History of Proposed Accounting and Auditing Reforms in the Wake of the
Enron Scandal
Bob
Jensen at Trinity
University
Questions
Note the phrase below that reads "including what is left
of Arthur Andersen."
-
For what does one pay what is left of Andersen
(AA) for anything other than training in St Charles?
-
Does AA still have offices in some cities other
than St Charles?
(AA is no longer allowed to perform audit services)
-
Do the $20 million in 2006 really compare with
the $4 million in 2001 in terms of what services are purchased?
-
Is Mr. Wilxox giving credit where credit is due
for the role Sarbox played in keeping investors from bailing out of
corporate securities investment after the very serious accounting scandals
of the creative accounting cookery (crookery) of the 1990s? Sarbox makes
auditing of his firm more expensive, but Sarbox may have helped save the
revenue stream of his financial services firm.
"Critics See Some Good From Sarbanes-Oxley: As Law Turns Five,
They Say It's Too Costly, But It Exposes Problems Before They Explode," by
Joann S. Lublin and Kara Scannell, The Wall Street Journal, July 30,
2007; Page B1 ---
Click Here
But even critics acknowledge the law has done some
good. "There is without question greater accountability in the boardroom,"
says Thomas Lehner, an official of the Business Roundtable, a Washington
group representing big-company CEOs. More boards resolve potential problems
"before they fester and explode," concurs John Olson, a senior partner at
Gibson, Dunn & Crutcher who advises directors at about a dozen concerns.
And institutional shareholders hurt by the scandals
applaud the law's impact. "Sarbanes-Oxley really has been a critical
safeguard in reassuring investors and restoring confidence in the integrity
of companies' financial statements," says Dan Pedrotty, head of the
AFL-CIO's Office of Investment.
The Sarbanes-Oxley statute demanded more rigorous
internal controls, forced top executives to certify the accuracy of
financial results and created a watchdog for auditing firms. It also
expanded the role of board audit committees and required companies to take
"whistleblower" complaints more seriously. Related stock-exchange rules
bolstered boardroom independence by requiring regular private sessions of
independent directors, among other changes.
"In the minds of the investing public, those are
important safeguards, and I think in fact they are," Mr. Lehner says.
Continued in article
Sarbanes-Oxley Lowers Corporate Fraud Lawsuits
After five years, the Sarbanes-Oxley law has reduced
corporate fraud. It was crafted to restore investor confidence with tighter
rules for audits and forcing executives to certify financial statements. Chris
Cox, chairman of the Securities and Exchange Commission, talks with Renee
Montagne.
NPR, August 2, 2007 ---
http://www.npr.org/templates/story/story.php?storyId=12555895
A powerful argument for Sarbox can be made simply by
examining the performance of financial markets since the landmark act was
passed. Though Sarbox certainly can't take full credit, the U.S. stock market
(as measured by the S&P 500) has increased 67%, or about $4.2 trillion in market
value, between July 30, 2002 and June 30, 2007. Even John Thain, CEO of the New
York Stock Exchange (NYSE) and no great fan of Sarbox, concedes "There is no
question that, broadly speaking, Sarbanes-Oxley was necessary."
Thomas J. Healey, "Sarbox Was the
Right Medicine," The Wall Street Journal, August 9, 2007; Page A13 ---
http://online.wsj.com/article/SB118662443703492573.html?mod=opinion&ojcontent=otep
Bob Jensen's fraud updates are at
http://www.trinity.edu/rjensen/FraudUpdates.htm
"Dealing With Sarbox," by Kenneth Wilcox, The Wall
Street Journal, June 1, 2007; Page A13 ---
http://online.wsj.com/article/SB118066527244221047.html?mod=opinion&ojcontent=otep
My own company (SVB Financial Group, which trades
on the Nasdaq) is likely indicative. In 2006 we paid over $20 million to the
Big Four (including what is left of Arthur
Andersen), for an average of about $17,000 per
employee. This is more than five times as much as we paid them only three
years ago.
It turns out, however, that only a diminishing
portion of this increase is due to Sarbox. More and more of it is due to the
significantly increased amount of time that audits are taking, and the much
larger number of people that they involve. Trying to tease out exactly why
they are taking longer and why more people are involved is difficult. When I
ask, I get a host of different but related answers. The auditors are
operating with droves of often newly hired and therefore inexperienced
people. They appear to have lost any sense of the time-honored accounting
concept of "materiality." They appear to have very little decision-making
power. Decisions, which increasingly need to be sent to superiors in
far-away locations, take much longer than just a few years ago.
Nobody appears to want to exercise judgment, either
with respect to the applicability of a given Financial Accounting Standards
Board (FASB) pronouncement, or to its application. Rules are applied,
whether the original framers were targeting the situation at hand or not.
And testing takes forever. In situations where just a few years ago just a
few tests might have sufficed, today several times as many may be required.
Finally, everybody seems to be operating from a position of fear, of
rejection or remonstrance.
When I ask about the causes of that, I am told the
following: Neither companies nor auditors can really understand all of the
primary accounting pronouncements coming out of the FASB, the number of
which has gone from 104 in 1989 to 159 today. Many of them are 50 pages or
more in length with accompanying interpretations that may be 10 times as
long as the pronouncement itself.
The Public Company Accounting Oversight Board (PCAOB)
discourages the auditors from either offering advice or exercising judgment.
Instead, auditors apply rules, whether they were meant to apply or not, and
in the most draconian manner possible, out of fear of reprisal from above.
The SEC is contributing to the fear factor as well,
and in many of the same ways as the PCAOB. As a result, almost 10% of all
publicly traded companies announced restatements in 2006. Finally, market
factors, namely supply and demand, have added to the turmoil. There are
nowhere near enough accountants available to staff these greatly expanded
audits, which has helped to drive up their price significantly.
We seem to have created a self-reinforcing system
which is difficult to adjust. Every aspect of it appears to reinforce the
workings of the whole, and no one appears to be either able or willing to
help us break out of it. There is a lot of finger-pointing, but very little
leadership and -- as a result -- very little relief.
Is this really the system that we want for our
economy? Is it really serving the shareholders of our publicly traded
companies in a way that justifies the cost? Are we really helping to make
America a better place to live and work? Or are we punishing the many for
the crimes of the few because, in the end, it's just plain easier?
Bob Jensen's threads on the setting of accounting
standards are at
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#MethodsForSetting
Study: Most Audit Committees Lack Accountant
Then why call them
audit committees?
A new report says that in 2005 the number of
accountants sitting on audit committees doubled compared to four years prior,
but that six out of 10 companies still did not have at least one accountant on
their committee. The research from
Huron Consulting
is based on a sample of more than 700 audit committee
members at 178 public companies from the NASDAQ 100 and Fortune 100
listings. The report analyzed patterns of audit committee
composition between 2002 and 2005 using information contained in the companies'
annual proxy statements and 10-K disclosures filed with the U.S. Securities and
Exchange Commission.
"Study: Most Audit Committees Lack Accountant ," SmartPros, November 30,
2006 ---
http://accounting.smartpros.com/x55639.xml
"Largest Accounting Firms See Coming Revolution in Business Reporting,"
AccountingWeb, November 27, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102827
As part of the Global Public Policy Symposium in
Paris, held on November 8 and attended by key players concerned with
ensuring the quality and reliability of financial reporting worldwide, the
Chief Executive Officers (CEOs) of PricewaterhouseCoopers (PwC)
International, Grant Thornton International, Deloitte, KPMG International
and Ernst & Young, published a joint statement of their vision of what the
future might hold for financial reporting and the accounting profession.
Entitled “Global Capital Markets and the Global
Economy: A Vision from the CEOs of the International Audit Networks,” the
document envisions investors having access to real time company financial
information through XBRL, financial statements that go beyond reporting past
performance to projecting future performance based on information about
business intangibles that are not currently measured, and a recommendation
that companies choose to supplement regular audits with periodic forensic
audits. The report may be viewed at
www.globalpublicpolicysymposium.com/
“This essay is about one type of information and
its importance to all actors in the global economy; information about the
performance of management and companies that make and deliver goods and
services, and compete for capital,” the symposium paper says.
In a letter to the Wall Street Journal published on
November 8, the day their paper was released, the CEOs wrote that when the
basics of current accounting procedures were written, the world’s investors
were more a “private club than a global network. Auditors used fountain
pens, capital stayed pooled in a few financial centers, and information
moved by runner.” The world has changed since then.
In the short term, the letter says, it will be
necessary to proceed as rapidly as possible with convergence in
international accounting standards, and with overcoming national differences
in oversight of auditors and in enforcement.
In the longer term, auditors themselves must
evaluate the usefulness to investors of information provided in the current
financial statement and footnote format and consider the inclusion of more
nonfinancial information.
But, the CEOs say in the Journal letter, “All of
these steps should include an emphasis on allowing auditors greater room to
exercise judgment. Accountants and auditors are trained professionals who
have the ability to apply the spirit of broad principles in deciding how to
account for and report financial and other information. . . . Such [future]
measures should also include an honest assessment of the “expectations gap,”
relating to material fraud and the ability of auditors to uncover it at a
reasonable cost.”
The paper looks forward to a world “where users
increasingly will want to customize the information they receive” in which
“the process for recording and classifying business information will be as
important, if not more important, than the static formats in which today’s
financial information is reported. Our jobs as auditors, must therefore
change to increasing focus on those business processes.”
An “important enabler” of future reporting will be
the Global XBRL Initiative, the paper says. XBRL users will be able to view
company data in any language, any currency and under different accounting
systems and get immediate answers to queries. “In fact the new world is
already here for the approximately 40,000 companies that already use XBRL to
input their data. . . . China, Spain, the Netherlands and the United Kingdom
have required companies to use XBRL.”
