http://www.nytimes.com/2002/03/30/business/30ACCO.html

March 30, 2002

Audit Group's Chief to Donate Disputed Stock to a Charity

By STEPHEN LABATON

WASHINGTON, March 29 — The head of the premier trade group for accountants, facing growing condemnation over a transaction critics liken to the lucrative partnership deals at Enron (news/quote), has decided to give away stock in the group's commercial subsidiary that cost him about $100,000 but is now worth more than $5 million.

The decision, abruptly announced in the middle of an interview late Thursday by Barry C. Melancon, the president and chief executive of the American Institute of Certified Public Accountants, was a swift about-face. It follows the months Mr. Melancon (ma-LAN-son) has spent defending the deal to increasingly hostile constituents who have begun a petition drive to remove him. It also comes as Mr. Melancon is leading a campaign to restore the sagging image of accountants and beat back tough new conflict-of-interest proposals.

While Mr. Melancon has said there was nothing wrong with his investment, critics have said that it was improper because he was using his position as head of a nonprofit organization to profit enormously from its commercial ventures. Since the deal was not at arm's length, they said, it raised questions about his ability to exercise independent judgment and supervise the institute's relationship with a company in which he holds a substantial interest.

As the institute's leader, Mr. Melancon is widely considered the voice of the profession. A 115-year-old organization, with more than 337,000 members, the institute serves many professional and regulatory roles. It disciplines unethical accountants, helps set standards, administers the exam for certified public accountants and offers the continuing education programs required of all practicing accountants. It also lobbies policy makers.

Two years ago, the institute decided to sell all its products through a dot-com start-up, CPA2Biz, where Mr. Melancon is the chairman. He was given a 1 percent stake for $100,000, an investment the institute's governing council approved. His holdings were recently valued in a lawsuit at $5 million. With the company taking discreet steps in recent weeks that could lead to a public stock offering, experts said that the value of Mr. Melancon's holdings could multiply several times more.

Mr. Melancon's decision, to donate the stock to a charitable foundation, was aimed at answering criticism from prominent accountants who said that the deal was inappropriate and had begun to undermine Mr. Melancon's efforts to revive public confidence in the profession.

"This was a distraction to communication," Mr. Melancon said. "It just was causing us to not be focusing on the issues on Enron, the issues of change to be made."

Other accountants, including members of the institute, had publicly criticized the stock deal. Abraham J.Briloff, an emeritus professor of accountancy at Baruch College of the City University of New York, had called it "obscene," and "a breach of a crucial, critical fiduciary relationship."

Harley Courtney, a member of the institute for more than 40 years and professor of accounting at the University of Texas at Arlington, attacked the deal in articles entitled "Rape, Pillage and Plunder at the A.I.C.P.A." in The CPA Software News, a trade publication.

BDO Seidman, the nation's sixth-largest accounting firm, has sued the institute over its ties to CPA2Biz and accused Mr. Melancon of unjustly enriching himself from his ties to the institute and the company.

Nancy Newman-Limata, president of the New York State Society of Certified Public Accountants and a PricewaterhouseCoopers partner, argued unsuccessfully to the institute's governing council that it was inappropriate for Mr. Melancon, as head of a nonprofit organization, to have a financial stake in CPA2Biz.

Two years ago, Mr. Melancon played a vital role in developing CPA2Biz and having the institute grant it exclusive rights to market all its products, including computer software for accounting firms, continuing education materials, accounting books, retirement planning services and insurance. Since all of the company's products have the institute's seal of approval, it is virtually impossible to practice accounting without buying some items from CPA2Biz.

In return, the company agreed to pay the institute annual royalties of at least $43 million the first year and $36 million thereafter. The company was awarded the exclusive right to market all the institute's products,

Mr. Melancon earned about $600,000 last year as the institute's top executive. Under changes filed two months ago to CPA2Biz's Delaware certificate of incorporation, Mr. Melancon's holdings grew to about 1.2 million shares, with an average purchase price of about 8 cents a share. Mr. Melancon declined to answer questions about the current value of the stock, or the value he would claim as a charitable donation on his income tax returns.

Defending the propriety of his initial investment, Mr. Melancon said his governing council had approved it overwhelmingly after it was reviewed by a special committee.

"The board did significant due diligence and did everything right," he said. He added that other investors in CPA2Biz, which include Microsoft (news/quote) and Thomson, had insisted that he have a personal stake. Those companies and others have invested more than $500 million.

But Ms. Newman-Limata of the New York State group said that she had raised a series of ethical concerns and tried to defeat the plan. Asked why the institute's leaders had no objections, she said: "I think the council represents a group of leaders of the profession that follow Barry and find him charismatic. He has surrounded himself by a network of good old boys and yes-men."

She said she was surprised to learn of Mr. Melancon's decision to donate his shares to an accounting foundation at the institute involved in educational and research projects. At a meeting of the governing council on Tuesday at which CPA2Biz was discussed, Mr. Melancon never gave any indication that he intended to donate his stock, she said.

Mr. Melancon said he had been considering the action for about a month, and a spokesman said that the top staff of the institute was told of his decision on Wednesday.

As public disapproval of the insider dealings at Enron coincided with the institute's own campaign to clean up the profession's reputation, the institute's early endorsement of Mr. Melancon's investment has come under heavy questioning.

Mr. Melancon said there were important differences between what occurred at Enron and his own investment, most notably that his governing council knew all the details of the transaction and approved it. But Professor Courtney said there were also important similarities.

"There are parallels between the two," he said. "There has been an unwillingness in both cases to disclose everything about the relationships between the two entities. Officers of the creating entity in both instances also functioned as agents of the created entities, representing both while creating deals between them. And of course, the officers of the parent organization were enriched by profits obtained by the created entity."

"I think," Professor Courtney added, referring to the former chief financial officer of Enron, "that Mr. Melancon needs to meet Mr. Fastow."