Accounting Scandal Updates on March 31, 2003
Bob Jensen at Trinity University


Updates and issues in the accounting, finance, and business scandals --- 

Many of the scandals are documented at 

Andersen audits got "behind!"
Sure seemed enough,
When Waste Management audits ignored smelly stuff.

And Andersen's unveilings bottomed out,
When Victoria Secret audits turned into doubt.

Now the latest criminal  issue,
Is Andersen's clean wipe of American Tissue.

AccountingWEB US - Mar-12-2003 - In yet another black mark against the now-defunct accounting firm of Arthur Andersen, LLP, a former senior auditor of the firm has been arrested in connection with the audit of American Tissue, the nation's fourth-largest tissue maker. Brendon McDonald, formerly of Andersen's Melville, NY office, surrendered Monday at the United States Courthouse in Central Islip, NY. He could face as much as 10 years in prison for his role in allegedly destroying documents related to the American Tissue audits.

Mr. McDonald is accused of deleting e-mail messages, shredding documents, and aiding the officers of American Tissue in defrauding lenders of as much as $300 million. American Tissue's chief executive officer and other executives were also arrested and charged with various counts of securities and bank fraud and conspiracy.

According to court documents, American Tissue inflated income and diverted money to subsidiaries in an attempt to make the company eligible to borrow additional money. "The paper trail of phony sales transactions, bogus supporting documentation and numerous accounting irregularities ended quite literally with the destruction of the falsified documents by American Tissue's auditor," said Kevin P. Donovan, an assistant director of the Federal Bureau of Investigation, according to a statement that appeared in The New York Times ("Paper Company Officials Charged," March 11, 2003).


The European Commission on Monday rejected a plea from the "Big Four" accounting firms for a monetary limit on the amount that auditors can be sued for. Frits Bolkestein, European commissioner responsible for financial services, said unlimited liability was a "quality driver" because auditors who did their job properly had no exposure to litigation.
Andrew Parker, The New York Times, March 24, 2003

Chronicling the inner workings of Andersen at the height of its success, Toffler reveals "the making of an Android," the peculiar process of employee indoctrination into the Andersen culture; how Androids - both accountants and consultants--lived the mantra "keep the client happy"; and how internal infighting and "billing your brains out" rather than quality work became the all-important goals. Final Accounting should be required reading in every business school, beginning with the dean and the faculty that set the tone and culture." - Paul Volker, former Chairman of the Federal Reserve Board.
The AccountingWeb, March 25, 2003.
Details about this book and other references are listed at 

The SEC wants the AICPA to know, in no uncertain terms, who's in charge of standard setting. Following the release last week of an AICPA exposure draft on internal control reporting, the SEC expressed strong concerns that the AICPA is creating the perception that they are more involved in the standard setting process than they really are. 

Mark Morze has the dubious distinction of having perpetrated one of the biggest and most brazen financial frauds in American history, serving as "president" of ZZZZ Best's insurance restoration business. Mr. Morze, who spent over four years in prison and is now helping auditors discover fraud, shares over 30 questions that the auditors should have asked that would have stopped him dead in his tracks. 

The latest Enron Scandal book in the words of the lead whistle blower herself:
Power Failure: The Inside Story of the Collapse of Enron
by Mimi Swartz, Sherron Watkins

Fraudulent Dealer Tricks:  An Interactive DHTML Illustration --- 
This includes a summary of ten unethical tricks of the trade by automobile dealers.

Free Whistle Blower Hotlines from TeleSentry (all hours seven days per week) --- 

We have designed our toll free reporting service specifically to provide employees an anonymous communication channel to bring forth Code of Conduct concerns and establish a protected platform for on-going communications with your company.

Bob Jensen's tips on how to report fraud --- 

Big Four accounting firm KPMG has agreed to pay $125 million as a result of a class action lawsuit filed by shareholders of Rite Aid, the nation's third-largest drugstore chain. In addition, KPMG has agreed to pay $75 million to shareholders of Oxford Health Plans after a computer snafu at Oxford in 1977 resulted in collection and payment delinquencies. 

Other selected KPMG scandals are summarized at 

WorldCom, the long-distance carrier that is mired in the nation's largest bankruptcy filing, said yesterday that it was writing down $79.8 billion of its good will and other assets. The move is an acknowledgment that many areas of the company's vast telecommunications network are essentially worthless. The company said in a statement that all existing good will, valued at $45 billion, would be written down. WorldCom also said it would reduce the value of $44.8 billion of equipment and other intangible assets to about $10 billion. WorldCom had previously signaled that it was considering the write-downs, but the immensity of the values involved surprised some analysts. WorldCom's write-downs are second only to those of AOL Time Warner, which recently wrote down nearly $100 billion of assets.
Simon Romero (See Below)

HealthSouth and Ernst & Young

Scrushy Accounting:  Sarbanes-Oxley's First Significant Test

Nonetheless, Mr. Smith and HealthSouth's chief executive, Richard Scrushy, on two occasions last year swore in public filings that the company's financial statements fairly presented HealthSouth's financial condition and operating results. Those quarterly certifications, which the Sarbanes-Oxley Act began requiring last year, appear to have made it much easier for prosecutors to build their case against Mr. Smith. The SEC filed civil charges against Mr. Scrushy Wednesday, but he hasn't been charged criminally. Prosecutors referred to HealthSouth's CEO and other unnamed HealthSouth senior executives as co-conspirators throughout Wednesday's court filings. Neither Mr. Scrushy nor his lawyer could be reached for comment.
Jonathon Weil

To Follow:  Another Billion Dollar Lawsuit Against Ernst & Young
"Prosecutors Outline Practices Behind HealthSouth Charges,: by Jonathan Weil, The Wall Street Journal, March 20, 2003, Page C1 ---,,SB104813028448850400,00.html?mod=todays%5Fus%5Fmoneyfront%5Fhs 

Forget about Enron-like special-purpose entities or exotic-sounding financial engineering. The accounting fraud to which HealthSouth's former chief financial officer, Weston L. Smith, agreed to plead guilty in an Alabama federal court was as straightforward as accounting fraud gets. Yet, because it was so well hidden, according to prosecutors, outside investors barely stood a chance of detecting it.

Here is how the health-care provider's scheme worked, according to prosecutors. Intent on not missing Wall Street analysts' earnings estimates, HealthSouth Corp. executives made a series of adjustments that manipulated the company's revenue line so revenue and earnings would appear larger than they were.

The executives made the adjustments to certain allowances on HealthSouth's financial statements. The allowances accounted for the difference between what HealthSouth charged a patient and the amount the company could collect from the patient's health insurer. By lowering the allowances improperly, HealthSouth improved its net revenue and bottom-line earnings.

At HealthSouth, for every dollar of illicit revenue that company executives recorded, they also had to make a corresponding entry on the company's balance sheet. And if they plowed it all into one type of asset, the company's auditors at Ernst & Young LLP's Birmingham, Ala., office -- where Mr. Smith had been an auditor during the 1980s -- might detect it. So they spread the improper entries far and wide in tiny pieces across HealthSouth's balance sheet.

According to the government, HealthSouth executives plumped such things as the company's inventory and intangible assets and property, plant and equipment assets. They even overstated the company's cash by $300 million, according to prosecutors. The improper entries, some of which dated to 1997, eventually piled up. HealthSouth's deft handling of its balance sheet made it practically impossible for investors to detect the scheme before it was too late. (HealthSouth has said it is cooperating with the Justice Department's criminal investigation.)

"The predominant evidence is not that the rules don't work," says Sean Coffey, a partner at New York law firm Bernstein Litowitz Berger & Grossman who specializes in pursuing class-action securities-fraud lawsuits. "It's that people continue to break the rules, and the gatekeepers keep letting them get away with it. There were rules that prohibited just about everything this guy did, and he just did it anyway."

The charges facing Mr. Smith include filing a false certification statement with the Securities and Exchange Commission, a violation of new laws established by last year's Sarbanes-Oxley securities legislation aimed at improving corporate governance. Mr. Smith's case underscores how Sarbanes-Oxley won't stop fraudulent earnings management, though it likely will result in more criminal prosecutions for accounting fraud.

The parts of the financial statements that Mr. Smith -- and, allegedly, other HealthSouth executives -- exploited, for the most part, are areas where management has broad discretion to estimate asset values. As long as corporate managers are the ones determining those values, opportunities for abuse will abound. In any given period, small irregularities that look like normal variances often can go undetected.

By mid-2002, according to prosecutors, HealthSouth's total assets were overstated by $1.5 billion. Property, plant and equipment assets were overstated by $1 billion, or more than 50%, and earnings for the first six months of 2002 were inflated by more than $150 million, the Justice Department said.

Nonetheless, Mr. Smith and HealthSouth's chief executive, Richard Scrushy, on two occasions last year swore in public filings that the company's financial statements fairly presented HealthSouth's financial condition and operating results. Those quarterly certifications, which the Sarbanes-Oxley Act began requiring last year, appear to have made it much easier for prosecutors to build their case against Mr. Smith. The SEC filed civil charges against Mr. Scrushy Wednesday, but he hasn't been charged criminally. Prosecutors referred to HealthSouth's CEO and other unnamed HealthSouth senior executives as co-conspirators throughout Wednesday's court filings. Neither Mr. Scrushy nor his lawyer could be reached for comment.

Continued in the article.

The SEC link --- 

Securities and Exchange Commission

Litigation Release No. 18044 / March 20, 2003

Accounting and Auditing Enforcement
Release No. 1744 / March 20, 2003

SEC Charges HealthSouth Corp., CEO Richard Scrushy
With $1.4 Billion Accounting Fraud

Commission Action Seeks Injunction, Money Penalties, Officer and Director Bar

Commission Obtains Emergency Relief

Securities and Exchange Commission v. HealthSouth Corporation and Richard M. Scrushy, CV-03-J-0615-S (N.D. Ala.)

The Securities and Exchange Commission announced that on March 19, 2003, it filed accounting fraud charges in federal district court in the Northern District of Alabama against HealthSouth Corporation ("HRC"), the nation's largest provider of outpatient surgery, diagnostic and rehabilitative healthcare services, and its Chief Executive Officer and Chairman Richard M. Scrushy.

The Commission's complaint alleges that since 1999, at the insistence of Scrushy, HRC systematically overstated its earnings by at least $1.4 billion in order to meet or exceed Wall Street earnings expectations. The false increases in earnings were matched by false increases in HRC's assets. By the third quarter of 2002, HRC's assets were overstated by at least $800 million, or approximately 10 percent. The complaint further alleges that, following the Commission's order last year requiring executive officers of major public companies to certify the accuracy and completeness of their companies' financial statements, Scrushy certified HRC's financial statements when he knew or was reckless in not knowing they were materially false and misleading.

According to the complaint:

The Commission alleges that HRC's and Scrushy's actions violated and/or aided and abetted violations of the antifraud, reporting, books-and-records, and internal controls provisions of the federal securities laws. Specifically, the Commission has charged HRC with violating Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Exchange Act Rules 10b-5, 12b-20, 13a-1, and 13a-13. The Commission has charged Scrushy with violating Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act, and Exchange Act Rules 10b-5 and 13b2-1. The Commission also has charged Scrushy with aiding and abetting HRC's violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13.

For these violations, the Commission is seeking a permanent injunction against HRC and Scrushy, civil money penalties from both defendants, disgorgement of all ill-gotten gains and losses avoided by both defendants as a result of the conduct alleged plus prejudgment interest thereon. The Commission also is seeking an order (i) prohibiting Scrushy from serving as an officer or director of a public company, (ii) freezing the assets of Scrushy, (iii) requiring HRC to escrow in an interest-bearing account, all extraordinary payments (including compensation) to any director, officer, partner, controlling person, agent, or employee, and (iv) preserving HRC's documents.

The Commission also obtained emergency relief on March 19, 2003 against HRC and Scrushy in the District Court. HealthSouth consented to the entry of an order by the Court (1) requiring that the company place in escrow, under the Court's supervision, all extraordinary payments (whether compensation or otherwise) to its directors, officers, partners, controlling persons, agents, or employees, pursuant to the provisions of the Sarbanes-Oxley Act of 2002, (2) prohibiting the company and its employees from destroying documents relating to the company's financial activities and/or the allegations in the Commission's case against HealthSouth in Scrushy, and (3) providing for expedited discovery in the Commission's case. The Court also entered a temporary order freezing substantially all of Scrushy's assets.

Pursuant to a separate Commission order issued on March 19, 2003, trading in the securities of HRC was suspended for two business days due to the materially misleading information in the marketplace.

The Commission wishes to thank the U.S. Attorney's Office for the Northern District of Alabama, the U.S. Department of Justice, and the Federal Bureau of Investigation for their cooperation in this matter.

The Commission's investigation is continuing.

SEC Complaint in this matter

Audit committees are supposed to be a big deal in fraud prevention . . . or are they a sham?  Enron's audit committee proved to be a useless pawn of Enron managers.  The big issue at HealthSouth centers on if the Audit Committee met and if it did anything.  


The case of the slippery Michael Young and the tight-lipped  Ernst & Young.  
The SEC has commenced litigation claiming over $1 billion in fraud undetected by the HealthSouth Audit Committee and the external auditors.
"HealthSouth Audit Panel Met Three Times in '01? ... Maybe," by Johathan Weil, The Wall Street Journal, March 25, 2003 ---,,SB104855430955864400-search,00.html?collection=wsjie%2F30day&vql_string=HealthSouth%3Cin%3E%28article%2Dbody%29 

Call it the case of the missing HealthSouth Corp. audit-committee meetings.

HealthSouth's 2002 proxy statement clearly states that the company's audit committee met only once in 2001. Within days of the government's accounting-fraud accusations against the company and its top officers, critics seized on the disclosure as a sign that the committee was asleep at the switch.

But now an attorney for the HealthSouth board's audit committee, Michael Young of the law firm Willkie Farr & Gallagher, says newly uncovered information shows the committee was not (asleep).

The proxy statement, he says, got it wrong. Just how wrong is the subject of conflicting accounts, both provided at different times by Mr. Young.

On Friday night, in response to an article in The Wall Street Journal that day citing the proxy, Mr. Young called a Journal reporter to say the audit committee had met "at least five times" in 2001, based on newly found records, copies of which he declined to provide. (See related article.)

Before the article's publication, HealthSouth audit committee members and company spokesmen hadn't returned calls seeking comment, and a spokesman for HealthSouth's auditor, Ernst & Young LLP, had declined to comment on the audit committee's activities.

For a Reuters article published Sunday night, Mr. Young told a reporter that the audit committee had met at least three times, citing records from Ernst & Young and the committee's chairman. Mr. Young Monday said the lower tally is the best available information. An Ernst spokesman Monday said the accounting firm's records show Ernst auditors attended three HealthSouth audit-committee meetings in 2001. The three audit-committee members are George H. Strong, C. Sage Givens and Larry D. Striplin Jr. An assistant to Mr. Striplin said he wouldn't comment, while the other two members couldn't be reached.

Some critics remain skeptical. "A proxy statement is an official document," says Columbia University accounting professor Itzhak Sharav, adding that HealthSouth should file an amended proxy if the committee met more than once in 2001. "A statement over the phone carries very little weight with me." Asked if an amended proxy would be filed, Mr. Young says: "I have no idea. There are more pressing issues than amending a proxy statement with regard to the number of audit-committee meetings in 2001."