The paper acknowledges that investors, analysts and
others will still want standardized reports to be issued by public companies
on a regular basis. But the CEOs say that investors have told them they want
more relevant information to be included. “The large discrepancies between
the “book” and “market” values of many, if not most, public companies
similarly provide strong evidence of the limited usefulness of statements of
assets and liabilities that are based on historical costs. A range of
intangibles, such as employee creativity and loyalty and relationships with
suppliers and customers, can drive a company’s performance, yet the value of
these intangibles is not consistently reported."
In short, the CEO’s vision states “the same forces
that are reshaping economies at all levels are driving the need to transform
what kind of information various stakeholders want from companies, in what
form, and at what frequency. In a world of “mass customization,” standard
financial statements have less and less meaning and relevance. The future of
auditing in such an environment lies in the need to verify that the process
by which company-specific information is collected, sorted and reported is
reliable and the information presented is relevant for decision making.”
Investors and regulatory bodies may expect auditors
to go further than is reasonable to detect fraud and the paper recommends
that all companies be subjected to a regular forensic audit, or be subjected
to forensic audits on a random basis.
Another option would be introducing more choice
regarding the intensity of audits for fraud. For example, since forensic
audits are conducted primarily for the benefit of investors, one possibility
would be to let shareholders decide on the intensity of the fraud detection
effort
they want auditors to perform. Shareholders could be assisted in making this
decision by disclosure in the proxy materials of the costs of the different
levels of audits, as well as the historical experience of the company with
fraud.
The CEO paper calls for both liability reform and
scope of service reform.
Considering the “Brave New World” of auditing
envisioned in the document and the scope of the questions it raises, “Global
Capital Markets and the Global Economy” has received little attention in the
financial press, Motley Fool reports. But, while approving the idea of more
timely information flows for the investor, Fool says, “enough companies have
trouble meeting their reporting obligations as it is. I would prefer to both
maintain those reports and supplement them with additional data.”
That financial reporting will evolve and change is
inevitable, the International Herald Tribune says, but whether large
accounting firms will lead the dialogue is another matter that may be
influenced by their “life-threatening litigation risks.”
Bob Jensen's threads on accounting theory are at
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm
"Accounting Firms Seek Overhaul," by Tad Kopinski, Institutional
Shareholder Services ISS, November 20, 2006 ---
http://blog.issproxy.com/2006/11/accounting_firms_seek_overhaul.html
The six biggest international audit firms have
called for a complete overhaul of corporate financial reporting as
the U.S. and Europe move toward convergence of international audit
standards.
In a Nov. 8 report, the accounting firms
propose to replace static quarterly financial statements with
real-time, Internet-based reporting that encompasses a wider range
of performance measures, including non-financial ones. The report
was signed by the chiefs of PricewaterhouseCoopers International,
Grant Thornton International, Deloitte, KPMG International, BDO
International, and Ernst & Young. The report can be downloaded
here.
"We all believe the current model is
broken," Mike D. Rake, KPMG's chairman, told the Financial Times.
"There are significant shortcomings to U.S. GAAP [Generally Accepted
Accounting Principles] and issues of concern with International
Financial Reporting Standards. We're not in a very happy situation."
Rake noted that quarterly reporting and the
short-term focus on companies' ability to meet Wall Street earnings
expectations helped foster accounting scandals. The firms have been
working on their proposals for more than a year.
The large discrepancy between the "book"
and "market" values of many listed companies is clear evidence that
the content of traditional financial statements is of limited use,
the report said. The audit firms recommend using non-financial
measures that would provide more valuable indications of a company's
future prospects, such as customer satisfaction, product or service
defects, employee turnover, and patent awards.
The report said the following developments
need to occur to ensure capital market stability, efficiency, and
growth:
--Investor needs for information are well
defined and met;
--The roles of the various stakeholders in these markets--financial
statement preparers, regulators, investors, standards setters, and
auditors--are aligned and supported by effective forums for
continuous dialogue;
--The auditing profession is vibrant, sustainable, and provides
sufficient choice for all stakeholders in these markets;
--A new business-reporting model is developed to deliver relevant
and reliable information in a timely way;
--Large, collusive frauds are more and more rare; and
--Information is reported and audited pursuant to globally
consistent standards.
ICGN Expresses Concerns Over
ConvergenceMeanwhile, the
International Corporate Governance Network (ICGN) has expressed
concerns about a draft proposal on harmonizing international and
U.S. accounting standards. The ICGN argues that the draft doesn't
pay sufficient attention to shareholder rights and the stewardship
role of boards and investors.
"Convergence must be there to raise
standards," ICGN Executive Director Anne Simpson told the Financial
Times. "Convergence for its own sake is not of value."
The ICGN letter was in response to a
request for comment by the International Accounting Standards Board
(IASB) and its U.S. counterpart, the Financial Accounting Standards
Board (FASB) on a discussion paper on harmonization objectives. The
IASB and the FASB have been working on harmonizing the two
accounting systems since October 2002 and have set 2008 as the goal
for finalizing the process.
Unlike the current IASB auditing framework,
the discussion paper endorses a model more similar to U.S.
standards, dropping a key shareowner safeguard embedded in
U.K.-style standards, the ICGN noted. Rather than focusing audits on
past transactions, the discussion paper calls for audits to focus on
"decision-usefulness" that can affect company cash flows, the letter
said.
"We are concerned that this emphasis on the
ability to forecast the future does not fully capture the
requirements of stewardship, which is concerned with monitoring past
transactions and events," Mark Anson, the CEO of Hermes Pensions
Management who chairs the ICGN, wrote in the Nov. 2 letter. (A
Hermes affiliate is a part owner of ISS.)
"In many jurisdictions, financial
statements provide significant input into the decisions we make as
shareholders, by providing an account of past transactions and
events and the current financial position of the business," the ICGN
letter noted. "In de-emphasizing things that are particularly
[relevant to shareholders' risks and rights], the standards setters
could achieve the perverse effect of actually increasing the cost of
capital."
The ICGN includes more than 400
institutional and private investors, corporations, and advisers from
38 countries with capital under management in excess of $10
trillion, according to its Web site. The ICGN letter also was signed
by Claude Lamoureux, CEO of the Ontario Teachers' Pension Plan.
A copy of the IASB discussion paper, which
was published in July, can be downloaded
here.
Bob Jensen's threads on standard setting are at
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#MethodsForSetting
Bob Jensen's threads on fair value accounting are at
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#FairValue
Bob Jensen's threads on troubles in the big international accounting firms
are at
http://www.trinity.edu/rjensen/Fraud001.htm
"Booming Audit Firms Seek Shield From Suits," by David Reilly, The
Wall Street Journal, by November 1, 2006; Page C1 ---
http://online.wsj.com/article/SB116235111161209823.html?mod=todays_us_money_and_investing
Business is booming at the world's biggest
accounting firms, so their top lobbying priority may seem ironic: They want
government protection from a big financial hit.
Revenues at the Big Four -- PricewaterhouseCoopers,
Deloitte & Touche, Ernst & Young and KPMG -- have grown at a double-digit
pace in recent years as audit fees soared. Regulatory overhauls enacted in
the wake of accounting scandals earlier this decade have led to new work for
firms. One of the biggest problems facing the Big Four these days is a lack
of staff to meet the huge demand for services.
Yet the Big Four want to limit court damages that
investors and others can seek from them for flawed audits of public
companies. Without such a shield, the firms say, it's only a matter of time
before one of them is felled by a massive court award.
Their argument is being championed by an
influential group recently formed to study the competitiveness of U.S.
financial markets with the encouragement of Treasury Secretary Henry
Paulson. The group is expected to recommend in coming weeks that the
government enact new protections for auditors. A panel set up within the
powerful U.S. Chamber of Commerce is sounding a similar theme. In Europe,
the European Commission is studying the issue and is likely to recommend
limitations on the damages accounting firms can face.
How much risk the big firms actually face has been
largely absent from the debate over auditor liability. Despite a slew of
big-ticket lawsuits that emanated from corporate scandals earlier this
decade, none of the firms suffered a fatal blow from those legal actions.
The one big firm that folded, Arthur Andersen LLP in 2002, fell victim not
to a lawsuit but to a criminal obstruction-of-justice conviction, later
overturned on appeal.
"I don't see that auditors have a real need for any
kind of special protections," said Bill Kelley, general counsel at the
Retirement Systems of Alabama, which has sued accounting firms following
corporate blowups. "Auditors need to be held to a high standard. Those are
the outsiders we rely on. It's tough to have that responsibility, but that's
what they're getting paid for."
Mr. Kelley and likeminded critics say it's also
difficult to quantify the risk the firms face from a big court award. That's
because the accounting firms are private partnerships that don't, in most
cases, disclose their financial condition or results. So outsiders don't
know how much capital the firms have, their level of profitability or even
how much insurance they carry.
If anything, the risk from class-action lawsuits
appears to be dwindling. The number of class actions that cite auditors as
defendants declined to five last year from 14 in 2002, according to the
Stanford Law School Securities Class Action Clearinghouse.
The bigger threat to firms has stemmed not from
civil litigation, but from alleged criminal actions related to their
conduct. In addition to the Arthur Andersen case, KPMG LLP suffered a
near-death experience last year due to its sale of improper tax shelters;
federal prosecutors ultimately decided not to indict the firm, a move that
likely would have put it out of business.
