Re:Balance -- Jim Peterson

Prescribed at Valeant: “Mr. Pearson, It’s Time to Take Your Medicine!”

It’s not considered good manners to speak ill of the sickly. Nor, for that matter, the other way around.

So all concerned would wish nothing but a complete and speedy recovery for Michael Pearson – the CEO of Valeant Pharmaceuticals until a sudden and severe attack of pneumonia forced him to take medical leave in late December.

Events at Valeant through the autumn would have been breath-taking for its leader at the best of times – not least, the 60 % fall in its share price since August, its need to rationalize revenue accounting policies for its frequently-adjusted relationship with specialty pharmacy Philidor, and the looming deadline to file its 2015 annual report.

While observers might question the potentially sinister implications of the New York Times report of January 6 that Pearson’s “whereabouts and details of his condition have not been disclosed by the company,” prudence for Pearson himself might counsel the desirability of a prolonged and low-profile convalescence.

That’s for three reasons:

First, governance at Valeant is, to put it kindly, unsettled. The company’s initial strategy, announced December 28, was to fill Pearson’s role with a three-person “office of the chief executive” – with that ménage abetted by another three-some made up of members of its board. Whereupon, the company’s stock price promptly tanked a further 10%. Thus was aptly fulfilled the axiom, that “You can take my job, but not my place.”

Instead, as any high school football coach knows, if you claim to have three starting quarterbacks, you really have none. That realization took a week to sink in at Valeant, until January 5 when the labor of slaying the Hydra-headed monster was given to Howard Schiller – board member, former CFO and now named interim CEO.

Second, then -- next in Schiller’s Herculean tasks is the effort to hose out the stables -- not easy, but made less complicated in retreat from Pearson’s strategy of massive price hikes for the binge of old drug acquisitions that had exposed the company in the first place. In other words, the more distance Schiller can keep from the publicly-vilified Pearson the better, especially in the cosmetically important area of dialog with the agencies of law enforcement and securities regulation circling the company.

As to Pearson himself, thirdly – it’s safe to assume that the pockets in his hospital pajamas are deep enough that he is funded for all the costly medications his recovery may require – a state of fiscal well-being perhaps less true for the angry Valeant customers forced to swallow his cost increases along with their re-priced pills.

Further, tactically timed medical events have a way of going poorly among the white-collar class who become ensnared in the legal system. Among a brief sample:

• Suspended FIFA autocrat Sepp Blatter’s hospitalization in November for a “small emotional breakdown” – although pumped up in Blatter’s unrepentant grandiosity to a claim that he was “close to dying” – failed to prevent his original temporary 90-day leadership suspension being extended by the soccer association to eight years – and likely into the far distant future.

• Ponzi schemer Allen Stanford resisted his prosecution with serial excuses -- a racing heart, injuries from a prison fight with a fellow inmate, impaired judgment from addiction to an anti-anxiety drug, and injury-related amnesia – all of which earned him no relief from a post-conviction sentence of 110 years.

• Following his guilty plea but before the sentencing scheduled for this February, former Speaker of the US House of Representatives Dennis Hastert was hospitalized with a stroke and complications – the impact of which by way of delay or mitigation remaining unknown.

• Notably more consequential, the heart attack suffered by Enron CEO Kenneth Lay in July 2006, following his conviction but before sentencing on multiple fraud counts, proved to be fatal – his demise thus voiding his conviction on the federal charges and, in effect, changing to a non-terrestrial venue whatever fire-and-brimstone punishment he is now bearing for his earthly transgressions.

As Samuel Johnson observed in the 18^th century, “when a man knows he is to be hanged … it concentrates the mind wonderfully.” More to the point for Pearson, as for the others noted, the looming presence of the law seems to impinge on the body as well, and not in a way conducive to good health.

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In Print: “A Look at the Profession’s Uncertain Future” – The CPA Journal

Through 2015 The CPA Journal – published by the New York State Society of CPAs – observed its 85-year history with comprehensive exploration of the profession – past, present and future.

It was my pleasure to offer a guest editorial in the Journal’s issue for December – copied here[1] -- “A Look at the Profession’s Uncertain Future: A Rough Path Lies Ahead for ‘Big Audit’.”

The views briefly reprise the themes in my book, also released last month – “Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms” – which explores the interrelated forces that challenge the sustainability of “Big Audit” -- the current fragile model by which assurance is delivered on the financial statements of the world’s large public companies.

Access to the Journal is either by membership in the New York society or by subscription. For the valuable insights available from this important “voice of the profession,” one choice or the other is recommended.