A HealthSouth spokesman Monday said he couldn't confirm how many times the committee met, and had no immediate comment on whether the company would file an amended proxy statement.

The Securities and Exchange Commission recommends audit committees meet at least four times a year. Ideally, former SEC Chairman Arthur Levitt said in a 1998 speech, an audit committee would meet 12 times a year.

Ernst & Young's purported failure to protect its HealtSouth client from insider fraud is another instance supporting the following assertion by Mark Morze (instigator of the ZZZZ Best well-know fraud):

Mark Morze has the dubious distinction of having perpetrated one of the biggest and most brazen financial frauds in American history, serving as "president" of ZZZZ Best's insurance restoration business. Mr. Morze, who spent over four years in prison and is now helping auditors discover fraud, shares over 30 questions that the auditors should have asked that would have stopped him dead in his tracks. 

Is this smoke and mirrors or what?
Deloitte and Touche is Considering Getting Out of the Auditing Business

AccountingWEB US - Mar-20-2003 - These are confusing times for accountants. As the accounting profession jockeys to identify and secure its proper place in the financial universe, conflicting messages continue to emanate from the leaders of the profession. 

Paul Volcker Calls For an End to High End Tax Work

In an interview this week with the Financial Times, former Fed Chairman Paul Volcker called upon the Public Company Accounting Oversight Board to ban audit firms from performing tax work for audit clients. "You can run into a real conflict if the auditor has to audit the tax planning of the company," said Mr. Volcker.

Mr. Volcker, who at this time last year was advocating that the ailing Andersen accounting firm become the model "audit-only" firm, still feels strongly that audit firms should back away from corporate finance, legal and tax services and focus on one core audit service, without any independence conflicts.

Deloitte Chief Contemplates Getting Out of the Audit Business

Deloitte Touche Tohmatsu chairman Piet Hoogendoorn warned over the weekend that exposure to lawsuits was forcing global accountancy firms to consider abandoning statutory audit work.

Our Dutch sister site reported that in his role as chairman of the Netherlands professional body NIVRA, Hoogendoorn voiced his concerns in an interview with the 'Het Financieele Dagblad' newspaper.

The big global firms were thinking about quitting the audit market because of the difficulty of getting professional indemnity cover. Insurers who were willing or able to provide cover could be counted on the fingers of one hand, he said.

Although Mr. Hoogendoorn's comments may be more politically motivated due to concerns stirred up over Dutch retailer Ahold's financial misrepresentations, it nevertheless represents a shot across the bow as to how audit reforms will be played out in the future, and whether there is a viable business model left for accounting firms to pursue.

Arthur Levitt to CFOs: Show Some Backbone

At his latest stop in a speaking tour to financial professionals, former SEC Chairman Arthur Levitt told a group of CFO's this week to "set the standard" and "provide moral and ethical leadership. Bring a dose of reality to your hard-charging CEOs." He implored the audience to resist the "culture of seduction" to fudge the numbers in favor of personal gain, and to let investors really know how a company is doing, without bending to Wall Street's expectations.

In his crusade to help restore investor confidence, Arthur Levitt's message to America's CFO's is clear: Do The Right Thing.

And The Last Word From Investment guru Warren Buffett

Warren Buffett's eagerly awaited Annual Letter to Shareholders released this week has some unique insight on corporate governance, financial reporting, and auditor responsibilities. Here's a sneak preview on Mr. Buffett's insight on curbing CEO compensation:

"The acid test for reform will be CEO compensation. Managers will cheerfully agree to board 'diversity,' attest to SEC filings and adopt meaningless proposals relating to process. What many will fight, however, is a hard look at their own pay and perks. In recent years compensation committees too often have been tail-wagging puppy dogs meekly following recommendations by consultants, a breed not known for allegiance to the faceless shareholders who pay their fees."

Get a more complete look at the words and wisdom of Warren Buffett. --- 

Mr. Buffett's annual Letter to Shareholders, in which he shares his views on his company and the state of corporate America --- 


U.S. Securities and Exchange Commission
Washington, D.C.

Litigation Release No. 18038 / March 17, 2003

Accounting and Auditing Enforcement Release No. 1742 / March 17, 2003

Securities and Exchange Commission v. Merrill Lynch & Co., Inc., Daniel H. Bayly, Thomas W. Davis, Robert S. Furst, Schuyler M. Tilney, Case No. H-03-0946 (Hoyt) (S.D. Tx)

SEC Charges Merrill Lynch, Four Merrill Lynch Executives with Aiding and Abetting Enron Accounting Fraud

Merrill Lynch Simultaneously Settles Charges for Permanent Anti-Fraud Injunction and Payment of $80 Million in Disgorgement, Penalties and Interest

The Securities and Exchange Commission today charged Merrill Lynch & Co., Inc. and four of its former senior executives with aiding and abetting Enron Corp.'s securities fraud. The Commission's complaint, filed in U.S. District Court in Houston, alleges that Merrill Lynch and its former executives aided and abetted Enron Corp.'s earnings manipulation by engaging in two fraudulent year-end transactions in 1999. The transactions had the purpose and effect of overstating Enron's reported financial results. Specifically, Enron used these transactions to add approximately $60 million to its fourth quarter of 1999 income (improving net income from $199 million to $259 million or 33 percent) and to increase its full year 1999 earnings per share from $1.09 to $1.17.

Simultaneous with the filing of this action, the Commission has agreed to accept Merrill Lynch's offer to settle this matter. Merrill Lynch, without admitting or denying the allegations in the complaint, has agreed to pay $80 million dollars in disgorgement, penalties and interest and has agreed to the entry of a permanent anti-fraud injunction prohibiting future violations of the federal securities laws. The Commission intends to have these funds paid into a court account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 for ultimate distribution to victims of the fraud. The four former Merrill Lynch executives named in the complaint, Robert S. Furst, Schuyler M. Tilney, Daniel H. Bayly, and Thomas W. Davis, are contesting the matter.

The Commission's complaint alleges that, in late December 1999, senior Enron executives approached Merrill Lynch with the two transactions it had designed. As alleged, the first transaction was an asset-parking arrangement whereby on December 29, 1999, Merrill Lynch bought an interest in certain Nigerian barges from Enron with an express understanding that Enron would arrange for the sale of this interest by Merrill Lynch within six months at a specified rate of return. In substance, this transaction was, at best, a bridge loan because the risks and rewards of ownership of the interest in the barges did not pass to Merrill Lynch.

As further alleged in the complaint, Merrill Lynch and the named executives knew that Enron would record $28 million in revenue and $12 million in pre-tax income in connection with this transaction. The Commission alleges that Merrill Lynch and the named executives entered into this transaction solely to accommodate Enron, despite express concerns that Merrill Lynch could appear to be aiding and abetting Enron's earnings manipulation. In 2000, Enron arranged to take Merrill Lynch out of the barge deal on the agreed time frame at the agreed rate of return.

In the second transaction, also closed in the last days of December 1999, Merrill Lynch and Enron entered into two energy options — one physical and one financial — that Merrill Lynch knew had the purpose and effect of inflating Enron's income by approximately $50 million. The complaint details that, at year-end 1999, the trading under these options was not scheduled to begin for approximately nine months. Before the transaction was closed, the complaint alleges, Enron told Merrill Lynch that, despite a nominal term of four years, it might want to unwind this transaction early.

Merrill Lynch believed that the two trades were essentially a wash and knew that the transaction would have a significant impact on Enron's reported results, bonuses, and stock price. Merrill Lynch demanded a multi-million dollar fee for entering into this transaction; Enron ultimately agreed to pay Merrill Lynch a structured fee to be paid over four years with a net present value of $17 million. In 2000, Enron approached Merrill Lynch seeking to unwind the transaction before trading under the energy options was scheduled to begin. The deal was unwound in June 2000 after Merrill Lynch agreed to reduce its fee to $8.5 million to terminate the transaction.

The complaint alleges that Merrill Lynch and the named executives aided and abetted Enron's violations of the anti-fraud, reporting, books and records, and internal controls provisions of the federal securities laws. For these violations, the Commission seeks in its complaint a permanent injunction, disgorgement, and civil penalties with respect to Merrill Lynch and, with respect to the individual defendants, permanent injunctions, civil penalties, and permanent officer and director bars.

Simultaneous with the filing of the complaint, Merrill Lynch agreed to file a consent and final judgment settling the Commission's action against it. In the consent, Merrill Lynch has agreed, without admitting or denying the allegations of the complaint, to the entry of a final judgment permanently enjoining it from future violations of Sections 10(b), 13(a), 13(b)(2), and 13(b)(5) and of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 thereunder.

Merrill Lynch also has agreed to pay disgorgement, penalties and interest in the amount of $80 million. Specifically, Merrill Lynch will pay $37.5 million in disgorgement, $5 million in prejudgment interest, and a civil penalty of $37.5 million. As noted above, the Commission intends to have these funds paid into a court account pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002 for ultimate distribution to victims of the fraud.

In agreeing to resolve this matter on the terms described above, the Commission took into account certain affirmative conduct by Merrill Lynch. Merrill Lynch terminated Messrs. Davis and Tilney after they refused to testify before the staff and instead asserted their Fifth Amendment rights. In addition, Merrill Lynch brought the energy trade transaction to the staff's attention at a time when it believed the staff was unaware of its existence.

The Commission acknowledges the assistance provided by the staff of the Federal Energy Regulatory Commission in this investigation.

The Commission also acknowledges the continuing coordination among the Division of Enforcement, the Justice Department Enron Task Force and the Federal Bureau of Investigation in the Enron investigation.

The Commission's investigation is continuing. For additional information see

SEC Complaint in this matter

Bob Jensen's threads on the Enron/Andersen frauds are at 

Especially note the "Rotten to the Core" section at 

The Biggest Crime of All:  They Still Don't Get It

"A Buffett Warning on Executive Pay," by Bloombert News, The New York Times, March 17, 2003 

Warren E. Buffett, the billionaire investor, says that companies will not regain investors' trust as long as compensation for chief executives, including stock options, keeps rising while the share prices of their companies fall. "What really gets the public is when C.E.O.'s get very rich and stay very rich and they get very poor," Mr. Buffett told chief executives at a conference on corporate governance on Friday night in Charlotte, N.C. Mr. Buffett's views on responsibilities of executives and directors have gained new prominence after accounting scandals at WorldCom and Enron, the two biggest bankruptcies, shook investors' confidence and costs stockholders billions of dollars. Regulators and executives, including Bank of America's former chief executive, Hugh L. McColl Jr., who helped arrange the meeting, have sought advice from Mr. Buffett on topics like executive pay and corporate governance. Mr. Buffett, 72, the largest shareholder in Coca-Cola and American Express, was paid $356,400 in 2001 as chief executive of Berkshire Hathaway, his investment company based in Omaha. "It is vital that we earn back the trust of the American public," Mr. Buffett said. "We will get it back when we deserve it. When I start reading the proxy statements a year from now, I'll know whether American businessmen and businesswomen are serious about wanting to really give back to the system what the system has given to them."

"Wall Streets CEOs Still Get Fat Paychecks Despite Woes," by Susanne Craig, The Wall Street Journal, March 3, 2003

Chiefs' Packages Decline Overall Still, $10 Million or More Isn't Bad

Stock markets are down. Corporate public offerings are out. Investors are on the sidelines. And financial firms continue to cut staff.

 But there is still a bull market in one pocket of Wall Street -- the pay of securities-firm CEOs.

Amid one of the worst operating environments in years, Wall Street chief executives continue to pull down annual paychecks topping $10 million. Even though their pay is down overall, it is still turning heads in many quarters. Morgan Stanley's CEO Philip Purcell received a 2002 pay package of $11 million. Goldman Sachs Group Inc.'s Henry Paulson made $12.1 million and Lehman Brothers Holdings Inc.'s Richard Fuld took home a pay package valued at $12.5 million.


Citigroup Inc.'s Chief Executive Sanford I. Weill, whose banking firm has been dogged by regulatory probes this year, volunteered not to receive a cash or stock bonus for 2002 because the share price of the company, which owns Salomon Smith Barney, dropped 25% during the year.

But Citigroup's board granted Mr. Weill stock options for 2003 with an current estimated value of $17.9 million, more than the $17 million cash bonus Mr. Weill received in 2001. At Bear Stearns Cos., one of the few securities firms that actually saw its profit rise in 2002, CEO James Cayne saw his total compensation more than double to $19.6 million last year.


The still-hefty paychecks are drawing criticism as being out of whack with these tough economic times. On Wall Street, fees from the most profitable businesses -- such merger-and-acquisition advice and underwriting initial public offerings of stock -- have all but dried up.

"The problem is there is no strong indication the bear market is over and we are a long way from justifying these type of packages," says Mike Corasaniti, director of research at boutique investment firm Keefe, Bruyette & Woods Inc. and an adjunct professor in the business department of  Columbia University in New York .


"In good times boards justify the big pay packages by saying the executives are doing a great job and in bad times they justify the pay by saying they are managing in a difficult environment. No matter what, they seem to find a way to rationalize it."

Officials at the various firms declined to comment

Of course, a Wall Street CEO's pay is tied to performance. And the job hasn't been easy. But the tough decision to cut staff may have in fact boosted the pay packages of many top executives, as the cost-cutting measures kicked in. With the exception of a few firms, notably Credit Suisse Group's Credit Suisse First Boston, most Wall Street firms have actually been making money during the bear market. CSFB reported a loss for 2002 of $811 million, due to $813 million in charges to cover items ranging from 1,500 previously announced job cuts to a provision for civil-litigation costs.

Bob Jensen's related comments are at 

Also see  

Also see the exhobitant compensation of the new executive team at Adelphia (see below)

I cannot say that I buy into Todd Boyle's reply below, but he does raise food for thought. In the end, however, I do think that the war issue really is about weapons of mass destruction. If Saddam gave up those weapons tomorrow there would be no war. 
March 8, 2003 reply from Todd Boyle []

Hi Bob,

Needless to say, some of that money goes into bribes and kickbacks to members of the boards and hiring committees, and other influencers. Would $100,000 in an envelope, impress some people? Yes, and more often it is some bizarre transaction way down in the business process.

That could all be reduced if banking transparency were increased; instead your faithful representatives in Congress work to strengthen banking secrecy, calling it "privacy". The little guy, in America, couldn't care less about financial privacy of course. That has been one of the surprising findings that came out of the dotcom era, as well as earlier experiments in encryption, private messaging, etc. Nobody would pay an extra cent for any of them.

Since American citizen doesn't natively, care about privacy, BANKS need to teach us a lesson, to get us on the same side of the issue with wealthy plutocrats. So we're all being abused with 10 or 20 years of banking frauds, called "identity theft".

1. banks maintain insecure card and ATM infrastructures, 2. the banking system suffers fraud and having a government protected monopoly on settlement and holding of deposits, simply ploughs the loss back onto the depositor or merchant, 3. the banking system then conspires to block the credit of the account-holder for months, who has done nothing wrong, and 4. they publish 120 decibel press releases calling the depositor the "Victim" and screaming for better privacy and financial secrecy.

This gets better.

The Iraq war could have been avoided years ago if banks simply cooperated in enforcing UN resolutions. Instead, suppliers of arms, machine parts, tools, etc. in Europe and former soviet states, easily broke the blockade and enabled Saddam Hussein to continue operating his military infrastructure.