The Andersen and KPMG cases have led some lawyers
to claim that the Big Four are already seen by government as too big to
fail. "The fact is that the government couldn't indict KPMG for policy
reasons," said Sean Coffey, a partner at New York law firm Bernstein
Litowitz Berger & Grossmann LLP, who has sued several accounting firms.
"These folks are effectively immune to being put out of business and now
they're trying to find ways to further inoculate themselves from
accountability."
The firms also have shown they can weather pretty
big hits. Over the past two years, KPMG has agreed to pay out nearly $700
million in fines and settlements related to criminal and civil actions. In
2000, Ernst & Young LLP settled for $335 million a shareholder suit related
to its work for Cendant Corp.
Accounting firms argue the danger they face from
civil litigation is real and that there are still many scandal-era actions
that have yet to work their way through the courts. What is needed, the
firms say, are litigation caps similar to those many states have enacted to
protect doctors from malpractice suits.
The firms say special protection is warranted
because they can be sued not just by the companies whose books they audit,
but also by others, such as investors. These investors, the firms add, try
to use auditors to recoup stock-market losses.
"The cost of our audits was never built for
insuring the capital markets," said William G. Parrett, chief executive of
Deloitte Touche Tohmatsu, the international arm of Deloitte & Touche. "I
don't think we're saying we shouldn't have any liability, but it has to be
in proportion to our participation in any problem."
The firms also say they can't get sufficient
insurance because their liability is almost unlimited, encompassing in a
worst-case scenario the total stock-market value of the companies they
audit. So they are forced to settle lawsuits rather than risk a trial.
A study for the European Commission, released in
September, said the total costs of judgments, settlements, legal fees and
related expenses for the U.S. audit practices of the Big Four firms had
risen to $1.3 billion in 2004, or 14.2% of revenue, up from 7.7% in 1999. In
addition, according to a study by insurer Aon, there were 20 claims
outstanding against U.S. auditors as of September 2005 where damages sought
or estimated losses topped $1 billion. Accounting firms say they couldn't
survive an award of that size.
Advocates of liability caps frame the issue around
the broader debate over U.S. market competitiveness.
"I think the whole issue of liability is one of the
major reasons why foreign companies aren't coming here" to list their stocks
on U.S. exchanges, said Hal S. Scott, a Harvard Law School professor and a
founding member of the Committee on Capital Markets Regulation, the group
formed with Mr. Paulson's blessing to study market competitiveness. Mr.
Scott added that while court awards can serve as a deterrent to shoddy audit
work, "if we left this to the legal process, we might come up with the right
amount of damages to deter bad behavior but have just two or three
accounting firms" because one will have gone out of business.
Recognizing, though, that auditor liability
overhaul might be a tough sell on Capitol Hill, the committee may suggest
that the U.S. Securities and Exchange Commission come up with a solution,
Mr. Scott said. "The SEC could modify their own rules regarding liability,"
he added. One idea under study: Allowing accounting firms to negotiate
liability caps with clients, a practice now barred to preserve auditors'
independence.
[Appeal for] "More Transparency for Audits," SoxFirst, August
2006 ---
http://www.soxfirst.com/50226711/more_transparency_for_audits.php
For a profession that likes to think of itself as
transparent, auditors might have some way to go. Particularly when it comes
to companies revealing to the market why they have dismissed or changed an
auditor.
According to risk researchers, Glass Lewis, it's
one area that needs urgent attention. It's absolutely critical information
for investors.
In their report Mum's the word, they point out that
1,430 publicly held companies changed their independent accounting firms
last year including 77 companies that changed auditors at least twice. But
in the vast majority of cases, we don't know why, because neither the
companies nor the auditors disclosed the reasons.
"Perhaps it's our skeptical nature, but we suspect
a lot of the companies that stayed mum changed auditors because of less
virtuous reasons: to seek more favorable opinions, to flee from
disagreements,to cut costs in a way that may diminish audit quality, or
because their former auditors couldn't rely on them," says the report.
The report calls on the SEC to expand its list of
required "reportable events" so that investors get more information about
such matters as whether there had been difficulties conducting the audit and
whether the auditor had advised the company about potential fraud.
Investors need nothing less from the profession
that's required to watch over the companies that they, the investors, own.
A Sad Time for Corporate Reputations
"Question for Corporate
America: Does Your Reputation Fall into the Liabilities Column on Your Balance
Sheet?" PR Web, June 19, 2006 ---
http://www.prweb.com/releases/2006/6/prweb399939.htm
In a survey conducted among 2,000 participants at
the 2004 Annual Meeting of the World Economic Forum, more CEOs said that
corporate reputation, not profitability, was their most important measure of
success. Fortune Magazine calculates that a one-point change on its scale
used to rank its most admired companies translates to a difference of $107
million to a company’s market value.
Lord Levene, Chairman of Lloyd’s of London,
reported in a 2005 speech at the Philadelphia Club that loss of reputation
is now viewed as the second most serious threat to an organization’s
viability. (Business interruption is the first.)An Economist Intelligence
Unit survey ranked reputational risk as the greatest potential threat to an
organization's value. More than 30% of participating CEOs said that
reputational risk represents the greatest potential threat to their
company's market value. Of this same group of CEOs only 11% said that they
had taken any action against the threat.
If these data are not sufficient to jolt companies
into action, there is enough compelling data linking corporate reputation to
corporate performance that should. Fortune Magazine, which has been
publishing the results of its "America’s Most Admired Companies" survey for
20 years, calculates that a change of 1 point on its scale, either
positively or negatively, affects a company's market value by an average of
$107 million. The results of another study published in 2003 in Management
Today, Britain's leading monthly business magazine, demonstrate a clear
correlation between corporate reputation and equity return. Using existing
data from Fortune’s surveys to construct portfolios of the most and least
admired companies, the authors found that for the five years following
Fortune’s publication of the results, the portfolios of the most admired
companies had cumulative returns of 126% while those of the least admired
had cumulative returns of 80%.
"While executives may choose to spend time
analyzing these data and poking holes in research methodologies in order to
dismiss reputation as a strategic priority," says Wallace, "the effort would
simply provide another diversion from addressing the problem head-on. The
fact that corporate America's sullied reputation has lead to such dramatic
legislative change in the form of the Sarbannes-Oxley Act, and that it has
become routine front-page news, is as telling as any data. No company wants
bad press, but it may finally be what convinces American business that, left
unmanaged, a company’s reputation can become a terminal liability."
Continued in article
Bob Jensen's threads on accounting for intangibles are at
http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#TheoryDisputes
Situational Ethics in Practice
October 12, 2006 message from Scott Bonacker
[aecm@BONACKER.US]
It was really the second of these two articles that
caught my eye. The point being, in any case, that teaching ethical behavior
is not just an issue for accountancy.
10-04-2006 Security's Rotten Apples
http://www.darkreading.com/document.asp?doc_id=105282
"if you're working with at least two other
IT/security professionals, and you're not breaking any rules, look
around -- there's a good chance one of them is.
That's the net result of Dark Reading's
"Security Scruples" reader survey, which tested the attitudes and ethics
of some 648 IT and security pros over the last two weeks.
The survey, which asked IT people about their
beliefs and behavior in both real and hypothetical security situations,
suggests that about two thirds of them agree on the conventions for
proper conduct -- and the other third might be doing anything from
peeking at colleagues' personal data to actively stealing information
from the company."
10-11-2006 Corporate Ethics are 'Situational'
http://www.darkreading.com/document.asp?doc_id=107203
"Officially, corporations never fail to report
suspected security violations, never pay ransoms to hackers, and never
allow employees to use company IT systems for personal reasons.
Unofficially, they do all of those things.
According to Dark Reading's "Security Scruples"
survey, which concluded today, many enterprises operate differently in
private than they say they do in public. And those differences cause
some concerns for IT security professionals, whose jobs are on the
line."
Scott Bonacker
Springfield, MO
Recall that the New York regulators had a long history of taking CPA
licenses away only for DWI drunk driving convictions (which when you think about
it probably has little to do with professional practice competency)
"NY Crackdown on Bad Accountants Addresses Long-Term Concern,"
AccountingWeb, July 17, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102351
New York State regulators’ new crackdown on the
accounting profession addresses an issue that has been roiling in the Empire
State ever since the Enron accounting scandal surfaced several years ago.
The New York State Board of Regents has revised the
definition of "unprofessional conduct" for CPA's licensed by the state to
include disciplinary actions taken by the Securities and Exchange Commission
(SEC) and its Public Company Accounting Oversight Board (PCAOB), meaning
that accountants or accounting firms disciplined by either of those bodies
now can be subject to censure, reprimand and the revocation of their
licenses.
The board also expanded the “unprofessional
conduct” definition to include any settlement with those agencies where a
CPA admits no wrongdoing but is still stripped of the right to practice the
profession at a public company. “We wanted to be in position where if
someone is licensed in this state is disciplined at the federal level that
they're held accountable at the state level too," said Johanna
Duncan-Poitier, deputy commissioner of the state Education Department's
Office of Professions.
The new provision apparently resolves a
disciplinary anomaly. Without the added state level regulatory teeth,
accountants punished by the SEC for public company wrongdoing have been free
to provide services to private companies and other organizations.
The need for the state to more tightly oversee CPAs
and punish them for wrongdoing came to light in the Enron heyday of 2002
when “Crain’s New York Business” reported that out of New York State’s
approximately 50,000 licensed accountants, only 16 were disciplined by the
state in 2001, and only one was reprimanded on professional grounds.
The report sparked a call for tighter oversight
that included cries from the profession itself. "Something is broken, and we
need to fix it," New York State Society of CPAs Executive Director Lou
Grumet was quoted as saying at the time. "I hope the low number of
disciplinary actions shows that our members are perfect, but I believe the
reality is that there are not enough resources to look at them.”
