Slowing Public Accounting Headhunting
Walker, today president and CEO of Herman Miller, is one of many furniture executives originating from the public accounting field. His counterpart at Haworth Inc. in Holland, Franco Bianchi, was also recruited from Arthur Andersen. Jim Keane, president of the Steelcase Group, was an auditor at what is today KPMG.
Public accountants are among the most popular recruiting candidates for companies big and small, with firms historically selecting candidates from the ranks of their accounting firms. Scott Baker, president of National Nail Corp. in Wyoming, came to that company through its consulting relationship with Arthur Andersen. Gaylen DeYoung, managing partner of Francis Marketing in Grand Rapids, audited the company as a member of Plante & Moran.
At Kalamazoo medical device manufacturer Stryker Corp., most of its financial oversight team hails from its external auditor, Ernst & Young LLP, including CFO Dean Bergy, Vice President of Internal Audit Jeffrey Winter and Controller James Praeger.
At least for publicly listed companies, recruiting talent from the public accounting field has become more difficult in the wake of the Sarbanes-Oxley Act of 2002. Among the lengthy financial and accounting disclosure regulations is a stipulation prohibiting the hiring of accountants from its external audit into a financial reporting oversight role.
As explained by Jeff Ott, an attorney at Warner Norcross & Judd who specializes in securities law, Sarbanes-Oxley Section 206, as interpreted by the SEC, states that an accounting firm will not be considered independent of a company if that company has a CEO, controller, CFO, chief accounting officer or equivalent who participated in the external audit as an employee of the accounting firm in the previous year.
“The practical effect is that companies are no longer going to be able to pool from the folks that have worked on their audit,” said Ott. “Or at least they won’t be able to right away, or they won’t be able to employ them in a financial oversight role.”
The intent of the regulation is to ensure that companies don’t have accountants working on both sides of its external audit, which, incidentally, was Herman Miller’s original intention in hiring Walker — to allow him to implement changes he had suggested as a member of the audit team — although the position he accepted would not likely have been prohibited by the new rule.
“What it has done is slow down the ability of clients to hire their auditor. They can’t come in right away if they’re going to be in a decision-making position,” said Robert Herr, managing partner of Crowe Chizek & Co. LLC in Grand Rapids. “If somebody needs a CFO, they’re not going to go to their external auditor to find them now. They’ll go to another firm or use headhunters and so forth.”
David Hoogendoorn, managing partner of Ernst & Young LLP in Grand Rapids, said that the new rule hasn’t slowed down recruiting, but it has shifted its direction.
“There is still a need for these types of people,” he said. “Before, companies would try to hire someone who knew their business and their process, someone who could have an immediate impact. Now they’ll hire from a different engagement or they’ll go to another firm.”
The rule was, in effect, intended to encourage companies to hire from firms not engaged as external auditors, Hoogendoorn said, and while that has happened, it isn’t an iron-clad law. Companies can hire employees for operational or non-oversight positions, then later move them into a financial oversight role. They could also seek a new audit firm.
For both sides, Hoogendoorn sees the new rule as positive: It has influenced the way companies recruit from its auditors for all positions.
“What it has done is force the company to really open up and have a dialogue with their auditor about the people they want to hire and what that means to the engagement,” he said. “Now you have to talk to the public accounting firm before you pursue the person. You can have a dialogue as to what the impact will be on the relationship between the companies.”
There are some other independence concerns when hiring from external auditors. For accountants eligible to receive retirement benefits, or with ownership interest in the accounting firms, those benefits or assets must be liquidated for the firm to remain independent. For retirement benefits, that could mean a lump-sum pre-payment.
“At the end of the day, we need to create an environment that is attractive for professionals to stay in the profession: work-life balance, compensation, all these things that would entice people to stay in the profession versus opting for an alternative in private industry, because there will always be an opportunity to do so,” said Tom Hiller, managing partner of BDO Seidman LLP in Grand Rapids.
According to Hoogendoorn, the recruitment of public accountants by clients ultimately has a positive impact.
“Public accounting firms are some of the best training grounds for high-quality financial reporting. When they go to work for clients, it’s a positive,” he said. “The vast majority of the CFOs of the top public companies in the area all came out of public accounting.”