The very foundation of American prosperity is welcoming immigrants with all their money, and selling them land etc. America is built on a foundation of accepting deposits from the whole planet on a good-faith basis ---- do you recall for example, brief experiments imposing withholding taxes on bank interest? After the banks bled white from capital flight the global investors won, and to this day there's no withholding tax on qualifying bank bond interest paid to foreigners.

And after all THIS global money recycling (dating back to recycling of Petro-dollars of the 1970s, Eurodollars in the 1960s and before, is the very system we are fighting to protect in the middle east: It is NOTHING LESS than the global financial and legal framework for multinational corporations, i.e., the integrity and nonrepudiation of accounts.

The Iraq invasion is not for oil, itself! Good god no. The oil will always come to market regardless whether it is drilled by rednecks or towel-heads. Nor is it about secret germ labs, or other fantastic excuses Bush talks about.

We are bombing to protect the western framework for banking and financial governance. That, is what CPAs are bound to defend. The sanctity and eternal righteousness of our infinite, interlocking, consolidated ziggurat of corporate general ledgers and their bank reconciliations.

It is time for a "freedom of information act" addressing excessive secrecy and lack of accountability of corporations. 


A federal grand jury indicted former U.S. Technologies Inc. Chief Executive C. Gregory Earls, charging him with misappropriating more than $15 million from investors ---,,SB104854297214257100,00.html?mod=technology_main_whats_news 

From The Wall Street Journal Accounting Educators' Review on March 28, 2003

TITLE: Sarbanes-Oxley Begins to Take Hold 
REPORTER: Janet Whitman 
DATE: Mar 25, 2003 
TOPICS: Accounting, Accounting Law, Auditing, Sarbanes-Oxley Act

SUMMARY: PricewaterhouseCoopers surveyed 137 chief financial officers and managing directors to obtain their views on the Sarbanes-Oxley Act. Results of the survey are reported in the article.

1.) According to the article, what was the primary purpose of the Sarbanes-Oxley Act? Do the executives surveyed believe that the Act will achieve its intended purpose? Support your answer.

2.) What is reported as being the primary benefits of the Act? Do these benefits do anything to restore investor confidence? Support your answer.

3.) List three provisions of the Sarbanes-Oxley Act that you believe will do the most to restore investor confidence in financial reporting. Support your answers.

4.) What percentage of the respondents report significant changes as a result of the Sarbanes-Oxley Act? If the survey results are accurate, was the Act needed? Support your answer.

5.) Reconcile the following survey results. "About 42% said that, though it is a well meaning attempt, the law will impose unnecessary costs on companies." "Only 4% cited substantial changes."

6.) How many respondents believe that more needs to be done to improve financial reporting and restore investor confidence? List three additional measures that should be taken.

Reviewed By: Judy Beckman, University of Rhode Island 
Reviewed By: Benson Wier, Virginia Commonwealth University 
Reviewed By: Kimberly Dunn, Florida Atlantic University


This is a good site!
AICPA Antifraud & Corporate Responsibility Resource Center --- 

FASB Project Schedules --- 

From KPMG:  Revisiting Stock-Option Accounting --- 
Bob Jensen's threads on this issue are at 

I might remind Rolf Eden that Al Capone and many other famous men were killed from syphilis that did not come from sitting on a public toilet seat.  See Example 10 below.

"Harvey Pitt's Misstep Among "Dumbest Moments in Business," SmartPros --- 

SAN FRANCISCO, Mar. 18, 2003 — Spotlighting humorous corporate follies and executive missteps from the past year, the April 2003 issue of Business 2.0 features the magazine's newest list of the "101 Dumbest Moments in Business."

Former Securities and Exchange Commission chief Harvey Pitt received special mention due to his botched attempt to appoint William Webster as head of the new Public Company Acccounting Oversight Board. Webster's potential "credibility problem" as a board member of U.S. Technologies was ignored by Pitt, and he appointed Webster anyway. This proved to be the last straw for the White House and led to Pitt's resignation in November 2002

A case of questionable compensation practices is also included on the list. Kmart's appointment of James Adamson as its turnaround specialist and chief executive led to 30,000 layoffs within 10 months -- and the eventual resignation of the "turnaround specialist." Regardless, Adamson is set to receive a $3.6 million bonus once Kmart is out of Chapter 11. The company lost about $2 billion under Adamson's watch, but Adamson's total take will amount to $7 million.

Separately, Kmart's most marketable product and personality, Martha Stewart, had her own fire to put out this past year. The home decorating guru is under investigation for insider trading of ImClone stock.

Beyond the scandals surrounding Pitt, Kmart, and Stewart, the special report, released by Business 2.0, a product of The FORTUNE Group at Time Inc., also highlights lesser-known but equally remarkable business flubs from a variety of sources. The following are 10 of the top corporate blunders from Business 2.0's third annual list of the "101 Dumbest Moments in Business":

1. Midas launches an ad campaign featuring an elderly woman ripping open her blouse, asking what the company's lifetime "tune-up" guarantee can do for her body.

2. Yahoo ends up paying an undisclosed sum to Wylie Gustafson, the yodeler featured in its ads, after he sues the company for $5 million, claiming he was paid only for limited use.

3. Hop-On sends samples of its new, innovative disposable cell phone to reporters, who quickly discover that the phone's "revolutionary secret" is actually run-of-the-mill Nokia parts.

4. Clonaid tries to sell a mysterious $9,220 contraption called the RMX 2010, heightening the product's ambiguity by donating one to a British science museum with strict orders not to open it to find out what is inside.

5. Microsoft's senior vice president for Windows, Brian Valentine, declares at a conference that all operating systems suck.

6. In an effort to stanch his company's bleeding, Edison School CEO Chris Whittle suggests putting Edison students to work for an hour a day -- for free.

7. Barclay Knapp, CEO of telecommunications firm NTL, proclaims that he built a good company -- just one with a bad balance sheet -- shortly before filing for bankruptcy with debts totaling nearly $23.4 billion.

8. Employees at a floundering car plant in Romania propose to erase the company's $20 million debt by selling their sperm.

9. The National Cattlemen's Beef Association launches a marketing website designed to "steer" girls away from vegetarianism.

10. German real estate tycoon Rolf Eden offers to pay 125,000 euros to any woman who can kill him through sexual intercourse.

Lucent admitted it had incorrectly accounted for $679 million in revenue in its fiscal 2000 fourth quarter.

The auditing firm is PricewaterhouseCoopers (PwC)


Lucent Settles Shareholder Suits In Agreement Worth $568 Million," by Dennis K. Berman, The Wall Street Journal, March 30, 2003 ---,,SB104880537423229200,00.html?mod=technology_main_whats_news 

Lucent Technologies Inc. said Thursday night that it had settled massive shareholder litigation for a total of $568 million in cash, stock and warrants, in one of the largest such settlements in history.

The size of the settlement shows the amount of risk that Lucent, one of the country's most widely held stocks, faced from at least 54 shareowner lawsuits. People involved in the case said that the Murray Hill, N.J., company faced a potential bankruptcy situation if it had gone to trial and lost.

The settlement also shows that Lucent is trying to put its woes behind it. Just last month, the company settled a civil case with the Securities and Exchange Commission without admitting or denying any wrongdoing, though Lucent vowed not to violate securities laws in the future. The SEC had been investigating Lucent's sales practices for over two years. "The clouds have been put behind us," said Kathleen Fitzgerald, Lucent's spokeswoman.

The main thrust of the shareholder suits claimed that the large telecommunications-maker engaged in financial fraud and aggressive sales practices to sustain its growth during the height of the telecom boom, from the time of its fourth-quarter 1999 financial results until December 2000. Then, Lucent admitted it had incorrectly accounted for $679 million in revenue in its fiscal 2000 fourth quarter.

The settlement will pay the estimated five million holders of Lucent stock between Oct. 26, 1999, and Dec. 21, 2000, a mix of both cash and stock totaling $315 million. According to the company, it will have discretion to issue these shareholders either stock or cash.

Lucent said its insurers agreed to pay another $148 million in cash, and Lucent also will issue 200 million stock warrants to shareowners, with a strike price of $2.75 and a three-year expiration. The company estimates the current value of those warrants at $100 million. The company said it would contribute another $5 million for administration of the claims process. While the company hopes to recover some of its portion of the settlement from insurers, Lucent said it expects to take a charge in the second quarter of $420 million, or 11 cents a share.

Attorneys for the plaintiffs, led by New York firm Milberg Weiss Bershad Hynes & Lerach LLP, also will collect a sizable amount for their work in the case. Partner David Bershad said the attorneys expect to seek fees of as much as 20% of the total settlement, and the attorneys would take the same proportion of cash, stock and warrants that shareholders get. That would mean fees of as much as $115 million. Both the settlement and the attorneys' fees require court approval.

Mr. Bershad said in an interview Thursday night that he believed the plaintiffs' cases posed "a serious threat" to Lucent.

Continued in the article.

Bob Jensen's threads on revenue accounting are at 

"AICPA Reviews Specialties, Reassures Credential Holders," AccountingWeb, February 27, 2003 --- 

AccountingWEB US - Feb-27-2003 -  The American Institute of Certified Public Accountants announced last week its plan to evaluate the future of the organization's specialty credentials to determine if they should be strengthened, redesigned, remain status quo, or discontinued.

Accreditations being reviewed include the Accredited in Business Valuation (ABV) credential, the Certified Information Technology Professional (CITP), and the Personal Financial Planning Specialist (PFS).

Credential holders received a letter from Bruce Harper, AICPA's National Accreditation Commission (NAC) chairman, who indicated the NAC plans to analyze the allocation of resources to the CPA credential versus the specialty credentials and to assess the market competitiveness of the specialty credentials. One option being explored is whether each of the various specialty credentials would be better served under the umbrella of other related organizations.

Specialty credential holders reacted hotly to the news. "They are killing the PFS and the CITP because they cost too much money," said a source quoted in Bowman's Accounting Report.

"We are not abandoning them," AICPA board member Harold Monk said. "We are trying to see if we can attrition them into other organizations or continue to make them work in some way. They are terribly expensive to support."

Meanwhile, the AICPA responded with a promise this week to continue supporting any member who holds a specialty designation, regardless of the future of the credentials.

Speculation abounds that the CITP and PFS credentials will no longer be offered by the AICPA but that the organization will continue to build the ABV credential. It is important to note that all the facts are not yet in on this issue, and the question of financially supporting the credentials is just at the assessment stage.

The issue of the ongoing viability of supporting the various specialty designations will be addressed and debated at the AICPA Spring Council meeting April 27-30, 2003.

After my move to the White Mountains on June 10, the only cable TV service available is from Adelphia.  Now I will be able to get those "adult channels."  But at my age, what's the use?

May 3, 2003 message from FinanceProfessor [

Well after a few months of relative quiet, Adelphia sure has been in the news a great deal of late. If you do not remember, Adelphia was the US’s sixth largest cable provider and was headquarter in nearby Coudersport PA. Then due to what most see as fraud and self-serving behavior of the Rigases, the firm was forced into bankruptcy and delisted. The Rigases were the first of the big names to be arrested by Federal authorities when the elder John Rigas was taken away in handcuffs.

So just a quick update of what has happened recently.

They have hired a new executive team to what many (including former CEO John Rigas) claim is an exorbitant contract, they are moving their headquarters from Coudersport PA to Denver Colorado, they ended their long term ban on “adult” channels, and they began charging significantly higher rates (over a 100% increase in many cases) to their commercial users.

And as amazing as it sounds, it seems like all of the accounting problems are not yet over! The company just admitted they would have to restate their 2002 earnings after certain expenses were classified as capital expenditures.

Last week Adelphia announced a new controversial pay package for the new executives. The pay plan, which calls for $26 million to the new CEO Michel William Schleyer and $16 million for the new COO Ronald Cooper, has been called excessive by many shareholders, including the Rigases themselves. The new execs both come from ATT’s Broadband unit. Since the firm is in bankruptcy the pay plan must be approved by the bankruptcy judge. The new CEO is saying that if the pay plan is cut, he may not leave the firm. (personally I doubt it, but maybe). The plan as structured has a $7.6 “severance package” (platinum parachute, which pays him $7.6 million if Schleyer is removed from either his CEO or Chairman of the board positions for any reason! Schleyer is threatening to not take the job if the pay is reduced, but I think I would call his bluff.

Adelphia is moving their corporate headquarters to Denver in a move that will likely hurt Coudersport PA quite bad.,1299,DRMN_4_1759879,00.html

The sale of the Sabres appears to more likely as Thomas Golisano appears have gotten approval to buy the team which has played poorly this year. Stay tuned.

From the AccountingWeb on March 4, 2003 --- 

AccountingWEB US - Mar-4-2003 -  The trend of suing accounting firms continues, this time in Switzerland. Aided by the results of a year-long study performed by PricewaterhouseCoopers, the Swiss state of Geneva has demanded 3 billion Swiss francs (US$2.2 billion) from Big Four firm Ernst & Young for damages from audits stemming from 1994 to the present.

According to the PwC report, E&Y used a method of risk evaluation that was "outside legal norms" when issuing statements concerning the merger of audit client Banque Cantonale de Geneve with another bank.

Continued in the article.

From the AccountingWeb on March 4, 2003 --- 

AccountingWEB US - Mar-6-2003 -  Last week VTech Holdings Ltd filed a $400 million lawsuit against PricewaterhouseCoopers (PwC) stemming from VTech’s acquisition of a business unit of Lucent Technologies in 2000. VTech alleges that PwC concealed information about the unit’s financial condition.

According to the suit, filed in a Manhattan federal court, PricewaterhouseCoopers allegedly convinced VTech to pay $113.3 million for the Lucent unit in order to impress its "bigger paying client." PwC was acting as an advisor for Lucent at the time of the transaction.

"We see no basis for any lawsuit against us," said Steven Silber, a spokesperson for PwC.

VTech, a Hong Kong-based company, designs, manufactures, markets and sells electronic learning and telecommunication products. It paid $113 million for the consumer telephone assets of Lucent, an AT&T spin-off. The acquisition doubled VTech’s consumer telecommunications business and gave it an exclusive 10-year right to use the AT&T brand name in the U.S. and Canada.

Continued in the article.

"Europe's Year of Nasty Surprises:  Suddenly, the Continent is awash in accounting scandals," Business Week, March 10, 2002 --- 

In a global downturn, Royal Ahold (AHO ) should have been the ultimate defensive play. The 116-year-old Dutch company is the world's third-largest food retailer, with supermarket chains including Albert Heijn in Europe and Giant and Stop & Shop in the U.S. But on Feb. 24, Ahold sent European markets tumbling when it admitted overstating earnings at subsidiaries in the U.S. and Argentina by at least $500 million in 2001 and 2002. Chief Executive Officer Cees van der Hoeven resigned along with his chief financial officer, and bond-rating agencies downgraded Ahold to junk status. "We're furious. We never expected anything like this: [We] trusted their long-term strategy," fumes a top executive at a major European financial group that is a big Ahold investor. His shares lost 60% of their value the day of the Ahold disclosures. 

From The Wall Street Journal Accounting Educators' Review on February 28, 2003

TITLE: Supermarket Firm Ahold Faces U.S. Inquiries 
DATE: Feb 26, 2003 
TOPICS: Accounting, Accounting Fraud, Accounting Irregularities, Audit Quality, Executive compensation, Fraudulent Financial Reporting, Securities and Exchange Commission

SUMMARY: Ahold, the third largest food retailer in the world, announced that profits for 2001 and 2002 were overstated by at least $500 million dollars. The Securities and Exchange Commission is investigating and has requested working papers from Ahold's auditor, Deloitte & Touche.