More recently, an Associated Press investigation
found that the SEC had taken disciplinary action against more than 50
accountants in 2005 and 2006 for misconduct, “but that nearly half of them
continue to hold valid state licenses to offer their services as certified
public accountants.” Reportedly, none of the New York licensees disciplined
by the SEC in 2005 and 2006 had been disciplined as of early June, though
two disciplined by the PCAOB have been.
Some of the individuals disciplined by the SEC are
now being investigated by New York regulators, Duncan-Poitier has confirmed.
But she would not disclose any of the cases underway.
The public in New York may well welcome the
additional regulatory muscle for another reason. The accounting profession
has been under the media’s microscope in New York over the past year because
of a spate of alleged accounting fraud by CPAs serving the public school
district, which have included the theft of millions of dollars from a
district in Long Island, N.Y.
Investors in Hedge Funds Do So at Their Own Peril
Hedge Funds Are Growing: Is This Good or Bad?
When the ratings agencies downgraded General
Motors debt to junk status in early May, a chill shot through the $1
trillion hedge fund industry. How many of these secretive investment
pools for the rich and sophisticated would be caught on the wrong side
of a GM bond bet? In the end, the GM bond bomb was a dud. Hedge funds
were not as exposed as many had thought. But the scare did help fuel the
growing debate about hedge funds. Are they a benefit to the financial
markets, or a menace? Should they be allowed to continue operating in
their free-wheeling style, or should they be reined in by new
requirements, such as a move to make them register as investment
advisors with the Securities and Exchange Commission?
"Hedge Funds Are Growing: Is This Good or Bad?" Knowledge@wharton,
June 2005 ---
http://knowledge.wharton.upenn.edu/index.cfm?fa=viewArticle&id=1225
"Court Says S.E.C. Lacks Authority on Hedge Funds," by Floyd Norris, The
New York Times, June 24, 2006 ---
Click Here
A federal appeals court ruled yesterday that the
Securities and Exchange Commission lacks the authority to regulate hedge
funds, dealing a possibly fatal blow to the commission's efforts to oversee
a rapidly growing industry that now has $1.1 trillion in assets.
A three-judge panel of the United States Court of
Appeals for the District of Columbia Circuit ruled unanimously that the
commission exceeded its power by treating investors in a hedge fund as
"clients" of the fund manager. The commission has authority over any manager
with at least 15 clients, and it used that to require hedge fund managers to
register.
The ruling, unless overturned on appeal, means that
Congressional action would be required to grant the S.E.C. the authority to
force hedge fund managers to register, or for the commission to impose any
other rules on such funds.
The ruling does not leave such funds totally above
the law since they are treated like any other investor in determining
whether they violated securities laws. As a result, the decision will not
affect an S.E.C. investigation into possible insider trading by a major
hedge fund manager, Pequot Capital Management, which was disclosed in a New
York Times article yesterday.
Christopher Cox, who became S.E.C. chairman after
the rule was adopted, said the commission would review the issue, but
stopped short of indicating that it would continue to seek authority over
hedge funds.
"The S.E.C. takes seriously its responsibility to
make rules in accordance with our governing laws," Mr. Cox said in a
statement. "The court's finding, that despite the commission's investor
protection objective its rule is arbitrary and in violation of law, requires
that going forward we re-evaluate the agency's approach to hedge fund
activity."
He said the commission would "use the court's
decision as a spur to improvement in both our rule making process and the
effectiveness of our programs to protect investors, maintain fair and
orderly markets, and promote capital formation."
As hedge funds have grown, and as some have
collapsed amid fraud or because they took excessive risks, pressures to
regulate them have grown. But fund managers have protested that the vast
majority have acted responsibly and should not be subjected to what James C.
McCarroll, a lawyer with Reed Smith, a New York law firm, said yesterday
were "regulatory overlays and burdens" approaching those faced by mutual
funds.
The S.E.C. rule, adopted in December 2004 on a
3-to-2 vote, called for fund managers with more than $30 million in assets
and at least 15 investors to register with the commission. Nearly 1,000
managers did so by the deadline of Feb. 1, 2006.
The S.E.C. rule exempted funds that imposed
two-year lockups on investors' money, meaning the money could not be
withdrawn for at least that long, leading a number of funds to impose such
lockups. Some may choose to remove or ease those rules now.
Hedge funds, as the appeals court opinion written
by Judge Arthur R. Randolph noted, "are notoriously difficult to define."
But they generally are open only to wealthy investors and charge fees based
on a percentage of the assets under management plus a portion of the
profits.
The growth of hedge funds has made some managers
incredibly wealthy, with incomes dwarfing even those of high-paid corporate
chief executives. Alpha, a publication of Institutional Investor, reported
that two hedge fund managers earned more than $1 billion each in 2005.
The pressure for more oversight of hedge funds grew
after one fund, Long-Term Capital Management, almost collapsed in 1998. The
Federal Reserve, fearful that such a collapse could cause systemic risk,
encouraged Wall Street firms to mount a rescue, which they did.
The emergence of activist hedge funds, which
sometimes act in concert with each other and can become the largest
shareholders of some companies, has also increased calls for regulation,
both here and in Europe. A German politician called such funds "locusts"
that plundered German companies and then fired German workers. Some European
governments have pushed for international regulation of such funds.
The decision to push for S.E.C. registration was
made by Mr. Cox's immediate predecessor, William H. Donaldson. Mr. Donaldson
argued that the funds had grown so large they could cause systemic risk to
the financial markets, and that a gradual process of "retailization,"
through such trends as "fund of funds" that allow relatively small
investments, had made it more important for regulators to have at least some
knowledge of what was going on in the funds.
Bob Jensen's threads on hedge funds are under the H-Terms at
http://www.trinity.edu/rjensen/acct5341/speakers/133glosf.htm#H-Terms
Bob Jensen's "Rotten to the Core" threads are at
http://www.trinity.edu/rjensen/FraudRotten.htm
The Sad State of Professional Discipline in Public Accountancy
"SEC Accountant Fines Largely Go Unpaid," SmartPros, June 7, 2006 ---
http://accounting.smartpros.com/x53399.xml
The Securities and Exchange Commission has taken
disciplinary action against more than 50 accountants in 2005 and 2006 for
misconduct in scandals big and small. But few have paid a dime to compensate
shareholders for their varying levels of neglect or complicity.
It also turns out that nearly half of them continue
to hold valid state licenses to hang out their shingles as certified public
accountants, based on an examination of public records by The Associated
Press.
So while the SEC has forbidden these CPAs from
preparing, auditing or reviewing financial statements for a public company,
they remain free to perform those very same services for private companies
and other organizations that may be unaware of their professional misdeeds.
Some would say the accounting profession has taken
its fair share of lumps, particularly with the abrupt annihilation of Arthur
Andersen LLP and the jobs of thousands of auditors who had nothing to do
with the firm's Enron Corp. account. Meantime, the big auditing firms are
paying hundreds of millions of dollars in damages - without admitting or
denying wrongdoing - to settle assorted charges of professional malpractice.
Individual penance is another matter, however, and
here the accountants aren't being held so accountable.
Part of the trouble is that there doesn't appear to
be an established system of communication by which the SEC automatically
notifies state accounting regulators of federal disciplinary actions. In
several instances, state accounting boards were unaware a licensee had been
disciplined by the SEC until it was brought to their attention in the
reporting for this column. The SEC says it refers all disciplinary actions
to the relevant state boards, so the cause of any breakdowns in these
communications is unclear.
Another obstacle may be that some state boards do
not have ample resources to tackle the sudden swell of financial scandals.
It's not as if, for example, the Texas State Board of Public Accountancy had
ever before dealt with an accounting fraud as vast as that perpetrated at
Houston-based Enron.
"We don't have the staff on board to manage the
extra workload that the profession has been confronted with over the last
few years," said William Treacy, executive director of the Texas board. "So
we contracted with the attorney general's office to provide extra
prosecutorial power."
Treacy said his office is usually notified of SEC
actions concerning Texas-licensed CPAs, but the process isn't automatic.
With other states, communications from the SEC
appear less certain. If nothing else, many boards rely upon license renewals
to learn about SEC actions, but that only works if the applicants respond
truthfully to questions about whether they've been disciplined by any
federal or state agency. A spokeswoman for Georgia's board said one CPA
recently disciplined by the SEC had renewed his license online without
disclosing it.
Ransom Jones, CPA-Investigator for the Mississippi
State Board of Public Accountancy, said most of his leads come from other
accountants, media reports and annual registrations.
"The SEC doesn't necessarily notify the board,"
said Jones, whose agency revoked the licenses of key players in the scandal
at Mississippi-based WorldCom.
Some state boards appear more vigilant than others
in policing their membership. The boards in California and Ohio have
punished most of their licensees who have been disciplined by the SEC since
the start of 2005.
New York regulators haven't yet penalized any
locals targeted by the SEC in that timeframe, though they have taken action
against two disciplined by the SEC's new Public Company Accounting Oversight
Board. It is conceivable that cases are underway but not yet disclosed, or
that some individuals have been cleared despite the SEC's findings. A
spokesman for the New York State Education Department said all SEC referrals
are probed, but not all forms of misconduct are punishable under local
statute. New rules now under consideration would strengthen those
disciplinary powers, he said.
Meanwhile, although the SEC deserves credit for
de-penciling those CPAs who've breached their duties as gatekeepers of
financial integrity, barely any of those individuals have been asked to make
amends financially.