 

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[1] With the generous permission of The CPA Journal, Voice of the Profession, December. 2015, all rights reserved, and thanks and appreciation to Rich Kravitz, its editor-in-chief.

Mike Oxley, RIP – Now For His Legacy…?

           “De mortuis, nil nisi bonum”

 As the bells of celebration were ringing in the New Year, they also tolled for Michael G. Oxley, retired Republican congressman from Ohio (1944-2016).

No news story failed to open with Oxley’s signature legislative accomplishment -- his co-sponsorship with now-retired Senator Paul Sarbanes (D-Md) of the 2002 law that bore their names and up-ended the regulation of public company audits and the auditing profession in the United States.

But for that bill – rushed to passage in the over-heated atmosphere of financial scandal known for short as Enron/WorldCom – Oxley’s extended career as a genial and modestly accomplished back-bencher would have been little remarked. With it, a re-visiting is possible of my observation in the International Herald Tribune on July 20, 2002, about the preliminary Senate vote, that “any legislation receiving the bipartisan margin of 97-0 is bound to be fundamentally defective.”

Those with interests to be served in preserving the status quo of Big Audit have been predictably bright and sunny. As SEC chairman Mary Jo White asserted on December 9, 2015, keynoting the AICPA’s annual national conference, “investor confidence in audited financial statements and independent auditors is high…. attributable, at least in part, to improvements in audit quality….”

Among those less sanguine about the persistence of the “expectations gap” would be the investors in the cascade of companies falling into disaster after the passage of Sarbanes/Oxley. They have reprised the question, “Where were the auditors?” as the list has lengthened since the debacle of 2007-2008 -- from Bear Stearns and Lehman Brothers, AIG and Fannie Mae, right down to Valeant and Martin Shkreli.

These and the many similar examples shape an understandable skepticism at the absence of convincing causation-based evidence that the American environment for reporting and auditing has been improved by Sarbanes/Oxley. And there are other grounds for doubt -- the following being tentative and incomplete:

• Start with the absence of a prosecutorial track record under the law’s new signing obligations for company officers and auditors – practical confirmation that these were hastily designed redundancies engrafted on the existing legal requirements of the core American securities laws of 1933 and 1934.

• The ability to conclude that Sarbanes/Oxley was no more than a one-off politically-motivated spasm by which the law-makers defaulted to “motion feigning as progress” is reinforced by the absence of discernible impact of the populist-oriented rhetoric from Occupy Wall Street through Elizabeth Warren to Bernie Sanders, and the lobbying-based bottle-necking of the rules by which to implement the Dodd-Frank legislation of 2010.

• Other concerns are found in the staff rooms of the large accounting firms – where straw polling among the generation of young auditors reveals deep dismay about the twin pressures of time-and-budget driven performance, and processes designed primarily to satisfy the hostile check-lists of the inspectors from the Public Company Accounting Oversight Board.

• Further, of concern to those staffers’ superiors in the ranks of the large firm partners, is the existential question whether audit quality has been improved or degraded by Sarbanes/Oxley’s injection of federal agency control over both auditing standards and quality review, and its constricting prohibitions on the scope of services permissible for audit clients.

Scholars of the human tendency to tell over-simplifying stories about complex events would caution that the supporters of Sarbanes/Oxley -- who optimistically ask, “Is the state of reporting and auditing better today than in 2002?” -- are asking the wrong question.

The more rigorous concern – therefore less appealing, and more readily denied or avoided – is this: “How would present conditions compare, if other strategies had been followed in 2002 – including, importantly, doing nothing at all but instead allowing the system to go through the inevitable period of cathartic cleansing that is part of every cycle in the financial markets?”  

That is – while Sarbanes/Oxley has plainly not achieved the Herculean task of hosing out the financial stables, neither are those edifices of capitalism equipped with self-cleansers. Rather, both periodic out-breaks of financial chicanery and the recurring resort to ineffective hindsight “solutions” are as embedded and as inevitable as the cyclical fluctuations in the world’s economies themselves.

Just so, it is a predictable certainty that the next generation of white-collar manipulators are evolving toward maturity even today – and that their unscheduled future break-outs will both surprise and evade the best efforts of earnest if out-witted gate-keepers – the SEC and the PCAOB, and Washington legislators as well.

Those would have included the well-intentioned Mike Oxley himself. All will speak well of him. But Shakespeare’s Mark Anthony expressed the darker view, at the funeral for Julius Caesar, that “the good is oft interred with their bones.”

That oration also provided a lasting reminder: even the Sarbanes/Oxley law is over-ridden by the law of unintended consequences, and “the evil that men do lives after them….”

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