1.) Refer to the first related article. Describe the accounting issue that led to the overstatement in profits on Ahold's financial statements. According to U.S. Generally Accepted Accounting Principles, when should revenue be recognized? Should rebates and bonuses received from food makers follow this general principle? Support your answer.

2.) Since Ahold is a Dutch company, why are they being investigated by the Securities and Exchange Commission in the United States? Refer to the second related article. Discuss the issues that relate to non-U.S. accounting firms that audit companies listed in the U.S. Is Ahold required to report financial statements prepared in accordance with U.S. GAAP? Support your answer.

3.) Discuss the impact of bonuses paid for meeting growth targets on incentives to manipulate accounting profits.

4.) The main article states, "the probes center on whether fraud was involved in the improper accounting . . . " What is fraud? If the improper accounting is not the result of fraud, what other explanation for it exists?

5.) The SEC has asked Deloitte & Touche for workpapers related to its audit of Ahold. Under what conditions can an auditor share details of workpapers?

 TITLE: Payments to Distributors Draw Scrutiny, Fleming Now Faces a Formal Probe 
 ISSUE: Feb 26, 2003 

TITLE: Ahold Case May Damp Exemption For Foreign Accountants by SEC 
 ISSUE: Feb 26, 2003 

 Bob Jensen's threads on revenue reporting can be found at

Related Links:

Leading tax software companies Intuit (TurboTax) and H&R Block (TaxCut) may be producing software that puts customer tax data at risk, according to some data security experts. Both TurboTax and TaxCut leave taxpayer data files unencrypted and thus unprotected from hackers, and some people are concerned about the possibility of identity theft. 

Bob Jensen's threads on identity theft are at 

MasterCard, Visa, American Express and the banks that issue credit cards don't do enough to protect merchants and consumers from the perils of fraud, reports analyst firm Gartner ---,1848,57823,00.html 

The credit card industry focuses too much on reducing its own fraud costs and not enough on protecting consumers.

That's the central claim in a new report from research firm Gartner that slams credit card companies for failing to notify consumers when credit card records are compromised by malicious hackers.

The report notes that while credit card companies' "zero-liability" policies protect card holders from paying for unauthorized or fraudulent charges, they do not protect consumers from identity theft and the credit report hell that can follow.

Avivah Litan, Gartner vice president and the report's co-author, said when security breaches happen, banks that issue credit cards seldom notify consumers.

"The issuers claim they don't really know if a card was compromised after a merchant or transaction processing firm reports a problem, so they wait to see whether a consumer reports fraud against his or her card," Litan said.

"Of course the fact that closing potentially compromised accounts and providing consumers with new cards costs the issuer about $35 per card is also a factor here. So the card issuers take a calculated risk that compromised cards won't be used fraudulently."

On Feb. 18, Visa, MasterCard and American Express confirmed that a malicious hacker had gotten access to 8 million credit card records through Data Processors International, a company that processes credit card transactions for mail order and online businesses.

The credit card companies quickly issued statements saying none of the stolen card-holder information was used fraudulently, and that all card-issuing banks had been alerted to the problem.

According to Litan, the card issuers have tagged the accounts believed to have been compromised in the theft, and will watch them for a period of time, typically three to six months, for possible fraudulent use.

"Based on a standard margin of error, I wouldn't be surprised to see 5 percent of those stolen cards compromised even while they are on the watch list," Litan said. "The only way to ensure that the cards will never be fraudulently used is to issue new cards to all 8 million users."

Consumer rights groups agreed that credit card companies should notify card holders about potential problems, and should at least offer the option of replacement cards if account records have been illegally accessed.

"Credit card issuers and other creditors should be required to let customers know immediately if they believe that their account information has been compromised," said Susan Grant, director of the National Fraud Information Center. "As it is now, it's hard for consumers to know exactly how security breaches happen or assess whether the companies who have their information have taken adequate steps to safeguard it."

"Credit card companies have a rocky road ahead of them," said Linda Sherry of Consumer Action in San Francisco. "Consumers are getting increasingly worried and angry about how their personal information is being used and protected. I wouldn't be surprised to see the federal government step in soon."

Continued in the article.

The Gartner Report is at 


On 18 February 2003, Visa, MasterCard and American Express confirmed that a computer hacker had recently accessed 8 million credit card records, including 2.2 million MasterCard accounts and 3.4 million Visa accounts. The hacker targeted Data Processors International, a merchant processor that mainly processes catalog and other card-not-present transactions. The card associations began to notify their member institutions in early February 2003. The card companies said that none of the information accessed was used fraudulently and that all card issuing banks were alerted. But fraud could potentially occur later on using these compromised records.

First Take

Although zero-liability policies protect card holders from paying for unauthorized or fraudulent charges, they do not protect consumers from identity theft and credit report nightmares that can follow. Seven percent of online adult consumers surveyed by Gartner in September 2002 reported being victimized by credit card fraud, and 1 percent reported having their identity stolen. However, since stolen credit card data makes stealing identities easy, Gartner believes identity theft will affect substantially more than 1 percent of this population. The credit card industry has focused too much on reducing its fraud costs and not enough on protecting consumer information.

Up to now, no one had much incentive to address the problem. Card issuers seldom notify consumers about hacking incidents they learn about through merchants or processors. The issuers claim they don't really know if a card was compromised, so they wait to see whether a consumer reports fraud against the card. Giving consumers replacement cards costs the issuer about $35 each. When fraud occurs in a physical store, the issuer bears the cost, but the merchant bears the cost of fraud for Internet, telephone and mail orders. If the present case follows typical patterns, the card associations will probably fine the processor whose site was hacked or possibly just issue a stiff warning.

However, rising levels of identity theft and consumer anger will lead to onerous legislation unless credit card companies move aggressively. Indeed, a recent California law (SB 1386) will require any company that sells to California citizens (just about every online merchant) to notify consumers. Accordingly, Gartner recommends:

  • Card companies should enforce requirements that all online credit card databases use encryption or other methods to ensure they aren't compromised.
  • Card companies should improve the vulnerability scanning of their online merchants and processors to find weaknesses before attackers do.
  • Card issuers should immediately inform consumers when their card information has been compromised so that they can try to protect themselves against identity theft by notifying credit bureaus and monitoring their own credit reports to catch problems early.

Analytical Sources: Avivah Litan and John Pescatore, Gartner Research

Recommended Reading and Related Research

(You may need to sign in or be a Gartner client to access all of this content.)

Bob Jensen's threads on fraud are at 

From The Wall Street Journal Accounting Educators' Review on March 7, 2003

TITLE: 'Goodwill' Is Not an Option 
REPORTER: T.J. Rodgers 
DATE: Mar 04, 2003 PAGE: B2 LINK:,,SB1046721015191077400,00.html  
TOPICS: Cash Flow, Accounting, Earnings Quality, Financial Accounting, Financial Accounting Standards Board, Financial Analysis, Financial Statement Analysis, Generally accepted accounting principles, Goodwill, Regulation, Stock Options

SUMMARY: The Financial Accounting Standards Board is revisiting accounting for employee stock options. The author of this article argues that the quality of accounting information would be further reduced by expensing stock options. Questions focus on the usefulness of GAAP reported earnings and pro forma earnings.

1.) What are stock options? Describe the current accounting treatment for stock options granted to employees.

2.) Do you think that stock options granted to employees should be expensed? Support your answer.

3.) What are GAAP reported earnings? What are pro forma earnings? Should GAAP earnings agree with pro forma earnings? Support your answer.

4.) What are the major differences between purchase and pooling accounting? Why does the author argue that eliminating pooling accounting reduced the quality of accounting information.

5.) Compare and contrast earnings with cash flow from earnings. Respond to the statement "the goodwill gaffe also damaged the basic integrity of GAAP accounting by decoupling earnings from cash flow."

SMALL GROUP ASSIGNMENT: Draft a letter to the author of this article. Your letter should either support or renounce the arguments presented in the article. Your letter should include logical arguments to support your position.

Reviewed By: Judy Beckman, University of Rhode Island 
Reviewed By: Benson Wier, Virginia Commonwealth University 
Reviewed By: Kimberly Dunn, Florida Atlantic University

Bob Jensen's threads on employee stock option accounting are at 

Stock Options
If the FASB and the IASB require expensing of stock options when vested rather than exercised, it will have really adverse effects on the bottom lines of some companies who rely heavily upon employee stock options for compensation.  This is why the U.S. House and Senate are already gearing up for a fight with the FASB and possibly SEC due to heavy lobbying pressures.  In the March 31, 2003 issue of Barron's on Page 28, the following sample impacts are provided:

Adjusting Earnings for Options

 »Earnings of major tech companies are well below reported levels when adjusted for option grants to employees. Options will become a big issue next year when companies likely will be forced to record them as an expense. Some companies, like Microsoft, are reducing option grants, helping shareholders.

Company Microsoft Intel IBM Cisco Oracle Applied
EMC Hewlett-Packard Texas
Recent Stock Price $25.04 17.58 81.45 13.5 11.36 13.5 7.16 16.44 17.75
2002 Earnings* $0.92 0.51 3.95 0.39 0.41 0.19 -0.05 0.79 0.22
Option-adjusted'02 Profits* $0.71 0.34 3.28 0.19 0.33 0 -0.22 0.48 -0.01
2002 P/E Ratio 27.2 34.5 20.6 34.6 27.7 67.5 NM 20.8 80.7
2002 Option-adjusted P/E 35.3 51.7 24.8 71.1 34.4 NM NM 34.3 NM
2002 Options Grant (mil) 82 174 60 282 63 9 52 66 37
Options Grant Relative to Shares Outstanding 0.8% 2.6 3.5 3.8 1.2 0.5 2.4 2.2 2.1
Options Issuance Trend ä ä ã ä ä ä ä ã ã
*2002 Fiscal Year.    NM-Not meaningful.                                                                                                  Sources: Company reports; Thomson/Baseline


Note that adjustments for many more companies are available in the "Core Earnings" revisions from Standard and Poors at 
I also created the shorter URL --- 

In response to growing concern about companies earnings reports, Standard & Poor’s has introduced a new methodology called “Standard & Poor’s Core Earnings.” The ultimate goal is to lead investors and analysts to a consensus on earnings calculations, and bring more transparency and consistency to earnings analysis and forecasts.

Bob Jensen's threads on these this controversy can be found at 

Artificial stupidity The saga of Hugh Loebner and his search for an intelligent bot has almost everything: Sex, lawsuits and feuding computer scientists. There's only one thing missing: Smart machines --- 

The latest iteration of the Nigerian e-mail swindle/scammers pose as buyers interested in big-ticket items for sale on the Net. Thanks to a little-known U.S. banking loophole, they're bilking Americans out of thousands ---,1284,56829,00.html 

Individuals and companies are victims of newer versions of Nigerian scams. The Sacramento Bee reported the latest variation yesterday. A credit union honored a Nigerian check for $45,000. See the full article at
(Paul Krause alerted me to the above link.)

The old version of the Nigerian scam consists of e-mails that request help in moving a fortune out of Nigeria. Anyone providing their bank account number to the solicitors is promised a big payoff -- but the victims end up losing money.

The latest offshoot involves the mailing of bogus checks that recipients are urged to cash at their banks. It says they can keep a portion of the money, then wire the rest to Nigeria.

"The bad guys are recruiting people ... who have good credit and good banking relations" to pass rubber checks without knowing it, said Jerry Kinlock, president and CEO of the Sacramento Credit Union.

Five weeks ago, the Credit Union unwittingly honored a $45,000 phony check that one of its members had received from Nigerian con artists, he said.

Lazy guide to net culture: Nigerian Scam Baiting --- 

This week’s online fad: Nigerian Scam Baiting

Does this ring any bells?












If you have not received an email similar to this then you either do not have a computer or are a programming genius who has developed some kind of wonder anti-spam software that is worth billions.

The above parody is a distilled version of the classic Nigerian 419 scam. The name reflects such cons’ usual country of origin and the section of its penal code that they violate. The deception is also known as West African advance fee fraud.

The details differ but the offer is always the same: earn millions by helping strangers illegally move money, don’t tell anyone and send sensitive financial information followed by thousands of dollars.

NB: if your IQ is slightly lower than that of the average goldfish it is worth reinforcing such offers are a total con. The only money that will be moving is yours. The endgame can involve a trip to a foreign country where you will be beaten up and held hostage.

The scam has been around for years and has evolved in parallel with communication technology. First the letters came by post, then by fax. Now they have embraced email and flood in-boxes around the world like some kind of e-Biblical plague.

Such letters from Maryam Abacha, corrupt Nigerian government officials and over-charging West African contractors are among the most common forms of spam, rivalling porn, free "Viagra" and "intimate enhancement" products.

419s are easy to spot. Many of them use a lot of religious language to show how sincere they are, their approach to spelling is refreshingly free form and a disproportionate number of them have a penchant for WRITING IN CAPITALS.

The peculiar style of these messages has attracted a cult following. They offer fertile ground for parody. There is even a site that randomly generates personalised 419 spam based on a few key words you have chosen. Have a go here.

Despite all this, people still fall for these ridiculous gambits and greed induces gullibility in the face of reason. In 2002, some 150 Britons were taken in by these fraudsters to the tune of £8.4 million. The US Secret Service estimates that Americans lose $100 million dollars a year to these scams. That’s an awful lot of money and not very much sense.

Unsurprisingly, the police take this issue very seriously. The Metropolitan Police have a comprehensive guide to the fraud here.

Others however, are fighting back outside the law by tying the fraudsters up in pointless correspondence. This is known as Nigerian Scam Baiting.

It has been dubbed the new Internet bloodsport.

One group of scam baiters, the Chaos Project, invites others to join in thus: "Perhaps you too will be inspired to adopt a 'pet Nigerian fraudster'. Remember, as well as amusing yourself and your friends, you are doing the world a service by monopolising the time and frustrating the efforts of these people."

Of course, there are risks associated with this kind of behaviour. The fraudsters are, after all, criminals and don’t take kindly to interference.

Wannabe e-vigilantes set up email accounts under assumed names (it's very important not to use a traceable account) and use these to play the fraudsters along. They answer the invitation enthusiastically, send off false details and see how long they can keep the pretence up. They even forge receipts for money transfers and airline tickets to show the criminals that they are serious.

Some online crime fighters don’t just restrict themselves to wasting the fraudsters’ time. They mock them – and post the results on websites like hunters displaying the heads of prey on walls. You can read some examples on Scamorama, which celebrates scam baiters.

Clueless 419 criminals have carried out extensive correspondence with such individuals as R U Sirrius, Hans Gneesunt-Boompsadazi and Stew de Baker Hawke (the Studebaker Hawk was a 1950s car).

One 419 perpetrator demanded a photograph of the person he was trying to defraud and was rewarded with a picture of the male model Fabio. After some questions, he accepted this as proof of identity and the email relationship continued until the penny finally dropped.

We are not dealing here with a criminal mastermind to rival Professor Moriarty.

These email exchanges are like a game of tennis. The fraudster wants to conclude matters quickly. The art of the baiter is to stretch things out for as long as possible without arousing suspicion. The "victim" may also make bizarre demands of their would-be beneficiary. The fraudster has to keep their correspondent happy and has no choice but to play along, often answering questions of a sexual nature.