No doubt, except for those elevated to CEO or CFO,
most accountants are not paid as handsomely as the corporate elite. That
said, partners from top accounting firms are were [sic] paid well enough to
cough up more than the SEC has sought, which in most cases has been zero.
Earlier this year, in what the SEC crowed about as
a landmark settlement, three partners for KPMG LLP agreed to pay a combined
$400,000 in fines regarding a $1.2 billion fraud at Xerox Corp. One of those
fined still holds his license in New York.
"The SEC has never sought serious money from errant
CPAs," said David Nolte of Fulcrum Financial Inquiry LLP. "Unfortunately,
the small fines in the Xerox case set a record of the amount paid, so
everyone else has also gotten off easy."
It's not that the CPAs found culpable in scandals
don't deserve a right to redemption, or just to earn a living. Most of the
bans against practicing before the SEC are temporary, spanning anywhere from
a year to 10 years.
But the presumed deterrent of SEC action is
weakened if federal and state regulators don't work together on a consistent
message so bad actors don't get a free pass at the local level.
"Some CPAs Escape State Disciplinary Action," AccountingWeb,
June 20, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=102273
There have been more than 50 accountants
sanctioned over 2005 and 2006 for professional misconduct and few of
them have compensated shareholders for their complicity or neglect. The
Associated Press reports that although sanctioned not to practice public
accounting for between one and ten years by the SEC, these accountants
still prepare, audit or review financial statements for public
companies.
They also remain able to perform these services
for private companies. While firms such as Arthur Andersen and others
have paid huge sums in accounting damages, the individual accountants
have escaped their professional penance, according to the Associated
Press.
The disconnect seems to be an established
communication system that would allow the SEC to advise state accounting
boards of federal sanctions against rogue accountants. Another aspect of
the disconnect is that state accountancy boards do not have staff to
handle the number or reach of financial scandals such as Cendant, Enron
or WorldCom.
Texas is one of many states facing this
situation. License renewals are not a verifiable method of finding out
about SEC sanctions unless without the accountant completing the
questions truthfully. A spokesman for the Georgia board told the
Associated Press that a CPA recently renewed his license online without
disclosing his disciplinary action by the SEC.
William Treacy, executive director of the Texas
State Board of Public Accountancy, told the Associated Press, “We don’t
have the staff on board to manage the extra workload that the profession
has been confronted over the last few years, so we contracted with the
attorney general’s office to provide extra prosecutorial power.”
One of the problems and potential fixes to this
situation may be to fine accountants. After a landmark SEC settlement in
which three partners at KPMG agreed to pay a combined fine totaling
$400,000 for their complicity in the $1.2 billion fraud at Xerox, the
Associated Press reports that one of the partners still holds his
license in New York.
David Nolte of Fulcrum Financial Inquiry told
the Associated Press, “The SEC has never sought serious money from
errant CPAs. Unfortunately, the small fines in the Xerox case set a
record of the amount paid, so everyone else has gotten off easy.”
With the heavy investment in internal controls
and procedures by CPA firms, the human element of accounting and
auditing helps even large CPA firms fail to identify accounting
problems. Members of an audit team can identify insufficient knowledge,
misrepresentation of information, sloppy accounting or even simple
misrepresentation of information but must be able to see the warning
signs of other risky behavior. The CPA Journal suggests a 360-degree
assessment of members on an audit team. As a structured, systematic way
to collect information, evaluators include the person’s boss, peers,
direct reports, and even clients.
Continued in article
Bob Jensen's threads on auditor fraud and incompetence are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#IncompetentAudits
House minority leader Nancy Pelosi has never been known as the
brightest bulb in Congressional chandelier, but with her seniority she often
is a difficult obstacle for Republicans. She faces a difficult challenge of
representing the most liberal anti-business and anti-war district in the
United States. Why then has she suddenly become the darling of the Editorial
Page of The Wall Street Journal?
"Two Cheers for Nancy Pelosi," by Mallory Factor, The Wall Street
Journal, March 18, 2006, Page A9 ---
http://online.wsj.com/article/SB114264532108001981.html?mod=opinion&ojcontent=otep
Have America's entrepreneurs and corporate leaders
found a new voice of regulatory sanity in, of all people, Nancy Pelosi?
Apparently so, and that should be a wake-up call to Republicans -- because
like everything else in the free market, the free enterprise agenda is up
for grabs. In the recent "Innovation Agenda" that the House Democratic
leader and her party unveiled, Ms. Pelosi acknowledges specifically the need
to "ensure Sarbanes-Oxley requirements are not overly burdensome," and
endorses reform. Meanwhile, the scourge of Wall Street, New York Attorney
General Eliot Spitzer, is criticizing Sarbanes-Oxley's "unbelievable burden
on small companies" and its possible role in "preventing some initial public
offerings."
Ms. Pelosi and other Democrats have been quicker to
recognize what many traditional champions of free enterprise have been slow
to see: the law's disastrous consequences for our nation's ability to
compete. Congress passed this law hastily in 2002 after the egregious
accounting frauds at Enron and WorldCom. The intent was to hold publicly
held companies and their executives more accountable and weed out bad
actors; but that's not been the effect. Four years after passage, it is now
evident that the costs of Sarbox clearly outweigh the benefits.
Consider first the costs. Recent estimates from the
American Electronic Association, for example, show that U.S. companies are
spending $35 billion annually simply to comply with the law as opposed to
original federal estimates of $1.2 billion. A University of Nebraska study
found that audit fees for Fortune 1000 companies, on average, increased a
staggering 103% from 2003 to 2004. The costs of being a U.S. public company
are now more than triple what they were before the law passed, according to
a study conducted by the Milwaukee-based law firm of Foley & Lardner. Some
smaller firms report that they are spending 300% more on Sarbox compliance
than on health care for their employees.
Based on a growing body of theoretical and
empirical research, the SEC's Advisory Committee on Smaller Public Companies
concluded that Sarbox places a disproportionate compliance burden on small
public companies, making it more difficult for them to compete with foreign
companies and to a lesser extent with larger U.S. companies. Consider the
survey by the American Electronics Association, which found that companies
with sales of $100 million and under are spending 2.6% of their revenues on
Sarbox compliance -- enough to tip many of them from profitability into
unprofitability. This makes it something of a challenge for these companies
to innovate, compete or grow -- or even survive.
As a result of these burdensome costs, enterprises
are deciding not to go public, or else are opting to back out of our capital
markets. Explaining his company's absorption into privately held Koch
Industries, Peter Correll, the CEO of Georgia-Pacific, said, "There is a lot
of time spent by top management on things that are not value-adding, but are
simply bureaucratic and are required by a raft of regulation." In fact, the
Foley & Lardner study found that 20% of public companies are considering
going private just to avoid Sarbox compliance. It's no wonder, then, that
the London Stock Exchange -- eager to exploit a competitive advantage -- now
promotes itself by reminding companies that by listing on the LSE they are
not subject to Sarbox.
Beyond the direct cost of compliance to individual
companies, a recent University of Rochester study concluded that the total
effect of the law has reduced the stock value of American companies by $1.4
trillion. That is $1.4 trillion that could be invested in infrastructure
improvements, jobs, innovative technologies or research and development. As
Sun Microsystems CEO Scott McNealy says, Sarbanes-Oxley throws "buckets of
sand into the gears of the market economy."
The true beneficiaries of Sarbox are the nation's
large auditing firms, which now maintain a regulatory oligarchy composed of
a handful of entrenched services corporations. They will continue to
champion Sarbox, since it provides a guaranteed market for their services.
Surely this law was not intended by its authors to become a full employment
act for the same auditing industry which was implicated in the original
malfeasance of four or five years ago.
Continued in editorial
S.E.C. to Ease Auditing Standards for Small Publicly Held Companies
The Securities and Exchange Commission will begin
the process of easing auditing standards for thousands of smaller public
companies this Wednesday when it proposes rules under the most contentious
provision of the Sarbanes-Oxley Act. The relaxed standards represent a
compromise, giving a qualified victory for businesses, which had considered
any regulation burdensome, and for the auditing firms, which had benefited
from the imposition of stringent requirements on their clients.
Stephen Labaton, "S.E.C. to Ease Auditing Standards for Small Publicly Held
Companies," The New York Times, December 11, 2006 ---
Click Here
June 6, 2006 message from Ganesh M. Pandit
[profgmp@HOTMAIL.COM]
An article published in the March 2006
issue of the CPA Journal says "Accounting did not cause the recent
corporate scandals such as Enron and WorldCom. Unreliable financial
statements were the results of management decisions, fraudulent or
otherwise. To blame management's misdeeds on fraudulent financial
statements casts accountants as the scapegoats and misses the real
issue....". The article can be accessed at
http://www.nysscpa.org/cpajournal/2006/306/essentials/p48.htm
Any thoughts from anybody??
Ganesh M. Pandit
Adelphi University
June 6, 2006 reply from Bob Jensen
Shame on the Lin and Wu!
Enron's Chief Accounting
Officer, Rick Causey, now sits in prison after having admitted to
falsifying accounts. He refused to testify in the Lay/Skilling trial
unless granted immunity from other prosecution.
Other Enron executives,
including some accountants, have confessed to accounting fraud.
Accounting fraud committed
by accountants purportedly because their bosses ordered them to
knowingly participate in the fraud does not make the fraud
non-accounting fraud no matter what the NYSSCPA Society tries to tell
us.
The NYSSCPA Society
published this Lin and Wu article. Recall that the NYSSCPA Society only
took CPA licenses away from CPAs convicted of drunk driving and
overlooked CPA fraud for decades in New York. I don't place much stock
in this NYSSCPA Society defense of accountants. I don't find the article
that you mention even worth citing. The authors did not do their
homework on the Enron or Worldcom scandals.
