Rosen the gadfly of accountancy

Among the CICA's beefs with Mr. Rosen is his persistent public denunciation of Canadian accounting standards. He describes them as a "massive Ponzi scheme," and says they attract fraudsters to this country. He's equally critical of the major accounting firms for "protecting one another with an unspoken secret pact," as well as the "bozos" they employ to perform financial audits for public companies.

The Financial Post
January 21, 2002

Rosen the gadfly of accountancy
'The auditors are the ones who are driving the getaway car'
Deirdre McMurdy

AlRosen1.jpg

Al Rosen is a chartered accountant — but what he really is a professional pain in the ass.

A forensic and investigative accountant since 1986, he clearly relishes his role as a defiant iconoclast. At 67, he is lean and slightly rumpled, with a habit of lowering his voice and glancing over his shoulder before sharing an insight. And he's got plenty of them, after so many years spent sniffing out the scams buried in corporate balance sheets.

He's also got plenty of scars from his frequent clashes with members of the financial establishment — whether the Canadian Institute of Chartered Accounts (CICA), the securities regulators or the country's corporate titans. "A lot of people think I'm nuts, but I don't care," he says. "Every year the CICA writes to me at least once to complain about my comments, but it always blows over."

Among the CICA's beefs with Mr. Rosen is his persistent public denunciation of Canadian accounting standards. He describes them as a "massive Ponzi scheme," and says they attract fraudsters to this country. He's equally critical of the major accounting firms for "protecting one another with an unspoken secret pact," as well as the "bozos" they employ to perform financial audits for public companies.

"The lower 80th percentile of a business class, that's the group that goes into accounting," he says. "They're not the cream of the crop. They're the weak ones."

So you can see why he doesn't win popularity contests.

But a consensus may be gathering around his views, as the accounting profession comes under increasing public scrutiny and evidence mounts that Arthur Andersen LLP, Enron Corp.'s auditor, has much to answer for in the biggest collapse in corporate history.

At the same time, as financial results for the fourth quarter of 2001 were starting to appear, Canadian securities regulators said companies reporting their earnings must include calculations based on
Generally Accepted Accounting Practices (or GAAP) in reports, releases and other investor information.

Mr. Rosen, however, remains unmoved by either development. He insists that the cloud hanging over
Enron's accountants has limited impact on the average investor. And he's equally cynical about the regulators' rule-tightening. "I think it's quite disappointing. They're saying you can still use the fake numbers as long as you explain that there are other ones too."

But even those who adhere religiously to Canadian GAAP come under fire. According to Mr. Rosen, the standard enshrines rules that are at least 30 years out of date. Among its most insidious "gimmicks," he says, are the ways it allows firms to defer expenses and losses, and the broad scope it permits in dealing with good will, which includes such intangible assets as supplier or customer relationships, which are impossible to quantify. In many cases, Canadian firms can treat them as equity.

This not only affects the borrowing power of a company, it misleads creditors and shareholders.
"Increasingly, it's become a warning sign when a company continues to adhere to Canadian accounting practices," Mr. Rosen claims. "Moving from U.S. to Canadian rules can change a profit of $7 a share to a loss of $1 a share."

Such aggressive attacks on the business establishment and on his peers is, of course, an essential part of the marketing strategy for Mr. Rosen's five-member firm, Rosen and Associates.

His clients include a roster of institutional investors, as well as banks and other creditors who have been stiffed on loans and covenants. He's also in demand as an expert witness when disputes go to trial.
"GAAP isn't designed for creditors or investors, it's designed to make life easy for accountants. But I shouldn't complain, because of all the problems that creates, my business is growing all the time."

That's especially true as the smoke clears from the frenzy of complex mergers and acquisitions and the implosion of the high-technology stock bubble.

Nortel Networks Corp., which reported a US$1.8-billion fourth-quarter loss last week, is one of the companies that Mr. Rosen started probing even as its share price was flying high. He found that after the company's rapid-fire purchase of nine technology ventures in just over a year, its quarterly accounting statements made it almost impossible to figure out which purchases contributed to revenue. As a result, it was tough to establish any revenue trend line. He was also leery of Nortel's emphasis on "operating profit" and the big-ticket asset sales that were used to offset massive pre-tax losses as early as the first quarter of 2000.

Does he gloat when he's proved right? Not at all. "I don't go around bragging about my call on Nortel," he says. "Given how many people got badly burned, they'd rather kill you than hear 'I told you so.' "

The same could be said of the whistle-blowing he has done on such high-profile corporate implosions as
Castor Holdings, Philip Services Corp., Livent Corp. and Cott Corp.

Still, for all the noise he makes, Mr. Rosen's attempts to capitalize on his market insights have largely fizzled. He has had an affiliation with a research-only equities boutique, Veritas Research. He has also engaged in short-selling forays, although he claims he's often been burned by being right too early on. "I don't invest in Canada any more. I lose too much here," he says. "I like the currency about as much as I like the accounting."

Mr. Rosen swears that he abides by the rule that he does not trade a stock within 60 to 90 days of making a critical report. Most recently, he says his personal portfolio took a hit because of his inability to unload a residual stake in Bell Canada International. One of his studies helped to push down the share price.

Given that he has more than 40 years of accounting experience and an innately suspicious mind, it typically takes him about 50 hours of scrutiny to track down the soft spots on a balance sheet. For that reason alone, he says it's unrealistic to expect individual investors to do the same.

Which is why he believes regulators and policymakers should be much more aggressive. "Your car and your condo are protected by a police force and a Criminal Code, but there's no protection for your savings," he says. "The average person's pension is at stake here. It's about time we all woke up."

Although he will grudgingly concede that the Ontario Securities Commission is trying to improve the enforcement of securities law, he insists the laws and the penalties are still too weak. He's an advocate of creating a national securities body and staffing it with "some full-time career SOBs — not people who are seconded to pad out their Rolodex and then return to Bay Street."

He takes an equally jaded view of recent reports on improving corporate governance, such as the task-force report tabled by Guylaine Saucier on behalf of CICA, the Toronto Stock Exchange and the Canadian Venture Exchange. "The report recommended that directors use the auditors as a liaison with management," snorts Mr. Rosen. "The auditors are the ones who are driving the getaway car."

Until the recession of the early 1980s, he says accounting still had some integrity, albeit flawed. But firms became more focused on their own bottom lines, hiring marketing types and dumping partners who didn't bring in or hold big clients. The pressure to make money encouraged them to overlook irregularities or succumb to client pressure to see things their way.

"From that time we've gone from one audit disaster to another," he says. "It's especially a problem with financial institutions where cash is really important." To underscore his point, he points to the failure of the Northland Bank, Principal Group, Confederation Life, Standard Trust and a series of credit union collapses.

While a permanent state of outrage is an integral part of Mr. Rosen's curmudgeon schtick, he insists his nature is not as dark as his view of the business world.

He claims his decades of teaching prove he's an optimist at heart. And the fact that he still speaks to his daughter, who studied for and wrote her CA exams several years ago, proves he has a sense of humour.
Now if only he could convince corporate Canada's auditors and chief financial officers.


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