However, the Everest of scam baiting is to con the conmen and get the fraudsters to part with cold hard cash. Only a few have managed this. One, writing under the moniker Bart Simpson, managed it by telling his Nigerian criminal target that he was being courted by another offer from West Africa. Bart said that this other correspondent had sent him $5 in a greeting card and he would sever his relationship unless the fraudster did the same thing.

The money duly arrived. While $5 is not much, it's the principle that counts.

Particularly vindictive anti-spammers will also send "supporting documents" to the fraudsters. When downloaded, these are found to contain not helpful bank details but particularly vicious viruses that cripple the criminal’s computers.

One scam baiter managed to get her target to fall for this seven times before he got the message. Read how here. This means he either saw seven expensive PCs reduced to smoking rubble or spent an awful lot of money on repairs. It's hard to feel much sympathy for him.

Of course, this kind of vigilanteism is utterly reprehensible and legally questionable.

It just happens to be very amusing as well.

Bob Jensen's threads on these types of frauds are at 

Mark Wellesley-Wood, DRD’s chairman, has been dealt a potentially crippling blow following an extraordinary letter of resignation served last night by company secretary Maryna Eloff --- 

Barbara Ley Toffler is the former Andersen was the partner-in-charge of 
Andersen's Ethics & Responsible Business Practices Consulting Services.

Title:  Final Accounting: Ambition, Greed and the Fall of Arthur Andersen 
Authors:  Barbara Ley Toffler, Jennifer Reingold
ISBN: 0767913825 
Format: Hardcover, 288pp Pub. 
Date: March 2003 
Publisher: Broadway Books

Book Review from 

Book Description A withering exposé of the unethical practices that triggered the indictment and collapse of the legendary accounting firm.

Arthur Andersen's conviction on obstruction of justice charges related to the Enron debacle spelled the abrupt end of the 88-year-old accounting firm. Until recently, the venerable firm had been regarded as the accounting profession's conscience. In Final Accounting, Barbara Ley Toffler, former Andersen partner-in-charge of Andersen's Ethics & Responsible Business Practices consulting services, reveals that the symptoms of Andersen's fatal disease were evident long before Enron. Drawing on her expertise as a social scientist and her experience as an Andersen insider, Toffler chronicles how a culture of arrogance and greed infected her company and led to enormous lapses in judgment among her peers. Final Accounting exposes the slow deterioration of values that led not only to Enron but also to the earlier financial scandals of other Andersen clients, including Sunbeam and Waste Management, and illustrates the practices that paved the way for the accounting fiascos at WorldCom and other major companies.

Chronicling the inner workings of Andersen at the height of its success, Toffler reveals "the making of an Android," the peculiar process of employee indoctrination into the Andersen culture; how Androids—both accountants and consultants--lived the mantra "keep the client happy"; and how internal infighting and "billing your brains out" rather than quality work became the all-important goals. Toffler was in a position to know when something was wrong. In her earlier role as ethics consultant, she worked with over 60 major companies and was an internationally renowned expert at spotting and correcting ethical lapses. Toffler traces the roots of Andersen's ethical missteps, and shows the gradual decay of a once-proud culture.

Uniquely qualified to discuss the personalities and principles behind one of the greatest shake-ups in United States history, Toffler delivers a chilling report with important ramifications for CEOs and individual investors alike.

From the Back Cover "The sad demise of the once proud and disciplined firm of Arthur Andersen is an object lesson in how 'infectious greed' and conflicts of interest can bring down the best. Final Accounting should be required reading in every business school, beginning with the dean and the faculty that set the tone and culture.” -Paul Volker, former Chairman of the Federal Reserve Board

“This exciting tale chronicles how greed and competitive frenzy destroyed Arthur Andersen--a firm long recognized for independence and integrity. It details a culture that, in the 1990s, led to unethical and anti-social behavior by executives of many of America's most respected companies. The lessons of this book are important for everyone, particularly for a new breed of corporate leaders anxious to restore public confidence.” -Arthur Levitt, Jr., former chairman of the Securities and Exchange Commission

“This may be the most important analysis coming out of the corporate disasters of 2001 and 2002. Barbara Toffler is trained to understand corporate ‘cultures’ and ‘business ethics’ (not an oxymoron). She clearly lays out how a high performance, manically driven and once most respected auditing firm was corrupted by the excesses of consulting and an arrogant culture. One can hope that the leaders of all professional service firms, and indeed all corporate leaders, will read and reflect on the meaning of this book.” -John H. Biggs, Former Chairman and Chief Executive Officer of TIAA CREF

“The book exposes the pervasive hypocrisy that drives many professional service firms to put profits above professionalism. Greed and hubris molded Arthur Andersen into a modern-day corporate junkie ... a monster whose self-destructive behavior resulted in its own demise." -Tom Rodenhauser, founder and president of Consulting Information Services, LLC

"An intriguing tale that adds another important dimension to the now pervasive national corporate governance conversation. -Charles M. Elson, Edgar S. Woolard, Jr., Professor of Corporate Governance, University of Delaware

“You could not ask for a better guide to the fall of Arthur Andersen than an expert on organizational behavior and business ethics who actually worked there. Sympathetic but resolutely objective, Toffler was enough of an insider to see what went on but enough of an outsider to keep her perspective clear. This is a tragic tale of epic proportions that shows that even institutions founded on integrity and transparency will lose everything unless they have internal controls that require everyone in the organization to work together, challenge unethical practices, and commit only to profitability that is sustainable over the long term. One way to begin is by reading this book. –Nell Minow, Editor, The Corporate Library

About the Author Formerly the Partner-in-Charge of Ethics and Responsible Business Practices consulting services for Arthur Andersen, BARBARA LEY TOFFLER was on the faculty of the Harvard Business School and now teaches at Columbia University's Business School. She is considered one of the nation's leading experts on management ethics, and has written extensively on the subject and has consulted to over sixty Fortune 500 companies. She lives in the New York area. Winner of a Deadline Club award for Best Business Reporting, JENNIFER REINGOLD has served as management editor at Business Week and senior writer at Fast Company. She writes for national publications such as The New York Times, Inc and Worth and co-authored the Business Week Guide to the Best Business Schools (McGraw-Hill, 1999).

Also see the review at 

Here is some earlier related material you can find at 

Lessons Learned From Paul Volker:  
The Culture of Greed Sucked the Blood Out of Professionalism
In an effort to save Andersen's reputation and life, the top executive officer, Joe Berardino, in Andersen was replaced by the former Chairman of the Federal Reserve Board, Paul Volcker.  This great man, Volcker, really tried to instantly change the culture of greed that overtook professionalism in  Andersen and other public accounting firms, but it was too little too late --- at least for Andersen.

The bottom line:

I have a mental image of the role of an auditor. He’s a kind of umpire or referee, mandated to keep financial reporting within the established rules. Like all umpires, it’s not a popular or particularly well paid role relative to the stars of the game. The natural constituency, the investing public, like the fans at a ball park, is not consistently supportive when their individual interests are at stake. Matters of judgment are involved, and perfection in every decision can’t be expected. But when the “players”, with teams of lawyers and investment bankers, are in alliance to keep reported profits, and not so incidentally the value of fees and stock options on track, the pressures multiply. And if the auditing firm, the umpire, is itself conflicted, judgments almost inevitably will be shaded. 
Paul Volcker (See below)

"Volcker says "new Andersen" no longer possible," by Kevin Drawbaugh, CPAnet, May 17, 2002 ---

WASHINGTON, May 17 (Reuters) - Former Federal Reserve Board Chairman Paul Volcker, who took charge of a rescue team at embattled accounting firm Andersen (ANDR), said on Friday that creating "a new Andersen" was no longer possible.

In a letter to Sen. Paul Sarbanes, Volcker said he supports the Maryland Democrat's proposals for reforming the U.S. financial system to prevent future corporate disasters such as the collapse of Enron Corp. (ENRNQ).

"The sheer number and magnitude of breakdowns that have increasingly become the daily fare of the business press pose a clear and present danger to the effectiveness and efficiency of capital markets," Volcker said in the letter released to Reuters.

JUNE 25, 2002 

How ironic that we are meeting near Arthur Andersen Hall with the leadership of the Leonard Spacek Professor of Accounting. From all I have learned, the Andersen firm in general, and Leonard Spacek in particular, once represented the best in auditing. Literally emerging from the Northwestern faculty, Arthur Andersen represented rigor and discipline, focused on the central mission of attesting to the fairness and accuracy of the financial reports of its clients. 

The sad demise of that once great firm is, I think we must now all realize, not an idiosyncratic, one-off, event. The Enron affair is plainly symptomatic of a larger, systemic problem. The state of the accounting and auditing systems which we have so confidently set out as a standard for all the world is, in fact, deeply troubled.

The concerns extend far beyond the profession of auditing itself. There are important questions of corporate governance, which you will address in this conference, but which I can touch upon only tangentially in my comments. More fundamentally, I think we are seeing the bitter fruit of broader erosion of standards of business and market conduct related to the financial boom and bubble of the 1990’s. 

From one angle, we in the United States have been in a remarkable era of creative destruction, in one sense rough and tumble capitalism at its best bringing about productivity-transforming innovation in electronic technology and molecular biology. Optimistic visions of a new economic era set the stage for an explosion in financial values. The creation of paper wealth exceeded, so far as I can determine, anything before in human history in relative and absolute terms. 

Encouraged by ever imaginative investment bankers yearning for extraordinary fees, companies were bought and sold with great abandon at values largely accounted for as “intangible” or “good will”. Some of the best mathematical minds of the new generation turned to the sophisticated new profession of financial engineering, designing ever more complicated financial instruments. The rationale was risk management and exploiting market imperfections. But more and more it has become a game of circumventing accounting conventions and IRS regulations. 

Inadvertently or not, the result has been to load balance sheets and income statements with hard to understand and analyze numbers, or worse yet, to take risks off the balance sheet entirely. In the process, too often the rising stock market valuations were interpreted as evidence of special wisdom or competence, justifying executive compensation packages way beyond any earlier norms and relationships. 

It was an environment in which incentives for business management to keep reported revenues and earnings growing to meet expectations were amplified. What is now clear, is that insidiously, almost subconsciously, too many companies yielded to the temptation to stretch accounting rules to achieve that result.

I state all that to emphasize the pressures placed on the auditors in their basic function of attesting to financial statements. Moreover, accounting firms themselves were caught up in the environment – - to generate revenues, to participate in the new economy, to stretch their range of services. More and more they saw their future in consulting, where, in the spirit of the time, they felt their partners could “better leverage” their talent and raise their income. 

I have a mental image of the role of an auditor. He’s a kind of umpire or referee, mandated to keep financial reporting within the established rules. Like all umpires, it’s not a popular or particularly well paid role relative to the stars of the game. The natural constituency, the investing public, like the fans at a ball park, is not consistently supportive when their individual interests are at stake. Matters of judgment are involved, and perfection in every decision can’t be expected. But when the “players”, with teams of lawyers and investment bankers, are in alliance to keep reported profits, and not so incidentally the value of fees and stock options on track, the pressures multiply. And if the auditing firm, the umpire, is itself conflicted, judgments almost inevitably

Continued at 

"We're The Front Line For Shareholders,"  by Phil Livingston (President of Financial Executives International), January/February 2002 --- 

At FEI's recent financial reporting conference in New York, Paul Volcker gave the keynote address and declared that the accounting and auditing profession were in a "state of crisis." Earlier that morning, over breakfast, he lamented the daily bombardment of financial reporting failures in the press.

I agree with his assessment. The causes and contributing factors are numerous, but one thing is clear: We as financial executives need to do better, be stronger and take the lead in restoring the credibility of financial reporting and preserving the capital markets.

If you didn't already know it and believe it deeply, recent cases prove the value of a financial management team that is ethical, credible and clear in its communications. A loss of confidence in that team can be a fatal blow, not just to the individuals, but to the company or institution that entrusts its assets to their stewardship. I think the FEI Code of Ethical Conduct says it best, and it is worth reprinting the opening section here. The full code (signed by all FEI members) can be found here.

. . .

So how did the profession reach the state Volcker describes as a crisis?

  • The market pressure for corporate performance has increased dramatically over the last 10 years. That pressure has produced better results for shareholders, but also a higher fatality rate as management teams pressed too hard at the margin.
  • The standard-setters floundered in the issue de jour quagmire, writing hugely complicated standards that were unintelligible and irrelevant to the bigger problems.
  • The SEC fiddled while the dot-com bubble burst. Deriding and undermining management teams and the auditors, the past administration made a joke of financial restatements.
  • We've had no vision for the future of financial reporting. Annual reports, 10Ks and 10Qs are obsolete. Bloomberg and Yahoo! Finance have replaced the horse-and-buggy vehicles with summary financial information linked to breaking news.
  • We've had no vision for the future of accounting. Today's mixed model is criticized one day for recognizing unrealized fair value contractual gains and alternatively for not recognizing the fair value of financial instruments.
  • The auditors dropped their required skeptical attitude and embraced business partnering philosophies. Adding value and justifying the audit fees became the mandate. Management teams and audit committees promoted this, too.
  • Audit committees have not kept up with the challenges of the assignment. True financial reporting experts are needed on these committees, not the general management expertise required by the stock exchange rules.

From the Chicago Tribune, February 19, 2002  --- 

International Standards Needed, Volcker Says

WASHINGTON, Feb. 19, 2002 (Knight-Ridder / Tribune News Service) — Enron Corp.'s collapse was a symptom of a financial recklessness that spread during the 1990s economic boom as investors and corporate executives pursued profits at all costs, former Federal Reserve Chairman Paul Volcker told a Senate committee Thursday.

Volcker -- chairman of the new oversight panel created by Enron's auditor, the Andersen accounting firm, to examine its role in the financial disaster -- told the Senate Banking Committee he hoped the debacle would accelerate current efforts to achieve international accounting standards. Such standards could reassure investors around the world that publicly traded companies met certain standards regardless of where such companies were based, he said.

"In the midst of the great prosperity and boom of the 1990s, there has been a certain erosion of professional, managerial and ethical standards and safeguards," Volcker said.

"The pressure on management to meet market expectations, to keep earnings rising quarter by quarter or year by year, to measure success by one 'bottom line' has led, consciously or not, to compromises at the expense of the public interest in full, accurate and timely financial reporting," he added.

But the 74-year-old economist also blamed the new complexity of corporate finance for contributing the problem. "The fact is," Volcker said "the accounting profession has been hard-pressed to keep up with the growing complexity of business and finance, with its mind-bending complications of abstruse derivatives, seemingly endless varieties of securitizations and multiplying, off-balance-sheet entities. (Continued in the article.)


From The Wall Street Journal Accounting Educators' Review on March 14, 2003

TITLE: Bristol-Myers Says Accounting Was 'Inappropriate,' Inflated Sales 
REPORTER: Gardiner Harris 
DATE: Mar 11, 2003 
TOPICS: Accounting, Accounting Changes and Error Corrections, Revenue Recognition

SUMMARY: Bristol-Myers Squibb Co. announced that sales reported between 1999 and 2002 were inflated by between $2.75 billion and $750 million. Questions focus on revenue recognition principles and correction of errors.

1.) When should revenue be recognized? Did Bristol-Myers violate this basis revenue recognition principle? Support your answer.

2.) Did sales targets contribute to the inappropriate sales reported between 1999 and 2002? Support your answer.