When Andersen auditor Carl
Bass sniffed out both charge-off and derivatives accounting fraud, his
boss David Duncan had him removed from the Enron audit.
The Worldcom fraud was
Accounting 101 where over $1 billion in expenses were knowingly
capitalized by the CFO and top accounting executives. The top accountant
mainly involved confessed that he knew what he did was against the law
but played along because of his need for the large paycheck. Only when
Worldcom internal auditor Cynthia Cooper finally figured out what was
going on and refused to play along was this enormous accounting fraud
brought to light.
These were huge ACCOUNTANT
frauds contrary to what the Lin and Wu would like to make you believe
with a whitewash article that should be beneath the professional
standards of a CPA society. CPAs are under tremendous pressure to lobby
on behalf of clients to water down Section 404 of SOX. The NYSSCPA is
simply playing along with defending accountants who knowingly committed
felonies. Now if they also had DWI convictions they'd be in bigger
trouble with the NYSSCPA Society.
Bob Jensen
June 6, 2006 reply from Ganesh M. Pandit
[profgmp@HOTMAIL.COM]
I don't think that this article is trying establish
that this is not an accounting fraud...regardless of the title of the
article. It is only saying that there were several parties in addition to
the accountants who helped this fraud! :)
Ganesh
June 6, 2006 reply from Roger Collins
[rcollins@TRU.CA]
Ganesh,
Let's think about this a minute...
It must be obvious from all the media reports that
there were "parties in addition to the accountants". Lay was not an
accountant; Skilling was not an accountant; Fastow never qualified as a CPA.
So, if the Lin & Wu paper is merely stating the obvious, why publish it?
The only obvious answer is that the paper was
approved for publication, not as a professional, but a political, statement.
As Bob says,
"CPAs are under > tremendous pressure to lobby on
behalf of clients to water down Section > 404 of SOX. The NYSSCPA is simply
playing along with these clients and > their CPAs."
Think for a moment about how articles are read and
interpreted. Most academic articles are published in so-called "academic"
journals - to be read by other academics and thereafter consigned to the
dust of history. A few establish new theories or lines of enquiry; rather
more either mine an already existing line of enquiry or justify themselves
in other ways such as maintaining or establishing academic reputations. Dr
Johnson famously wrote "No man but a fool ever wrote, except for money" -
and the money doesn't have to be a direct flow of cash. There are a few
selfless souls who find academic accounting an end in itself, but they are
thin on the ground.
Most professional articles are read far more
widely. But they are often skimmed or "headlined", with summaries - or less
- tossed around for any manner of reasons. Whether it was their intention or
not, what L and W have done is to provide ammunition in the defence of a
group - accountants - who, as the NYSSCPA and other professional groups,
seek to deflect responsibility and accountability when they should be
engaging in a much more profound examination of accounting policies,
procedures and ethics. Articles such as that by L &W are harvested for sound
bites by the profession's apologists and replayed ad infinitum for the
benefit of any politician / lobbyist who will lend an ear.And, as Bob says,
that comes down to yet more pressure to roll back the one major advance in
accountability the accounting world has experienced in a very long time. All
in all, its NOT "A Good Thing".
Regards,
Roger
Roger Collins
TRU School of Business PS For anyone curious about the previously-mentioned
Mandy Rice-Davis...
http://en.wikipedia.org/wiki/Mandy_Rice-Davies
June 6, 2006 added reply from Roger Collins
[rcollins@TRU.CA]
After my last note, I came across this article,
reporting on a piece of acdemic research that's in stark contrast to the W &
L article...
http://money.cnn.com/2006/05/26/magazines/fortune/colvin_fortune_0612/index.htm
A quote.... "Then came Sarbanes-Oxley, which
required that option grants be reported within two business days. A new
paper by Lie and Randall Heron of Indiana University, still unpublished,
finds that evidence of backdating virtually disappears after Aug. 29, 2002,
when the requirement took effect."
(My apologies if others have posted this
previously).
Regards,
Roger
Roger Collins
TRU School of Business
Bob Jensen's Enron Quiz is at
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
Bob Jensen's threads on the Enron, Worldcom, and
Andersen meltdowns can be found at
http://www.trinity.edu/rjensen/FraudEnron.htm
"Enron’s Lasting Influence," AccountingWeb, January 10,
2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=101647
With the former Enron executives finally coming to
trial, we are reminded again of the long shadow cast by the implosion of the
company that helped enact the Sarbanes-Oxley (SOX) Act of 2002. Section 404
has added teeth to SOX, making regulation more expensive and staff intensive
and the Public Company Accounting Oversight Board (PCAOB) has been created
to aid in the governance and enforcement of the accounting industry. Audit
committees have attained more important positions in corporate structures
and are more attuned to avoid the conflicts of being both auditor and
consultant for the same company. At the same time, with the collapse of
Arthur Andersen, the consolidation of the Big Five to the Big Four now have
four accounting firms doing the work for more than 90 percent of publicly
traded companies, according to the New York Times.
“We certainly have seen some improvements in
governance, but we’ve also seen some areas of no improvement, and some areas
where things have gone backwards,” said Lynn E. Turner, speaking to the New
York Times. Turner is the former chief accountant at the Securities and
Exchange Commission (SEC) and now managing director of research at Glass,
Lewis & Company.
The outright accounting scandals of WorldCom, Tyco,
and Adelphia have now morphed into companies making financial restatements.
Glass, Lewis & Company reports that earnings restatements numbered 1,031
through the end of October 2005, compared with 650 for 2004 and 270 in 2001,
according to the New York Times. John C. Coffee, speaking in the Los Angeles
Times, said the restatements were not necessarily evidence of fraud but
shows the tighter focus of accountants.
Also, more than 1,250 public companies, out of
around 15,000 in total, reported material weaknesses in their internal
corporate controls in October 2005. Some 232 other companies reported less
serious, but significant deficiencies in their internal controls, according
to the New York Times.
In contrast, a new study shows that the number of
securities class-action suites has come down 17 percent in 2005. The 176
filed in 2005 is the lowest since 1997, according to Cornerstone Research
and Stanford Law School. 1998 saw 239 suites, the highest number in recent
years, according to the Los Angeles Times.
Christopher Cox, chairman of the SEC, said in a
late December interview with the New York Times, that he agreed that more
should be done, disclosing his intention to lead a commission effort to
rewrite rules forcing companies to provide more financial details concerning
executive pay.
Tighter accounting and disclosure rules enacted to
enhance the transparency of financial information have lead to an
industry-lead backlash. Cox said to the New York Times that it “would be a
mistake” to retract major provisions of SOX.
“The shocks were so big that no director could miss
the lesson and if they did miss somehow, the significant changes in the law
made it absolutely certain that they are now more focused,” Cox added. “With
just a few years of Sarbanes-Oxley under their belts, most companies are
begrudgingly admitting that the exercise is producing benefits.”
SOX has sincere proponents though, institutional
and pension investor groups being the most vocal. Alan G. Hevesi, New York
comptroller of one of the nation’s largest institutional investors, has been
leading the effort to increase corporate accountability. Speaking with the
New York Times, Hevesi said, “We’ve had some successes in corporate
governance reform. In other words – such as giving a greater voice to
shareholders to elect independent directors and curbing excessive executive
compensation – we haven’t been as successful. I worry about whether the
necessary reforms have really been institutionalized.”
Executives say that restatements are healthy signs
of change according to the New York Times although, “The general impression
of the public is that accounting rules are black and white. They are often
anything but that, and in many instances the changes in earnings came after
new interpretations by the chief accountant of the S.E.C.," said Steve
Odland, Office Depot’s CEO and head of a corporate governance task force at
the Business Roundtable.
Accounting scandals are more often settled with the
SEC or actions filed by the agency now. For example, AcAfee, the Internet
security company, has agreed to settle charges made by the SEC that they
inflated revenues by some $622 million between 1998 and 2000. Their penalty
will be $50 million. The settlement is awaiting court approval.
The SEC filed a civil lawsuit against six former
executives then employed by an unnamed transfer-agent unit of Putnam
Investments last week. They allegedly defrauded mutual funds and clients out
of some $4 million in 2001. Also the judge has ruled that SEC testimony will
be allowed into the trials of former Enron executives Jeffrey Skilling and
Kenneth Lay.
What are some of the main lessons learned from the
Enron scandal?
I especially like "Suggestions for Reform" listed
at http://www.citizenworks.org/corp/reforms.php
A pretty good summary of lessons learned is provided at http://www.law.northwestern.edu/professionaled/documents/Ruder_Lessons_Enron.pdf
Bob Jensen's threads on reforms are at
http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Bob Jensen's threads on the Enron/Andersen scandals are at
http://www.trinity.edu/rjensen/FraudEnron.htm
Bob Jensen's Enron Quiz is at
http://www.trinity.edu/rjensen/FraudEnronQuiz.htm
"Combating Corporate Fraud," AccountingWeb, January
13, 2006 ---
http://www.accountingweb.com/cgi-bin/item.cgi?id=101663
The number of companies around the
world that reported incidents of fraud increased 22 percent
in the last two years, according to the 2005 biennial survey
by PricewaterhouseCoopers (PwC), which interviewed more than
3,000 corporate officers in 34 countries. In England, a
recent Ernst & Young survey of the Times Top 1000 indicated
the average cost of each fraud exceeded $200,000. But fraud
is not the only problem. There's also misconduct, unethical
behavior, lying, falsification of records, sexual
harassment, and drug and alcohol abuse.
