The Problem With a Non-CPA CFO - GUEST POST by Francine McKenna

NOTE: While I am on vacation, I invited some guest posts from popular bloggers. Following is our second guest post from Francine McKenna, managing editor of Re:The Auditors. She is also a popular speaker, and will be on a panel at the New York County Lawyer's Association on Sept. 15. Her guest blog post follows.

There?s been quite a bit of press about American Apparel?s financial troubles. It?s now three weeks since the company announced that its auditor, Deloitte, had resigned. (See also the company's Form 8-K and the auditor's response.) Shares plunged almost 25% on that news.

It?s not often that we see the details behind a high profile auditor resignation. It?s even more unusual to see that auditor resignation investigated by the U.S. Attorney's Office. Further, if a company goes bankrupt, we may learn more about how the auditor relationship deteriorated via a bankruptcy examiner?s report.

New Century Financial Corp. creditors have asked a federal judge for permission to investigate KPMG LLP's relationship with the bankrupt subprime mortgage lender?New Century's official committee of unsecured creditors said it wants to obtain documents from KPMG, and question current and former officers concerning its accounting, auditing and other services for New Century. KPMG resigned as auditor on April 27, 25 days after New Century filed for Chapter 11 bankruptcy protection from creditors.

Part of the problem with American Apparel may be its thirty-one year old CFO Adrian Kowalewski. It?s beyond my ken how a listed, public company with a history of accounting issues can get away with naming an investment banker with no CPA or even a hint of hands-on accounting experience to CFO.

?In his new role as Chief Financial Officer, Mr. Kowalewski will also have oversight over financial management, accounting, and financial reporting, including Sarbanes-Oxley compliance? Mr. Kowalewski began his career in investment banking at CIBC World Markets in mergers & acquisitions. He also worked at Houlihan Lokey Howard & Zukin and Lazard Frères & Co., both investment banking firms, where he was involved in mergers & acquisitions and financial restructurings. Mr. Kowalewski received a bachelor?s degree with honors in economics from Harvard University, and an MBA from the University of Chicago Graduate School of Business.?

Do you remember the last time we had a high-profile non-CPA CFO trying to sort out serious accounting issues?

Does the name Erin Callan mean anything to you?

?In retrospect, it is easy to see the error of her ways for taking the job and of Lehman?s management for appointing her. What public company, of the size and stature of Lehman, in trouble already, can afford to have a CFO who is not an accountant? Have we not seen what happens when a CFO has no interest or aptitude for GAAP? A seasoned CPA CFO ? not Mr. Kowalewski - would have known that an auditor resignation over ?controls? could lead to lots of questions. Auditor resignations also eventually lead to lots of litigation if there?s a sudden stock price drop that accompanies them. [Editor's note (EO): Long-term experience and other credentials in place of or in addition to a CPA certificate per se may also help qualify a CFO, but there is a lot to be said for holding a CPA certificate and a fair amount of CPA experience to fulfill the role of CFO, including practicing professional skepticism, understanding testing of accounts, significant experience reviewing external reporting and internal controls, etc.]

?I don?t think there is any fire there,? Schey [American Apparel attorney] said. ?Most of the smoke revolves around weak internal controls, being worked on as we speak. They may not be the most seasoned Wall Street players, but when it comes to ethics and integrity, they have it in spades.?

In spite of their lawyer?s exhortations, I?m afraid the U.S. Attorney's Office thinks ethics and integrity may be the bigger issue.

[Editor's note (EO): In the guest post above, McKenna writes about the importance of ethics and integrity. Ethical leadership and Integrity have been among the pillars of FEI's mission since its founding, over 75 years ago. Additionally, FEI members sign a Code of Ethics annually, which states, among other things, that all FEI members will "Share knowledge and maintain skills important and relevant to constituents' needs," and "Proactively promote ethical behavior as a responsible partner among peers, in the work environment and the community." To keep up on the latest issues, read more about our upcoming conferences, webcasts, research and advocacy activities. FEI, an international organization, also has local chapters where you can network with peers.]

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