3.) Why is it inappropriate to recognize revenue for sales made to suppliers that are in excess of supplier demands?

4.) How will the adjustments to prior years sales be reflected in the financial statements of Bristol-Myers?

5.) Explain the following comments: "the restatement would involve simple shifting sales from earlier periods to 2002 and 2003...." and, "extra sales had disappeared, "primarily due to changes in accruals from sales returns, rebates" and accounting changes.'

Reviewed By: Judy Beckman, University of Rhode Island 
Reviewed By: Benson Wier, Virginia Commonwealth University 
Reviewed By: Kimberly Dunn, Florida Atlantic University


Huge Growth in Derivatives Trading

March 21, 2003 message from Risk Waters Group [

The OTC derivatives market continued to grow strongly in the first half of the year, according to the International Swaps and Derivatives Association. The credit derivatives market grew 37%, with total notional outstandings reaching $2.15 trillion during the first half of 2002, the trade body said. Notional outstanding volume in interest rate and currency derivatives increased 20%, to $99.83 trillion, in the first half, while equity derivatives outstanding volumes rose to $2.45 trillion - up 6%. "The continued pace of growth in the over-the-counter derivatives markets during times of economic and political uncertainty demonstrates their importance as a mechanism for mitigation and dispersion of the risks our members encounter in the course of their business," said Bob Pickel, Isda chief executive. "The acceleration in use of credit derivatives in particular is testimony to the effectiveness of this product set in the redistribution of credit exposures to those firms desirous of adopting them."

Meanwhile, confidence built this week that the US could achieve a swift victory in its invasion of Iraq. This sentiment prompted a raft of sellers to enter the credit default swaps market. The cost of protection for France Telecom and Deutsche Telekom debt was 20bp tighter on the week at around 200bp-mid. Other active names, including automaker Ford and engine-maker Rolls Royce, were 15bp to 20bp tighter for the week, trading at 530-mid and 290bp-mid, respectively.

"HUGE RISE IN USE OF DERIVATIVES WORRIES WATSA:  Fairfax chairman sees looming disaster," by John Partridge, The Globe and Mail, (Canada), March 12, 2003, Page B10.

The chairman of Fairfax Financial Holdings Ltd., like U.S. billionaire investor Warren Buffett, with whom he is sometimes compared, is warning that the "exponential increase" in the use of derivatives is a disaster in the making.

"The total value of all unregulated derivatives is estimated to be US$128-trillion (not a typo)--roughly four times the underlying assets of the global economy," Prem Watsa says in an annual letter to shareholders of the Toronto property and casualty insurance holding company.

"We have avoided companies that are highly exposed to derivatives.  It is another catastrophe waiting to happen!"

He does not elaborate on the topic or cite a source for the $128-trillion figure.

Mr. Watsa's letter, dated March 3, appears in Fairfax's annual report for 2002, which became available on-line last Friday.

Mr. Buffett, the widely respected chairman of Berkshire Hathaway Inc. of Omaha, Neb., called derivatives "time bombs" and potentially lethal "financial weapons of mass destruction" in his annual letter to shareholders.  He said derivatives had been used to facilitate some "huge-scale frauds and near frauds" and warned of the dangers posed by the concentration of much of the business in the hands of "relatively few" derivatives dealers, who also trade widely with one another.  He warned of a possible chain reaction that could lead to a meltdown of the world's financial system.

Mr. Buffett, whose corporate empire is based on insurance, has been dubbed the Oracle of Omaha and, at least until Fairfax's financial and stock market performance ran into problems several years back, observers sometimes compared Mr.Watsa with him.

Derivatives contracts are instruments that call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values.  Financial institutions and other companies typically use swaps and other derivatives to hedge various types of risk they face from, for instance, fluctuations in currency exchange rates and interest rates.

Continued in the article.

Note from Bob Jensen:  The above quotations seem to be Year 2002 and 2003  Déjà Vu  in terms of all the bad ways investment bankers cheated investors in the 1980s and 1990s.  Read passage from Partnoy's book quoted below.

When I first began reading a novel about derivatives, two paragraphs in the Preface really caught my attention.  They seem to apply more so today in the aftermath of Enron's trading disasters. Those  paragraphs written in 1997 read as follows:

Derivatives have become the largest market in the world.  The size of the derivatives market, estimated at $55 trillion in 1996, is double the value of all U.S. stocks and more than ten times the entire U.S. national debt.  Meanwhile, derivative losses continue to multiply.  

Of course, plenty of firms made money on derivatives, including Morgan Stanley, and the firm's derivatives group is thriving, even as derivatives purchases lick their wounds.  Some clients tired of having their faces ripped off or being blown up, and business declined briefly in 1995 and 1996.  Many of us quit during this period, some leaving for less brutish firms.  
(Continued on Page 15)
Frank Partnoy in FIASCO:  The Inside Story of a Wall Street Trader (New York:  Penguin Putnam, 1997, ISBN 0 14 02 7879 6)

We have been following the transition of public accountants from the most trusted profession in the United States to one of the least trusted.  It is interesting how this transition is taking place amidst a somewhat similar transition in investment banking and securities trading in general.  The following quotation from the above Preface may really open your eyes:

From 1993 to 1995, I (Frank Parnoy) sold derivatives on Wall Street.  During that time, the seventy or so people I worked with in the derivatives group at Morgan Stanley in New York, London, and Tokyo generated total fees of about $1 billion --- an average of almost $15 million a person.  We were arguably the most profitable group of people in the world.

My group was the biggest moneymaker at the firm by far.  Morgan Stanley is the oldest and most prestigious of the top investment banks, and the derivatives group was the engine that drove Morgan Stanley.  The $1 billion we made was enough to pay the salaries of most of the firm's ten thousand worldwide employees, with plenty left for us.  The managers in my group received millions and millions in bonuses;  even our lowest level employees had six-figure incomes.  An many of us, including me, were still in our twenties.

How did we make so much money?  In part, it was because we were smart.  I worked with the greatest minds in the derivatives business.  We mastered the complexities of modern finance, and it is no coincidence that we were called "rocket scientists."  (Page 15)

This is the part that indirectly relates to the changing business model of public accountants.

This was not the Morgan Stanley of yore.  In the 1920s, the white-shoe (in auditing that would be black-shoe) investment bank developed a reputation for gentility and was renowned for fresh flowers and fine furniture (recall that Arthur Andersen offices featured those magnificent wooden doors), an elegant partners' dining room, and conservative business practices.  The firm's credo was "First class business in a first class way."

However, during the banking heyday of the 1980s, the firm faced intense competition from other banks and slipped from its number one spot.  In response, Morgan Stanley's partners shifted their focus from prestige to profits --- and thereby transformed the firm.  (Emphasis added)  Morgan Stanley had swapped its fine heritage for slick sales-and-trading operation --- and made a lot more money.

Other banks --- including First Boston, where I worked before I joined Morgan Stanley --- could not match Morgan Stanley's aggressive sales tactics.  By every measure, the firm had been recast.  The flowers were gone.  The furniture was Formica.  Busy managers ingested lunch, if at all, at a crowded donut stand jammed between two hallways along the trading floor.  Aggressive business practices inspired a new credo:  "First class business in a second class way."  After decades of politesse, there were savages at Morgan Stanley."  
(Continued on Page 14 of the book cited above).

Added notes from Bob Jensen

CEO Robert Gannon allowed himself to be seduced by investment bankers from Goldman Sachs to sell off all the solid assets (e.g., a hydro power dam) for pie in the sky so Goldman Sachs could earn $20 million in sales commissions and Gannon could become a multi zillionaire.  The February 9, 2003 airing of Sixty Minutes of this scandal is one of the most sickening things I've learned about in this saga of recent corporate scandals.
This should be another chapter in Partnoy's book.


I was sitting in Times Square (where I was Program Director for the 1994 American Accounting Association Annual Meetings in the Marriott Marquis Hotel) and captured an address by the Chairman of the Financial Accounting Standards Board (Denny Beresford) quoting that until 1993 he thought derivatives were "something a person his age took when prunes did not quite do the job."  You can hear my MP3 recording of Denny's remarks (along with related and free audio and video clips) at 

"Gold hedging foe not friend, says Goldcorp," Mineweb, March 12, 2003 --- 

TORONTO – In one of the more controversial presentations at this year’s PDAC conference, mid-tier Canadian gold producer, Goldcorp, came out blazing against the practice of gold hedging. North America’s biggest non-hedger seized the opportunity presented by the annual Toronto mining talkshop to beat its well-worn anti-hedging drum, backing up its arguments with quotes from Warren Buffett -- a lately vociferous anti-hedger who has called derivative instruments “financial weapons of mass destruction”.

March 10 message from Dennis Beresford [


You might be interested in the attached item that was published on Mineweb last Friday.


"The Idiot's Guide to Hedging and Derivatives," Mineweb March 7, 2003 --- 

Ismail is a successful mule trader in Peshawar. Every year Ismail delivers 30 mules to the Kabul Mule Market and gets $40 per mule. This year however, the Khyber Pass is full of warlord militias, so Ismail is not sure he can drive his mules to market without losing a mule here and there. Also, the demand for mules in Kabul seems to be dropping. Maybe he'll only be able to sell 20 mules, or, God forbid, 15, and then be forced to feed and water the rest of them on a money-losing trek back home. In other words, it's a scary market and Ismail is worried about feeding his family. What Ismail needs is to limit his risk with an Enron derivatives package.

First he pays $2 per mule for a Khyber Pass Derivative, so that any mule killed or stolen by warlords will be reimbursed at the rate of $20 per mule -- half the going market rate, but still better than taking a total loss. Next he sells Enron Mule Futures. For $28 per contract, he guarantees delivery of a mule in three months time. He sells 15 of these, figuring that a guaranteed $28 mule sale is better than showing up in Kabul and discovering that the mule buyers have been killed by stray bombs.

Meanwhile, at the Enron Mule Trading Desk in Houston, eagle-eyed yuppie are studying the worldwide mule markets and starting to have their doubts about those $28 delivery contracts. Mule use is dropping all over Afghanistan, even as the mule count is dwindling. Better resell eight of those15 contracts to a European commodities broker for $24 each, then make up that $32 loss somewhere else while cutting the company's exposure in half. But how to hedge the risk on the other seven?

Aha! A blip on the computer screen. A temporary mule shortage in southern Iran! With a current mule price of $42 in Tehran, Enron could offer a Linked Mule Swap Double Derivative tied to the gap between the price of mules delivered in Kabul on a given date and the price in Tehran on the same date. Sure, you would rather have the quick-and-clean Iran sale, instead of the sale in Kabul that requires trucking the mules to a foreign market. But even if you add in $4 per mule for transport through militia-held territory and averaged the markets together, you can still clear eight bucks just on the gap alone.

Enron's average price-per-future-mule is now $32.57 when you include the $4-per-mule loss on the mule futures dumped in Europe. But based on the amazing $12 Kabul/Tehran trading gap, they can easily put together a "delivery in either market" contract that will allow them to ask $36 per mule on their Mule Online Internet trading system.

The first mule future sells instantly for $36, and the price bobs up to $36.50. Two mules go for $36.75, and then there's a big jump for the last three mules to $37.90. Enron has now off-loaded all its price-based mule futures liability for a profit of $31.70. But this doesn't mean they're out of the mule market in Central Asia. It's still two months until Ismail delivers his 30 mules, and Enron is on the hook for his Khyber Pass derivative insurance policy. Things are not looking good in that part of the world, either. The chances of a mule being picked off as a road-passage tax are pretty high, and the loss of the whole herd would be a $600 liability.

Quickly, the financial boys go to work, and part of that liability is resold to a consortium of Singapore banks, Australian mutual funds, and Saudi Arabian arms merchant Adnan Kashoggi, thereby reducing Enron's percentage to 25%, or $150 in potential liability against a $15 premium (remember the $2 per mule paid by Ismail), and Enron also takes a brokerage fee of $20 from the three other partners, thereby reducing its real liability to just $120.

But that's still too much of a spread, so Enron continues to hedge. Fortunately, the company has such a diversified trading floor that Enron mule-market experts can walk over to the traders in the warlord-militia derivatives department. Sure enough, at least four tribes near the Khyber Pass are increasingly concerned about profit margins. There simply aren't enough people to rob. Things have gotten so bad, in fact, that the warlords are hedging against the oncoming winter by taking futures positions in stolen chickens, stolen humanitarian aid trucks, and Western hostages.

There's not a mule market yet, because the warlords have successfully converted many of the recalcitrant villagers into pack animals. But Enron knows how to MAKE markets. Quickly the numbers-crunchers go to work, and they soon determine that the average number of stolen mules per100-man militia is 1.4 per year. That represents anywhere from $28 to $56 in lost mule-thievery income if the Khyber Pass is closed or inhospitable to traders from Pakistan. Amortizing that amount over 12 months, the warlords have an exposure of anywhere from $2.33 to $4.67 per month in lost pillage. Hence Enron announces the new Highway Robbery Derivative, in which each tribe is guaranteed the value of two stolen mules in each 12-month period in return for paying a premium of $4 per month.

Enron's hedge is now complete, and it is a beautiful thing to behold. The chances of Ismail losing a mule to a raiding party are approximately one in 30, or 3.33 percent. Since he's paying $60 for his derivative contract, the expected loss of 3.33 percent of his herd would result in a payment of only $20 -- a more than comfortable spread. Meanwhile, if the mule is stolen by a warlord holding a Highway Robbery Derivative, then the payment to the other side would only be $28 against premiums of $48. If Ismail simply passes through the Khyber Pass without incident and sells all his mules at the standard price, Enron pockets $60 from Ismail and $48 each from four warlords, in addition to the previous profit of $31.70 from that heady Internet mule-futures trading day and the $20 in packaging commissions.

If each warlord steals his standard 1.4 mules per year, then Enron still owes six-tenths of one mule to the warlord, or about $22.20 based on a $37 sales price. Total expected profit, based on 5.6 stolen mules, one of which is stolen from Ismail: $143.20. Total profit from all Ismail-related mule transactions: $194.90.

See, it's simple when you know how it works. Ask Arthur Andersen.

Bob Jensen's threads on financial instruments derivative frauds are at

Bob Jensen's threads on financial instruments derivative instruments accounting, FAS 133, and IAS 39 are at

March 2003 Update on Accounting for Employee Stock Options

"Now for plan B," The Economist, March 13, 2003

The (Political) battle to fend off sensible accounting

ONLY desperate, last-minute lobbying saved America's technology firms last summer from having to count as an expense the billions of dollars-worth of share options that they dish out to their staff each year. This time, the tech industry is better prepared. Even before the Financial Accounting Standards Board (FASB) announced on March 12th that it was opening a formal inquiry into mandating the expensing of stock options, a coalition of tech lobbyists was carpet-bombing the press with propaganda. Wisely, the techies have also shifted their defence.

The expensing debate has required delicate handling by Silicon Valley. On the one hand, tech firms oppose the notion that options are an expense at all: accounting for their cost by the usual method (the Black-Scholes options-pricing model) would cut tech firms' reported profits by 70%, on some estimates. On the other, tech firms must guard against the notion that their profits—such as they are—are an accounting fiction. This creates a countervailing urge to argue that the market is already counting in the costs of options, either in its studious attention to the footnotes (where American firms must already disclose cost estimates), or in the way they dilute corporate profits for shares in issue.


The Financial Accounting Standards Board announces its “Agenda on Employee Stock Options and Pensions”.