PwC found that “accidental” ways of
detecting fraud, such as calls to hotlines or tips from
whistleblowers, accounted for more than a third of the
cases. Internal audits were responsible for detecting fraud
about 26 percent of the time.
Steven Skalak, Global
Investigations Leader at PwC, told Reuters: "I think the
investment in control systems is paying off and detecting
more crime." The study found that companies with a larger
number of controls could better determine the full impact of
the fraud, uncovering three times as many losses as
companies with fewer controls.
Many of the new and increased
controls were generated through the passage of The
Sarbanes-Oxley (SOX) Act of 2002, which made having
confidential, anonymous reporting mechanisms a legal
requirement for any publicly traded company. But private,
government and non-profit organizations would be well
advised to also create and implement this important tool.
While executives get the headlines,
43 percent of surveyed people admit to having engaged in at
least one unethical act in the workplace in the last year,
and 75 percent observed such an act and did nothing about
it. Not spoken to the employee in question, not reported it,
nothing. As much as we do not like to admit it, theft, fraud
and malfeasance are common occurrences in companies.
Unfortunately these practices exist in every level of the
organization and irrespective of size or sector. Non-profits
are stolen from in equal measure.
The Association of Certified Fraud
Examiners 2002 Report to the Nation indicates, "the most
common method for detecting occupational fraud is by a tip
from an employee, customer, vendor or anonymous source." It
additionally comments, "the presence of an anonymous
reporting mechanism facilitates the reporting of wrongdoing
and seems to have a recognizable effect in limiting fraud
and losses."
The report concludes,
"organizations with hotlines can cut their fraud losses by
approximately 50 percent per scheme." To be effective, a
confidential, anonymous reporting mechanism must be operated
by an independent, third party. Employees are understandably
hesitant and reluctant to report another employee. There is
not only the fear of retaliation; there is the fear of
retribution and of being ostracized by co-workers. In fact,
in an independent survey, 54 percent gave this as the main
reason for their silence.
There is also a concern if the
incident involves management, or the person required to take
the report or initiate the investigation. Employees must be
confident in knowing they can report an incident
effectively, confidentially and anonymously. Furthermore,
statistics prove that an internal hotline or reporting
mechanism is rarely perceived as truly anonymous.
You can become aware of and build
upon the positive aspects of employee relations while
proactively addressing and heading off potentially negative
issues with Ethical Advocate’s confidential, anonymous
reporting mechanisms and feedback system.
Confidential, anonymous reporting
mechanisms serves as an early warning system, enabling
organizations to react quickly to investigate issues, and
often resolve problems prior to increased malfeasance,
costly stealing, litigation, or negative publicity. Spending
a few dollars early on can save untold dollars and valuable
time. It also creates a culture of ethical behavior that
over time will diminish the prospects of these actions.
When installed properly,
confidential, anonymous reporting mechanisms can uncover a
variety of information that can improve processes, resolve
issues, and prevent catastrophic financial losses. Like a
computer network and a website, an employee hotline was once
just a good idea that top companies had adopted. Now it's a
mandatory part of doing business.
Bob Jensen's threads on fraud are at
http://www.trinity.edu/rjensen/fraud.htm
Bob Jensen's threads on the importance of whistle blowing
are at
http://www.trinity.edu/rjensen/FraudConclusion.htm#WhistleBlowing
Bob Jensen's PowerPoint files on fraud are
PwC 2005 Global Annual Review
January 25, 2006 message from
inman.and.wyer@us.pwc.com
We'd like to make the Annual Review available
to you, so that you may explore the contents in an interactive manner
via the link below.
http://www.pwc.com/2005GlobalAnnualReview
PricewaterhouseCoopers Global Economic Crime Survey 2005
The threat of fraud from apparently simple
cases of bribery to complex financial misrepresentation is more
prominent than ever on the agendas of company directors and financial
regulators. PwC's third biennial Economic Crime Survey is based on
interviews with more than 3,600 senior executives in 34 countries, and
reveals their experiences with fraud, its causes and losses, their
responses and recovery actions and the effectiveness of fraud prevention
measures. Please click to the link below to access the full survey.
http://www.pwc.com/EconomicCrimeSurvey
Protecting International Trade
How can we reduce the risk that terrorists will
exploit legitimate trade to attack the United States? One answer is
described in PwC's "Cargo Security White Paper." It provides an example
of the application of internal control processes to increase protection
and expedite cargo. Please click to the link below to access the white
paper.
http://www.pwc.com/cargosecuritycontrols
PwC on Fortune "100 Best Companies to Work
For"
As we communicated to you in the past, we have
placed a significant focus on our people initiatives. As a result of
these efforts, we have seen a substantial reduction in turnover; and as
external validation of our focus we were pleased to hear the recent
announcement that PwC is on the Fortune "100 Best Companies to Work For"
in 2006. Our emphasis on the development and retention of our people
continues to be a top priority for us.
As always we welcome your feedback and
appreciate hearing from you on how PwC can best support you as faculty
members.
Regards,
Brent Inman and Jean Wyer
Sarbanes-Oxley: What is too much of a seemingly good thing?
"Class-Action Sarbox," The Wall Street Journal, January 7, 2006;
Page A6 ---
http://online.wsj.com/article/SB113659722018040446.html?mod=opinion&ojcontent=otep
At first glance, the study from Stanford University
and Cornerstone Research seems to be good news, noting that the number of
class-action suits filed in 2005 dropped to 176 from 213 in 2004 -- a 17%
decrease. Good-governance types are claiming this decline is a direct result
of the 2002 Sarbanes-Oxley legislation working as intended, keeping
companies on the straight and narrow.
Yet as any first-year Wall Street analyst knows,
this minor legal reprieve is better attributed to last year's relatively
stable stock market. Class-action suits arise out of booms and busts in
equity markets: As share prices dive, plaintiffs' lawyers swarm. Yet with
last year's stock market less volatile than at any point since 1996, the
"strike suit" pickings were lean.
So what then accounts for those 176 suits? Try . .
. Sarbanes-Oxley. It appears the tort bar is now using the law's strict
financial-reporting requirements as its latest excuse to sue. A whopping 89%
of the suits alleged misrepresentations in financial documents, while 82%
claimed false forward-looking statements. Lawyers have certainly used
financial documents as a reason to sue in the past, but this year's notable
uptick in the number of suits filed that cite this cause of action suggests
that the tort bar has found a whole new line of business.
The real news here is that lawyers managed to drum
up so many results-related suits in a year when the stock market was stable
and corporate earnings were strong. Just wait for the next economic
downturn, when class-action lawyers will be able to exploit Sarbox's new
"internal controls" documentation as a roadmap. Our guess is that we have
only begun to discover the ways in which Sarbox will be a trial-bar bonanza.
Continued in article
Jensen Comments
A useful reference site from Cornerstone is at
http://www.cornerstone.com/fram_res.html
A Stanford University Press Release is at
http://securities.stanford.edu/scac_press/20060103_CR_SCAC.pdf
The Stanford University Law School Class Action Clearinghouse is at
http://securities.stanford.edu/
March 31, 2006 message from Richard Newmark
[richard.newmark@PHDUH.COM]
I think this transcript is very informative about
Sox and 404. It includes cost figures for compliance for different size
companies. It notes that despite the high cost, more small companies have
gone public after Sox went into effect. It also discusses the pros and cons
of some of the alternatives being discussed for small companies.
http://www.exchange-handbook.co.uk/news_story.cfm?id=58462
Rick
Richard Newmark
Sarbanes-Oxley (SOX) Sites
From Smart Stops on the Web, Journal of Accountancy, February 2006
---
http://www.aicpa.org/pubs/jofa/feb2006/news_web.htm
| SOX/B&I
SITES |
|
Brush Up on Compliance
www.aicpa.org/sarbanes/index.asp
CPAs and compliance officers can find background
documentation, guidance and tools for implementing the
Sarbanes-Oxley Act of 2002 here. Looking for related CPE credit?
Follow the link to the CPA2Biz.com store for a CD-ROM webcast. Or
read the full text of the act and get a brief history of the
regulations.
Voice Your Opinion
www.sarbanes-oxley-forum.com
This e-portal offers visitors who register for free
the opportunity to share their experiences of complying with
Sarbanes-Oxley in its discussion forum; topics include audit and IT
issues, conferences and training and control methodologies. Look up
the portal’s latest poll results—or vote yourself—on which stage
your organization has reached with respect to Sarbanes-Oxley
compliance.
Time to Take Control
www.fei.org/advocacy/internal_controls.cfm
CPAs and internal audit controllers will find a full
menu of links to discussions, surveys, trends and white papers on
Sarbanes-Oxley at this Financial Executives International Web spot.
In addition to the full text of the act, you can find SEC and PCAOB
guidance and summaries of section-404-related laws. Check out the
results of Pricewaterhouse- Coopers’ Barometer Surveys on the impact
of Sarbanes-Oxley on private companies and not-for-profits.
For (Internal) Control Freaks
www.cfoc.gov
Managers, come to the Chief Financial Officer’s
Council Web site to get the implementation guide for the Office of
Management and Budget (OMB) Circular A-123 on your responsibilities
for internal control over financial reporting. The guide comes with
a detailed flowchart outlining a five-step assessment process and
numerous exhibits, including one for the money spent on financial
reporting activities.
