?

Bowsher: An SRO is just one of a number of possible answers. I think the profession has to put together a package of reforms and, in the process of developing that package, decide how to best make it work. It may include an SRO; I just don't know at this time. The POB's report said it examined the SRO and decided the existing institutions could be used to accomplish reform.

CPAJ: What are other things we can do to improve the CPA's image in the eyes of the public, legislators, and regulators?

Bowsher: One of the things the profession can do is stop denying there is an image problem and then step forward with positive solutions. If it doesn't, others will step in to fill the void. I know of a super regional bank that turned to a consulting firm to get a report on its internal control system. The tools are there. The new AICPA S&L Audit Guide, issued perhaps after the barn door had been closed, presents the details of the operations of an S&L and the procedures and controls essential to it. The profession should also be looking at the high risk industries - health care, defense, insurance, and the like - that have the potential for significantly impacting the Federal budget.

The profession should recognize that constructive change is needed. The leadership of the profession should develop a bold plan and present it to the congress. Colonel Carter did it 60 years ago. We need the same type of leadership today.


The position of Comptroller General was created in 1921 as part of the Budget and Accounting Act, which established an executive budget. The lawmakers established the office as an independent audit function to be the watch dog of how Federal monies were managed. The Comptroller General, appointed by the President, for reappointment, and may only be removed by a joint resolution of Congress for permanent incapacity, inefficiency, neglect of duty, malfeasance in office, and moral turpitude. The heart of the law empowers the Comptroller General to "investigate, at the seat of government or elsewhere, all matters relating to the receipt, disbursement, and application of public funds" and to "make such investigation and reports as shall be ordered by either house of the Congress or by any committee of either House having jurisdiction over revenue, appropriations, or expenditures." The initial charge to the Comptroller General was to report to the Congress on every expenditure or contract made by any Federal agency in violation of the law and on the adequacy and the effectiveness of the administrative examination of accounts and claims in government departments.

The Act also required all departments and establishments to furnish the Comptroller General with requested information concerning their operations and to accord him "access to and the right to examine any books, documents, papers, or records of any such department or establishment."

Activities of the General Accounting Office of in its early years were to audit expenditure vouchers to see whether any particular expenditure was in accordance with law and to prescribe forms, systems, and procedures for administrative and fund accounting in executive agencies. As expenditures grew during World War II so did the number of vouchers to audit. By the end of the war there was a backlog of 35 million vouchers even though the size of the GAO staff had reached over 14,000. At that point the nature of work began to change more from being checkers of documents to auditors of programs.

The Budget and Accounting Procedures Act of 1950 significantly changed and clarified the GAO's responsibilities. The Act stated that maintaining accounting systems and financial reporting were responsibilities of the executive branch, and the Comptroller General should prescribe accounting principles and standards and cooperate with agencies in developing, reviewing, and approving systems. It also sanctioned the comprehensive audit by requiring the Comptroller General to "give due regard to generally accepted principles of auditing, including consideration of the effectiveness of accounting organizations and systems, internal audit, and control."

GAO Issues the First "Yellow Book"

In 1972, in response to the need for audits of Federal assistance programs that had proliferated in the 1960s, the GAO issued Standards for Audit of Government Organizations, Programs, Activities, and Functions, familiarly known as the yellow book. The yellow book standards gained wide acceptance. The Single Audit Act, which required that audits under the Act be performed under those standards, increased their importance. The yellow book was revised in 1981 and 1988 and is presently titled Government Auditing Standards. A third revision is under development.

The Congressional Budget and Impoundment Control Act of 1974 had a major impact on the activities of the GAO. It enlarged and gave it important duties relating to a new congressional budget process. It is this act that gave GAO a stated responsibility to provide committees, now a major part of its activities.

The staff was reduced to around 5,000 in 1960, where it has remained. Half the staff is located in Washington, D.C., with the other half in 15 regional offices.

Charles A. Bowsher, CPA, was appointed Comptroller General in 1981 by President Ronald Reagan. At the time of his appointment he was a partner of Arthur Andelsen & Co. He had been with the firm for 25 years except for the four-year period he served as Assistant Secretary of the Navy for Financial Management.

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