Federal auditor cites golf legend as epitome of integrity

The American golfer Bobby Jones was on track to win the 1925 U.S. Open tournament when the head of his golf club accidentally touched the ball on a rough embankment adjacent to the green on the 11th hole.
No one else had seen the contact between ball and club, Greg Scates told an audience of Lehigh accounting students last Tuesday, but Jones reported the incident to officials and insisted on taking the automatic one-stroke penalty that went with it.
The extra stroke, said Scates, who is a deputy chief auditor with the Public Company Accounting Oversight Board (PCAOB), cost Jones the victory in one of golf’s most prestigious events. Jones finished the match in a tie and lost the ensuing playoff.
But Jones also exemplified the meaning of integrity that Scates imparted to his audience—”doing the right thing when no one is watching.”
Scates was invited by the department of accounting and the College of Business and Economics to give the address at the Ninth Annual Andrew P. Segal ‘67 Distinguished Accounting Speaker Series Event.
He devoted much of his 45-minute talk to the need for ethics and oversight in the auditing of public companies. His talk was titled “Auditors as Gatekeepers: Are Investors Protected?”
“Protecting the interests of investors”

Scates gave a brief history of auditing regulations in the United States. In 1934, he said, Congress established the Securities and Exchange Commission (SEC), partly in response to the stock market crash that had occurred five years earlier.
The McKesson Robbins scandal of 1938 and the collapse of Equity Funding Corp. of America and Penn Central in the 1970s, Scates said, led to a tightening of standards by the profession and, in 1977, to the establishment by Congress of the Public Oversight Board (POB).
The Enron and WorldCom scandals of 2001 and 2002 prompted Congress in 2002 to pass, almost unanimously, the Sarbanes-Oxley Act of 2002, said Scates. “If WorldCom had not failed,” he said, “we would not have Sarbanes-Oxley.”
Sarbanes-Oxley, or the “Public Company Accounting Reform and Investor Protection Act,” as it was labeled in the U.S. Senate, set new auditing standards, and tougher penalties for fraudulent financial activity, for U.S. public companies and their governing boards and accounting firms.
The act also authorized the creation of the PCAOB, which replaced the POB. With a staff of 800 operating from offices in Washington, D.C., and New York City, PCAOB oversees the auditing and accounting practices of the 2,300 companies in the U.S. and four other nations that are registered with the organization.
“Our goal is to protect the interests of investors,” Scates said. “We focus not just on risk but on the philosophy of firms. We interview their leaders to find out how they are running their companies and how are they making decisions. We ask, ‘how do you attract and retain clients? Does your quality-control philosophy encourage members of your firms to do the right thing?’
“We have to get an inkling as to whether management can be trusted.”
The inspections it conducts of the companies that are registered with it, said Scates, are the PCAOB’s main method of protecting investors.
“We try to get firms to remediate quality-control deficiencies to our satisfaction within one year,” he said. “We go further by identifying the root causes of these deficiencies.
“We’re going to expand our auditing reports in response to recommendations from investors.”
“Rare opportunities” for students and faculty
Scates, who took questions from half a dozen students, concluded his talk by returning to the story of Bobby Jones.
“What happened to Bobby Jones after the 1925 U.S. Open? He went on to win 11 of the next 15 major golf tournaments. He achieved the Grand Slam, winning all four major golf tournaments in one year. No one else has done it since.
“It’s amazing what happens when you do the right thing.”
Scates was invited to campus by Parveen Gupta, professor and chair of the accounting department, who worked at the SEC as an academic accounting fellow from 2006-07.
In addition to giving the Segal Lecture, Scates visited classes that Gupta and Jay D. Brodish, professor of practice in the accounting department, teach in the Master’s in Accounting and Information Analysis Program. He discussed the role of the PCAOB and changes occurring in the auditing profession.
Scates also met with accounting department faculty members to discuss research opportunities.
“Greg Scates very generously spent an entire day on campus interacting with students and faculty,” said Gupta. “These are rare opportunities, and we are fortunate that I was able to invite him to campus through the Segal Lecture Series.”
The Andrew P. Segal ‘67 Distinguished Accounting Speaker Series was established in 2003 by William N. Segal and Andrew P. Segal ’67 to bring accounting leaders to campus.