In IT We Trust
www.itrb.gov
The Information Technology Resources Board (ITRB)
e-stop may be meant for employees using computer systems in federal
government agencies, but all IT professionals can benefit from some
of the content in the Published Reports section. Titles of note
include “A Balanced Approach to Managing Risk in an Unfriendly
World: An Executive’s Guide.” |
Federal Reserve Chairman Alan Greenspan defended
the Sarbanes-Oxley Act
Federal Reserve Chairman Alan Greenspan defended the
Sarbanes-Oxley Act that Congress passed after a series of corporate accounting
scandals, saying he is surprised that a law enacted so "rapidly" has "functioned
as well as it has." Delivering a commencement address at the University of
Pennsylvania's Wharton School yesterday, Mr. Greenspan said the 2002 law
"importantly reinforced the principle that ... corporate managers should be
working on behalf of shareholders to allocate business resources to their
optimum use."
David Wessel, "Corporate Overhauls Are Proving To Be Effective, Greenspan Says,"
The Wall Street Journal, May 16, 2005; Page C3 ---
http://online.wsj.com/article/0,,SB111616543499633916,00.html?mod=todays_us_money_and_investing
This is somewhat contrary to the praises being sung by CEOs of auditing
firms
From Jim Mahar's Blog on August 30, 2005 ---
http://financeprofessorblog.blogspot.com/
Sarbanes-Oxley after Three Years by Larry
Ribstein
SSRN-Sarbanes-Oxley after Three Years by Larry
Ribstein:
I am sure many of you have been wondering whether
Sarbanes-Oxley has been successful or not. I know that I have been!
Unfortunately, it is a very difficult thing to test. While the costs are
relatively easy to measure, the benefits are not. Moreover, even like any
regulation, the passage is anticipated and thus normal event studies get
muddied.
So with that in mind (and a good dictionary in
hand) I present to you Larry Ribstein's look at the Sarbanes-Oxley Act after
three years.
Ribstein presents a very interesting history (why
and how it came about) and summary (what it contains) of SOX. He then
reviews the literature on the Act. This literature review can be summarized
with the following quote:
"The finance studies on the effect of SOX have been
accompanied by data on the costs of SOX that have fueled mounting doubt
about the Act's cost-effectiveness." Ribstein's conclusion stems from this
literature review:
"In general, the costs have been significant and
the benefits elusive." Overall the paper makes several good points, and
concludes with his recommendations for future legislation, however, I was
left wanting more empirical evidence but I guess that will have to wait.
However, it was a good read and the history/summary
section would be great for class use!
Cite: Ribstein, Larry E., "Sarbanes-Oxley after
Three Years" (June 20, 2005). U Illinois Law & Economics Research Paper No.
LE05-016.
http://ssrn.com/abstract=746884
BTW Jim's am not kidding about needing a good dictionary. ;)
Sarbanes Oxley Blues
What the business world now calls SOX
is a law passed that forces auditing firms to provide better audits at a
substantially increased cost to their clients. We now have a new song that
is not exactly a celebration of SOX.
From:
Mike Kennelley [mailto:MKennell@jbu.edu]
Sent: Tuesday, March 01, 2005
8:24 AM
To: escribne@nmsu.edu
Subject: Sarbanes-Oxley Blues
If
you haven't heard this one, turn on those speakers and enjoy . . .
http://www.headwatersmb.com/content/audio_02.html
It appears SOX is here to stay, but there may be new designs almost every
year
Jonathan D. Glater, "Here It Comes: The Sarbanes-Oxley Backlash," The New
York Times, April 17, 2005 ---
http://www.nytimes.com/2005/04/17/business/yourmoney/17sox.html
For corporate America, it is always a good time to
lobby - even when the public image of business is increasingly associated
with executive perp walks.
Last week, business representatives gathered in
Washington at an all-day roundtable discussion held by federal regulators
and complained about the cost of complying with a provision of the
Sarbanes-Oxley corporate reform law. Not one business leader asked to repeal
the law, which was passed in 2002 after a wave of financial scandals, or to
gut it. Nearly every executive, however, lamented the costs of compliance
The criticism is striking, given that it comes
against a backdrop of continuing revelations of potential fraud, criminal
prosecution of fraud and convictions on fraud charges. Bernard J. Ebbers,
the former chief executive of WorldCom, is awaiting sentencing after being
convicted last month of fraud, conspiracy and filing false reports. Trials
of former Enron executives are set to begin this week. Arthur Andersen,
audit firm to both WorldCom and Enron, is still fighting to save its
reputation and its few remaining assets in a lawsuit brought by WorldCom
shareholders.
"There've been so many companies that have gotten
in trouble, none of them want to come out now and say we oppose" the law,
said Lynn E. Turner, a former chief accountant at the Securities and
Exchange Commission who now works at Glass, Lewis & Company, an investment
research firm in San Francisco. "It just leaves people with a bad feeling
about that company."
He added that the last person whom he had heard was
bashing Sarbanes-Oxley was Maurice R. Greenberg of the American
International Group, who resigned as chief executive last month amid a
review of the company's accounting and who invoked the Fifth Amendment when
being interviewed by investigators last week.
"I don't think you're going to see that anymore,"
Mr. Turner said of executives' campaigning against Sarbanes-Oxley.
Instead, executives are pushing for what they
describe as specific changes in the implementation of the law, while singing
its praises in general terms.
"There is no question that, broadly speaking,
Sarbanes-Oxley was necessary," said John A. Thain, chief executive of the
New York Stock Exchange, in remarks echoed by others at the roundtable.
Nick S. Cyprus, controller and chief accounting
officer for the Interpublic Group of Companies, was even more specific,
praising a provision of the law that has become a particular target for many
critics. "I'm a big advocate of 404," he said, referring to Section 404 of
the law, "and I would not make any changes at this time."
Section 404 requires companies and their auditors
to assess the companies' internal controls, which are the practices or
systems for keeping records and preventing abuse or fraud. Something as
simple as requiring two people to sign a company check, for example, is one
type of internal control.
Of the 2,500 companies that filed internal controls
reports with the Securities and Exchange Commission by the end of March,
about 8 percent, or 200, found material weaknesses, the agency's chairman,
William H. Donaldson, said at the roundtable. That exceeds the 5.6 percent
rate that Compliance Week magazine found in a review of the first 1,457
companies to report.
Executives at the roundtable consistently said that
complying with Section 404 has been more expensive than they had
anticipated, and they questioned whether the benefit - which no one has been
able to quantify - is worth the cost.
There are, perhaps unsurprisingly, several studies
of the cost of compliance from various business groups. Financial Executives
International, a networking and advocacy organization, said last month that
a survey of 217 publicly traded companies showed they had spent $4.36
million, on average, to comply with Section 404.
A different survey, of 90 clients of the Big Four
accounting firms - Deloitte Touche Tohmatsu, Ernst & Young, KPMG and
PricewaterhouseCoopers - found that the companies spent an average of $7.8
million on compliance. That was about 0.10 percent of their revenue, and
less than the $9.8 million paid, on average, to C.E.O.'s at 179 companies
whose annual filings were surveyed earlier this month in Sunday Business.
Continued in the article
Pull your SOX up boss (remember Marlon Brando in
Teahouse of the August Moon)
More than 500 public companies have reported
deficiencies with their internal accounting controls under a controversial new
federal rule -- a figure sure to feed the continuing debate about the cost and
usefulness of recent efforts to strengthen corporate governance. To
backers, the volume of disclosures demonstrates that the new rule, part of the
2002 Sarbanes-Oxley corporate-accountability law, is pushing a lot of U.S.
companies into line. But business groups complain that it's costing them a lot
of money and effort to turn up deficiencies that in most cases are
inconsequential.
Deborah Solomon, "Accounting Rule Exposes Problems But Draws
Complaints About Costs," The Wall Street Journal, March 2,
2005; Page A1 --- http://online.wsj.com/article/0,,SB110971840422767575,00.html?mod=home_whats_news_us
Bob Jensen's threads on reforms are at http://www.trinity.edu/rjensen/FraudProposedReforms.htm
Holy Sox Audit Man: Those two little paragraphs in
Section 404 and so much confusion
"Living With Sarbanes-Oxley: How companies are coping in the
new era of corporate governance," by Diya gullapalli, The Wall Street
Journal, October 17, 2005; Page R1 ---
http://online.wsj.com/article/SB112922100637567825.html?mod=todays_us_the_journal_report
The centerpiece of Sarbanes-Oxley is internal
controls: the checks and balances that make sure public companies record
assets, liabilities and other items accurately on financial statements.
Under Sarbanes-Oxley, companies must make sure their controls are sound,
then have an auditor sign off on them.
One of the biggest problems companies had with
compliance last year was the constant creation of new rules and standards by
regulators who were still in the midst of translating the legislation into
regulations. Section 404 of Sarbanes-Oxley, which lays out internal-control
rules, is only two paragraphs long; it simply states that company management
and auditors must certify the soundness of internal controls in annual
reports. The newly created Public Company Accounting Oversight Board was
assigned to help write up specific guidelines -- which meant companies had
to start assessing their controls while the rules were still being created.
And companies couldn't turn to their auditors for
guidance. Under the regulators' guidelines, auditors can't help companies
design or implement their controls, because the auditors must eventually
sign off on the companies' work. Helping the companies might compromise the
auditors' role as independent observers. Some auditors, wary of violating
rules, went even further and refused to offer advice on a host of other
complex accounting matters -- making things even more confusing for
companies.
The result: escalating tension. Foley & Lardner's
report, for example, quotes corporate executives as saying that
internal-control reporting "created an adverse relationship with auditors,"
in part because executives felt like they were paying auditors for advice
and then not getting it. The rising price tag seemed to make things worse:
One boss cited in the report said that auditors' higher fees meant the
auditors "now drive a Mercedes instead of a Buick."
Continued in article
As part of an ongoing effort to improv