Awkwardly, these two arguments are not only bogus, but contradictory. That has made them easier to demolish, a job done most comprehensively by Zvi Bodie, Robert Kaplan and Robert Merton in the latest Harvard Business Review. The standard-setters at FASB, meanwhile, are sticking to their guns. So the latest gambit from the International Employee Stock Options Coalition, a tech-industry lobby group, is to shift the debate towards the practical issue of how the cost of options should be calculated. This, maintains the coalition, is such an uncertain and controversial art that expensing would do more harm than good, by sowing confusion among investors. As evidence, they cite comments by Paul Volcker, an options-expensing heavyweight. “There's so much controversy about how to expense [options]”, Mr Volcker said at a recent conference, “it may conceivably even now kill the credibility of expensing them.”

Mr Volcker seems surprised at his claimed solidarity with the techies: he says he was expressing a fear that their lobbying tactics might work. It would be better to expense inaccurately, adds Mr Volcker, than not at all. The odds are that FASB will take the same view. Testifying before Congress on March 4th, FASB's chairman, Bob Herz, confirmed his desire to get options expensed. FASB officials say it has strong support among investors. After recent corporate scandals, Congress may be less inclined to meddle, as it did in 1994 when politicians helped to block an earlier attempt to require the expensing of options.

Still, there is a good argument that the Black-Scholes model may overvalue the cost of employee stock options, albeit by far less than the tech industry claims. (Options are sometimes forfeited when employees leave the firm, for instance, which makes the options worthless.) If the tech industry can claw back even a portion of the 70% of its reported profits that are about to vanish, its lobbying might still be money well spent.

It must be  Des Ja Vu all over again for our good friend Dennis Beresford, former Chairman of the Financial Accounting Standards Board.

In 1995
Association for Financial Professionals, AFP Exchange
, July/August 2002. --- 

Silicon Valley was up in arms against the bill, led by former Treasury Secretary Lloyd Bentsen and Sens. Joseph Lieberman (D-CT) and Barbara Boxer (D-CA). In the height of the lobbying season, one hundred CEOs from around the country flew to Washington, D.C. to lobby Congress on the issue. Lieberman even proposed a bill that would close down the Financial Accounting Standards Board (FASB). Those who opposed reform were telling Congress, "If it ain’t broke, don’t fix it."

The Senate eventually voted 88-9 to recommend against putting stock options pay on the books. In 1995, the FASB settled for a compromise position of requiring stock options to be disclosed in the now-sacred footnote on corporate earnings sheets using Black/Scholes.

Continued in the article.

"Gain Without Pain" Upside," April 1993 --- 

Every benefit has its cost. And every dollar of employee income requires a dollar of employer expense. Right? Not necessarily. But don't tell that to the wizards at the Financial Accounting Standards Board (FASB), the top rule-making body for America's accountants. They might get confused and do the right thing. Trouble started last spring when FASB (pronounced fas-bee), proposed a new accounting rule that would require companies to deduct from current earnings the future value of the stock options granted to employees. For those unfamiliar with stock options, the change sounds like a minor tweak to an arcane rule. But FASB's proposal has profound implications for America's economic future, and has sparked a bitter political struggle whose outcome still hangs in the balance.

Leading the charge for the new rule is, of course, FASB itself. But the high priests of accounting are not alone. Oddly enough, they're allied with the capitalist-bashers in Congress. FASB had been mulling over its rule change since 1984, but it didn't actually propose the change until Senator Carl Levin (D-Michigan) threatened legislation if FASB didn't act. As Levin sees it, the current policy "encourages runaway executive pay by disguising the true cost of stock option compensation."

Their logic sounds eminently reasonable, particularly if you subscribe to zero-sum, "every benefit implies a cost" economics. After all, why should a company be able to compensate its employees without telling its shareholders about the costs incurred? Underreporting compensation expense allows companies to overstate earnings, deceive investors, inflate stock prices, and put giant corporations that don't hand out stock options at an unfair disadvantage when it comes to raising capital.

Since FASB's sole reason for existence is to assure investors that corporate financial statements accurately reflect the financial condition of American corporations, the failure to correct misleading accounting would amount to dereliction of duty. As Dennis Beresford, FASB's chairman makes clear, "Our principal mission is to establish accounting standards that lead to financial reports that are unbiased, that are neutral, and that don't favor one particular organization or type of company or industry over another."

But since Silicon Valley's ox is the one being gored, high-tech business leaders don't see things quite so dispassionately. They have mounted a feverish campaign to get FASB to abandon its proposal before it goes into effect, or failing that, to get Congress to override it. Dick Kramlich, head of the National Venture Capital Association called FASB's proposal, "a knife through the heart" of American high-technology.

A survey by ShareData, Inc. shows why. Nearly 90% of all high-tech firms with under a hundred employees distribute stock options to all their workers. With such heavy use of options, a Coopers & Lybrand projection shows that the typical high-tech firm's earnings will drop about 27%, if the new rule goes into effect. By contrast, large companies, which tend to restrict option grants to top executives, would only see a 3% hit to earnings.

FASB's opponents base their case on two arguments. First, they contend that stock options are the essential ingredient in attracting first-class talent to risky startups. If startups couldn't offer workers a realistic chance of getting rich, there'd simply be no way to recruit them from established firms or motivate them to put in the hundred hour weeks that propel "never heard of" firms like Microsoft into the top ranks of American business. Pulling the plug on stock options would kill off precisely the kind of entrepreneurial companies giving America an edge in the global battle for high-tech leadership.

FASB, quite properly, responds that it must let the cards fall where they may. Its mandate is accurate accounting, not industrial policy. If more accurate accounting reveals that high-tech startups aren't as profitable as previously believed, well, then, so be it. Underreporting employment costs should be no more privileged than any other subsidy or loophole.

Indeed, by waving the flags of job creation and U.S. competitiveness, the high-tech community demeans its unique economic role, and sounds like any other special interest group. "We need this special exemption to provide Americans with fill in the blank (more jobs, cheaper sugar, affordable subway fares). Take it away from us, and you'll hurt the whole country."

Implicitly recognizing this argument's weakness, the high-tech community also attacks FASB's rule on technical grounds. Since no one can tell what, if anything, a stock option is worth at the time of the grant, they claim it's ridiculous to expense a specific amount against the company's earnings.

For example, if StartUp, Inc. recruits the brilliant software designer Joe Bithead away from his high-salary job at MegaCorp by offering him the option to buy 10,000 shares of StartUp's stock at its current price of a penny a share, what's the value of Joe's grant? If StartUp goes belly up, as 80% of new high-tech firms do, the grant is worthless. More than once, jobless workers of bankrupted ventures have ceremoniously torched their option certificates in backyard barbeques.

But if, on the other hand, after five years of struggle, StartUp, Inc. manages to create a successful product and outperform its competitors, the company's stock might sell for, say, $10 a share on the public market. For a penny each, Joe can buy the 10,000 shares held in reserve in StartUp's treasury since the day of his grant. He immediately unloads them in the market for a $100,000 profit. Under FASB's new rule, how much should StartUp, Inc. charge against its earnings when it recruits Mr. Bithead, zero or $100,000?

Dennis Beresford, FASB's chairman, acknowledges that the mathematical formulas used to estimate the potential value of stock options are imperfect. But, he says, there's no way to avoid estimates in accounting. The future cost of pension benefits, insurance company reserves, and bank loan loss reserves are all calculated with the best available techniques. Even a flawed estimate is better than ignoring an expense altogether.


Bob Jensen's threads are accounting alternatives in this area are at 

March 12, 2003 message from David Albrecht [albrecht@PROFALBRECHT.COM

I finished reading Disconnected: Deceit and Betrayal at WorldCom, by Lynne W. Jeter

Here is my review of the book submitted to Amazon.

Why to buy this book: This book will bring you up to speed on WorldCom.

What this book does: (1) gives a fact-based history of Worldcom from start (1984) to just past the end (December, 2002), (2) identifies and discusses key figures in the rise and fall, (3) introduces the foibles of Ebbers, (3) describes the clash of corporate culture following of MCI acquisition (4) describes accounting coverup in broad terms (5) suggests five reasons for the fall: denial of Sprint takeover, inability to integrate and manage MCI, costly excess capacity entering the business slowdown of 2000-2003, revenue loss as a result of long-distance competition, Ebbers inadequacies.

What this book does not: (1) provide acceptable levels of detail in the acquisitions, (2) give enough detail for the strengths and weaknesses of key figures, (3) provide sufficient detail about the accounting cover up, (4) thoroughly analyze each of the reasons the reasons for the fall.

The author is somewhat confused by accounting terms, and perhaps about what the accounting issues were.

After reading this book, you will be ready for (and need to read) the next books that come out on WorldComm. At least, I want to know more about it.

Having panned the book, I still would recommend it to my students.

David Albrecht
Bowling Green State University

March 13, 2003 reply from Jim McKinney [jim@MCKINNEYCPA.COM

If you go to  you can hear a local NPR radio interview with the author. The show was on March 11th on The Diane Rehm Show . 
Jim McKinney 
Howard University

A bit more than pocket change!

"WorldCom to Write Down $79.8 Billion of Good Will," by Simon Romero, The New York Times, March 14, 2003 

WorldCom, the long-distance carrier that is mired in the nation's largest bankruptcy filing, said yesterday that it was writing down $79.8 billion of its good will and other assets. The move is an acknowledgment that many areas of the company's vast telecommunications network are essentially worthless. The company said in a statement that all existing good will, valued at $45 billion, would be written down. WorldCom also said it would reduce the value of $44.8 billion of equipment and other intangible assets to about $10 billion. WorldCom had previously signaled that it was considering the write-downs, but the immensity of the values involved surprised some analysts. WorldCom's write-downs are second only to those of AOL Time Warner, which recently wrote down nearly $100 billion of assets.

Continued in the article.

March 9, 2003 message from Roger Collins [

this may be of interest (it looks as if the worthy captains of British industry are just as determined to be obstructive of reform as any of their U.S. colleagues) 

*Chairmen attack post-Enron reforms* 

Company chairmen oppose key recommendations from a report aimed at preventing Enron-style scandals.

Hi Mohammad,

Some studies of low-balling are cited at 

Over-time versus across-services incentives for client retention Research indicates auditors' judgments and decisions are influenced by incentives to retain audit engagements. These over-time incentives exist separate from the existence of across-services incentives for obtaining or retaining consulting engagements for audit clients. Research also suggests that auditors do not systematically low-ball audit fees in order to obtain engagements for non-audit services from audit clients.

Farmer et al. (1987) show that an auditor is more likely to agree with managers' financial-reporting preferences when the risk of losing the engagement is high versus low. Trompeter (1994) finds that auditors who are compensated based on local-office profitability are more likely to agree with clients' preferences as GAAP becomes more subjective. Overall, this research suggests that auditors' judgments can be influenced by incentives to retain audit clients. ***************

Remember that low-ball fees may be accompanied by higher fees for non-audit services. The above testimony discusses this as well.

An indirect study of possible interest is "The Relation Between Auditors' Fees for Nonaudit Services and Earnings Management," The Accounting Review, Volume 77, Supplement 2002, pp. 71-114. This paper by Richard Fankel et al was presented at a Quality of Earnings Conference.

Bob Jensen

-----Original Message----- 
Sent: Wednesday, March 19, 2003 12:45 PM 
Subject: Audit Low balling case

Dear All,

I am in need of a good case on auditor strategy of low balling when pricing initial audits. I would appreciate it if you could send me a case or steer me to a source where I can get one.

Thank you.

Mohammad J. Abdolmohammadi, DBA, CPA  
John E. Rhodes Professor of Accounting 
Bentley College 
175 Forest Street Waltham, MA 02452

March 5, 2003 message from Dennis Beresford [


I don't know whether you've heard of the Association for Integrity in Accounting. I've attached a document that describes its activities, one of which is to seek abolishment of the FASB. I'm sure these folks are well intentioned, but it would be nice if some of these academics devoted themselves to more positive pursuits.

Feel free to mention this in your Bookmarks if you think it would be worthwhile.


Note from Bob Jensen
The AIA home page is at 

Press Statements

Ralph Nader, consumer advocate, founder, Citizen Works --- 

Tony Tinker, professor of accountancy, CUNY-Baruch College --- 

Linda Ruchala, associate professor of accountancy, University of Nebraska-Lincoln --- 

The Association for Integrity in Accounting (AIA) is a project being incubated by Citizen Works, a nonprofit, nonpartisan, 501 (c) (3) tax-exempt organization founded by Ralph Nader in April 2001 to advance justice by strengthening citizen participation in power.  Contact Information: Citizen Works, PO Box 18478 , Washington , DC 20036 -- Phone: (202) 265-6164 -- Fax: (202) 265-0182 -- 

AIA Mission Statement

Whereas the integrity of the accounting profession is premised on individuals who acknowledge their responsibility to maintain expertise, to exercise independence of thought and action, and to serve and be guardians of the public interest; and

Whereas the influence of corporate pressures on professional standards have eroded and compromised this integrity;

The mission of the Association for Integrity in Accounting is to provide an independent forum to present and advance positions on a wide range of critical accounting and auditing issues, standards and regulations affecting the accountability and integrity of the profession and the public interest in maintaining trust and confidence in accounting.

The Association for Integrity in Accounting includes members, domestic and international, from private, public, and academic accounting (as well as students and others) interested in the advancement of accounting to support a more informed public.

Steering Committee Members

1.      David Crowther - David spent over twenty years as a practicing accountant in the various sectors of the UK economy prior to becoming an academic. After entering the academic world he completed a Ph.D. in corporate social reporting. He is now Professor of Corporate Responsibility at London Metropolitan University .

2.      Jesse Dillard - Jesse Dillard is the KPMG Professor at the School of Accountancy , University of Central Florida , and editor of Accounting and the Public Interest. He has published in the accounting and business literature, and is currently studying the ethical implications of information technology.

3.      Steven Filling - Steven Filling teaches Information Systems and Management Control Systems at California State University , Stanislaus. Steven practiced accounting and systems analysis prior to becoming an academic. He is currently involved in public budgeting and faculty union activities.

4.      Marty Freedman - Marty Freedman is a Professor of Accounting at Towson University and co-editor of Advances in Environmental Accounting and Management. He has published over thirty papers mostly focusing on social and environmental responsibility. He has also published a book on air and water pollution.

5.      Soon Nam Kim - Soon Nam Kim is a lecturer in accounting at the University of Wollongong . Her major teaching areas are first and second year management and financial accounting. Her research interests are cultural issues in accounting, in particular race/ethnicity and gender issues, issues in accounting education, international accounting, and business issues. She has published a number of articles in internationally referred journals.

6.      Linda Ruchala  - Linda Ruchala is an associate Professor of Accountancy at the University of Nebraska-Lincoln. Her areas of interest are managerial accounting, accounting information systems, and accounting in the public interest.

7.      Bill Schwartz - Bill Schwartz is the dean of Indiana University South Bend. He is the co-editor of Advances in Accounting Education, and has served as past chair of Teaching and Curriculum for the America Accounting Association and past managing editor of Research on Accounting Ethics.

8.      Tony Tinker - Tony Tinker is Professor of Accounting at Baruch College at the City University of New York and visiting Professor at Leicester University and the University of South Australia . He is co-editor of Critical Perspectives on Accounting and the Accounting Forum. He has appeared on CNN, the BBC, and NPR, and has published several books and numerous articles.

9.      Paul F. Williams - Paul F. Williams is a Professor of Accounting at North Carolina State University . He served as past chair of the Public Interest section of the American Accounting Association and currently is associate editor of Accounting and the Public Interest.

10.  Kristi Yuthas - Kristi Yuthas is the Swigert Professor in Information Systems at Portland State University . She is currently on leave and is a scholar-in-residence at American University . Professor Yuthas studies issues associated with the organizational and social consequences of accounting and management control systems.

Founding Members:  John W. Argo, CPA and Partner, Medical Business Consultants, Edward Blocher, Professor, University of North Carolina, David Crowther, Professor, London Metropolitan University (England), Jesse Dillard, Professor, University of Central Florida, Bob Dwyer, CPA, Ralph Estes, Professor Emeritus, American University,Steven Filling, Professor, CSU- Stanislaus, Timothy Fogarty, Professor, Case Western Reserve University, Martin Freedman, Professor, Towson University, Soon Nam Kim, Lecturer and CPA, University of Wollongong (Australia), Sue Ravenscroft, CPA and Ph.D. in Accounting, Iowa State University, Linda Ruchala, Associate Professor, University of Nebraska-Lincoln, Bill Schwartz, Dean, Indiana University-South Bend, Tony Tinker, Professor, Baruch College- CUNY, Paul F. Williams, Professor, North Carolina State University, Kristi Yuthas, Professor, Portland State University, Milton Zisman, CPA and Co-founder, Accountants for the Public Interest

Some of the founding members are also active contributors to our beloved AECM discussion group --- 
The most frequent and very solid contributor is Paul Williams.  Tony Tinker was an active contributor for a brief period of time, but he has been silent on the AECM throughout the post-Enron era.  I suspect others are silent lurkers on the AECM.  To my knowledge, nobody in the AIA has called attention to the AIA, although I could have easily missed a meeting announcement.  

My own take on the FASB issue is that some standards setting body other than a government body needs to take on the technical issues in terms of global business complexities in contracting, and the body that will be most effective must in fact be recognized and respected by the business community.  Major upheavals and revolutions are sometimes a good thing.  However, the players lose some credibility without first trying to work within the system before turning it over.  For example, it would be interesting how the members of the AIA communicated their efforts to influence the FASB/IASB standards before suddenly organizing a revolution to eliminate the established standard setting bodies like the FASB.  For example, were any efforts made during the "comment phase" of the FASB's Interpretation 46 on SPEs (now VIEs) to improve Interpretation 46?  

I will say some of the AIA members like Paul Williams have very actively tried for many years and in a very scholarly manner to impact on the editorial biases of the leading accounting research journals, especially the biases of mathematical elegance built upon superficial assumptions of CAPM and agency/game theory that assume away monumental missing variables in the interest of mathematical and statistical convenience.

I do have great respect for the scholarly backgrounds and talents of the founding members of the AIA.  I hope that some AIA members will share their innovative views of how to bring about more integrity in accountancy.  I am especially interested in solutions that do not replace professional bodies with government bodies.  Perhaps this is my knee-jerk reaction that government agencies are almost always cheerleaders for the industries they regulate.  Perhaps the FASB should be eliminated, but what will take its place?  Hopefully, it will not be something like the SEC or the cosmetic PCAOB.  Perhaps it will be the IASB, but the IASB runs the risk of getting bogged down in United Nations-like global politics.  The FASB is far from perfect, but it has shown an ability to be more independent than the other alternatives in history.

In any case, the AECM is in my viewpoint an excellent discussion group for issues of integrity in accountancy, and I hope that some of the respected scholars in the AIA will commence to share their arguments and proposed solutions with us.

March 7, 2003 reply from Steven Filling [steven@SAMSARA.CSUSTAN.EDU

Speaking as a member of AIA, I am confused by your statement that "it would be nice if they [we] devoted themselves [ourselves] to more positive pursuits." What could be more positive than trying to remedy some of the more obvious problems with financial reporting and recordkeeping in the States? Must we accept the status quo ex ante? At what point does working for positive change become a less than positive pursuit?

TIA s.


March 7, 2003 reply from Bob Jensen [

Hi Steven,  

I guess the bottom line really is that it is easier to criticize most anything than it is to come up with viable remedies to right the wrongs.      

The AIA has been formed by very talented scholars who are highly articulate in finding faults in the assurance service industry. They have been far less successful in proposing remedies for corrections of these faults.   

We really would like to know more about the remedies before we know whether the AIA is advocating positives as well as negatives. In my own writings on these matters, I have found it very easy to find the negatives. Doing something positive has been much more difficult for me ---   

I guess what we are all begging for is for you to provide some hints as to what direction the remedies are taking us.    

Or will these remedies be more along the lines of the following:    

Bob Jensen

March 9, 2003 reply from Steven [steven@SAMSARA.CSUSTAN.EDU


On Sat, 8 Mar 2003 09:22:17 -0600 "Jensen, Robert" <rjensen@TRINITY.EDU> wrote:

> > I guess the bottom line really is that it is easier to criticize most > anything than it is to come up with viable remedies to right the > wrongs.

True. But is is also true that the ab initio requirement for "viable remedies" is a critical understanding of the issue.

> > > The AIA has been formed by very talented scholars who are highly articulate in finding faults in the assurance service industry. They have been far less successful in proposing remedies for corrections of  these faults.

Not sure I agree here. I don't know that "they have been far less successful in proposing remedies" is accurate. It may be more precise to state that 'they have been far less successful in selling other players on the commercial viability of proposed solutions.'

> > > I guess what we are all begging for is for you to provide some hints as to what direction the remedies are taking us.

One of AIA's first acts has been to identify what we believe is at least one understanding of the "fatal flaws" in the industry. Our next step, already in progress [obviously not quickly enough ;^}], is to craft working papers delineating alternatives for consideration. Note that this is a rather complex task, as we are simultaneously attempting to communicate with several disparate audiences ranging from readers of this list to congressional staffers to TC MITS. I think I speak for the group when I assure you that we will take advantage of the intellectual resources represented by this list, and will make those working papers/position statements widely available as quickly as may be.

> > > Will these remedies be really drastic such as doing away with the capitalist economy in favor of s socialist or Marxist economy?

Well, that's my remedy of choice, but I suspect it might be rather difficult to instantiate. Nice to know, though, that spectres of Marx still haunt us all.

> > Will these remedies entail shifting the assurance services industry > into an insurance industry with respect to conformance to accounting  and auditing standards (which is not a bad idea in my estimation)?

There has been some discussion of that. Intellectually I like Briloff's "return to the priesthood of auditing" approach, although the Hobbesian understanding of man inherent in the current conceptual framework suggests that approach would be doomed to failure, as does recent press coverage of the profession. In a sense, AIA may be looking for the semantic opposite of the recently floated 'audit audience disclaimer'.

> > Will these remedies follow the lines of the Nader-like multi-billion dollar class action lawsuits (which seems to be nothing new given the billions in lawsuits already pending against large accounting firms)?

Isn't that already happening, albeit with strictly limited class membership? Your suggestion of "serious penalties" is probably an alternative, although I confess to being rather cynical as to the likelihood that such legislation/regulation could be effectively put into practice. I just don't think our society has a good track record when it comes to legislating moral/ethical norms.

I share a lot of Elliot's and others' concerns about more government involvement, but I'm not sure how else social goods can be produced/guarded - clearly the market-based approach leaves something to be desired [pun intended].

Steven Filling, 
CFA Stanislaus 


March 8, 2003 reply from Elliot Kamlet SUNY Account [ekamlet@BINGHAMTON.EDU] 

I am certain that we all support efforts to improve the transparency and integrity of financial reporting. Speaking for myself, I wonder exactly how much research was done into more positive alternatives when this fairly new organization called for the abolishment of the FASB. I have been a CPA and Lecturer long enough to recall the end of the APB and the beginning of the FASB. I am not opposed to changing the rule making body from the FASB to something else if I can believe the something else is an improvement. Simply calling for the abolishment of the FASB may grab headlines but will not improve the profession. If the proposed solution is government regulation, tell me where to return my CPA certificate.

Elliot Kamlet 
Binghamton University

March 8, 2003 reply from J. S. Gangolly [gangolly@CSC.ALBANY.EDU]


Let me play the devil's advocate once again.

We accountants have been pretending, at least since the formation of APB, that accounting practice can be reduced to a bunch of rules, and that "principles" are meant to make us feel good, if not look good or do good.

It has been our pipe dream that we have a set of rules that can be decided on "logical" grounds by application of economic theory. It is just that, a pipe dream.

Accounting rules, if they must exist, must be the result of public debate and adjudication, not privilege of a chosen few. If the events of the past few years have taught us anything, it is that having one august body of unelected people is not a recipe for the advancement of accounting.

If Accounting standards are rules that all have to live by, it is important that we practice what we preach -- democracy. A polity needs legislative, adjudicative, as well as enforcement functions. It must be shown that these three, which already exist in our political system are some how unable or in competent to handle the accounting "problems".

It is my considered personal opinion, often supported by Paul Williams, that a return to common law (and the securities related statutes, and the regulations of the SEC) for the adjudication and enforcement in the accounting arena is an alternative worth considering.

It was the alternative that the Late Leonard Spacek suggested a long time ago, but we were not listening.

Any debate that takes FASB off the table does not do justice to our profession.

I hope we can debate this alternative on this AECM forum.

Jagdish S. Gangolly

Hi Dan,

I think virtually every established and new association of accountants is desperately trying to instill greater integrity and professionalism in accountancy. Your remarks are on target for the AIA, and we are looking forward to future proposals from the AIA regarding how to accomplish its goals. As I mentioned previously, it is easy to criticize but difficult to create good solutions/answers/strategies.

One forthcoming example of a strategy of the AICPA riles my feathers a bit is the multi-million "Image Enhancement Campaign" 

It seems to me that the strategy to spend millions on advertising could be more effective if these millions were spent instead on really trying to be a better profession rather than merely advertise integrity amidst weekly outpourings of lawsuit announcements and SEC actions. The advertisements lose credibility like Dennis the Menace standing over the latest broken item (antique vase, radio, television, computer, window, rose bush, etc.) who looks up and claims "I really am an angel Mom in spite of evidence to the contrary."

If the profession is going to advertise, it should not focus on denials. To be credible, the profession must admit to really serious failures and shortcomings and then stress what is being done to restore public confidence. For example, the advertising theme that there were relatively small numbers of bad audits in the past two decades is contrary to the evidence such as the evidence of a culture change in the profession provided by Paul Volcker at 

Denials in advertisements merely signal lies rather than genuine credibility. Perhaps there should be advertising, but there should not be denials. I think the advertisements my be counter productive.

I look forward to AIA strategies that do more than advertise integrity.

Bob Jensen

-----Original Message----- 
From: Dan Stone [mailto:dstone@UKY.EDU] Sent: Sunday, March 09, 2003 5:38 AM 
Subject: AIA Importance: High

A few thoughts on the recently formed Association of Integrity in Accounting.

1. The AIA mission statement says nothing about eliminating the FASB. Instead it calls for integrity and independence in the accounting profession and a commitment "to serve and be guardians of the public interest." 2. The press conference announcement of the organization says nothing about eliminating the FASB. 3. Ralph Nader's (a founding member) press statement says nothing about eliminating the FASB. 4. Tony Tinker's (a founding member) press statement says nothing about eliminating the FASB. 5. Linda Ruchala's (a founding member) press statement states, "Our preliminary evaluation suggests that the Financial Accounting Standards Board should be eliminated and the SEC required to live up to its original mandate for establishing financial reporting standards."

My observations:

1. Note that the FASB statement above is a "preliminary evaluation" .... that is to be followed up by additional research on this topic (this is from later in Linda R's press statement).

2. Isn't it interesting that the focus of the AECM list serve discussion of the AIA has been, with the exception of Bob Jensen's remarks, entirely focused on the "eliminate the FASB statement"?

3. As Mark Twain is alleged to have said, "Get your facts first, and then you can distort 'em as much as you please." &field=LastName&paint=1&cat=&first=100 (Footnote: I have some doubts about the accuracy of this quote and welcome scholarship to track down the source & exact words more precisely than I have)

My opinion:

We desperately need an activist organization of accounting academics that is committed to integrity, the public interest, and action, not eternal debate.

Bravo to the founders of the AIA for recognizing this need and being willing to act and call for action in contrast to the typical "paralysis of (over)analysis" of academics!!!!!

Bravo to the founders of the AIA for being willing to challenge our assumptions and ask the hard questions that need to be asked!!!!! While I do not agree with every statement made at the AIA's website, I welcome the willingness of these scholars to step into the void of inaction of the current state of accounting academe.

Bravo to AECMers for their willingness to engage these important issues!!!!!!

Dan Stone 
Univ. of Kentucky

March 10, 2003 reply from Paul Williams [williamsp@COMFS1.COM.NCSU.EDU
As usual, Paul gives us some very scholarly points to ponder!

Bob, Denny, et al

I've been dealing with family problems over the weekend so I haven't checked my email in a couple of days. Just mention eliminating the FASB and folks' indignation comes to a boil. Seems we got people's attention. I take exception to Denny Beresford's assertion that there are more productive things the AIA could do besides going after FASB. On this website we were referred by Bob Jensen to a link to the Houston Chronicle website where we could view the birthday video produced by the folks at Enron. One skit involved people discussing how they would get their revenues up and the solution was to employ a new type of accounting called "hypothetical future value accounting," -- a send up of the FASB worthy of SNL. On this website, Bob has suggested that we should contemplate the hypothesis that fair value accounting may have contributed to the recent troubles of Enron, Worldcom, etc.

The FASB has created a reporting model that could be described as "hypothetical present value accounting," where the basic measurement principle is "your guess is as good as mine." Leases, EPS, derivatives, post-retirement benefits, pensions, etc. bloody etc. are all items that are reported for which there is no basis for providing "assurance." Financial statements are increasingly unauditable and we are surprised at audit failures and a growing cynicism among professionals about the whole audit process. At least we should call a moratorium on any more standards. What the solons at the FASB seem to believe is that they are capable of divining the economic future, something which true believers in a market system claim can't be done. If we could assertain the value of a derivative today then we wouldn't need the derivative in the first place. We could replace the market system with a group of omniscient accountants who know the value of everything because they possess the unique ability to forecast the economic future (a claim Dierdre McCloskey refers to as economic snakeoil). The FASB has self-righteously fashioned itself with the discourse of rational decision theory (predict the timing, amount and uncertainty of future cashflows) and market utopianism (an agent for efficient capital markets) that its reform would be difficult, if not impossible. It is an unelected body that writes U.S. law (e.g., it has radically redefined what a liability is), but does so from a fundamentalist-like certainty of belief in an imaginary world -- a belief that is convenient for certain powerful interests. Just prior to his death, Ray Chambers wrote an article for ABACUS in which he observed, "The standards authorities which over the past dozen years have emerged as rule-makers, continue to propagate the illogicalities and inconsistencies of the rules they inherited, filling vast tomes with detailed rules as if for a profession of morons (ABACUS, 35(3), p. 250)." Since I teach intermediate accounting, I concur with his observation. It is impossible to keep a straight face when teaching students what the "rules require."

What faces us as a profession and, even more importantly, as a democracy, can not be reduced to the silly capitalism vs. communism bifurcation. This is the standard ploy of the radical right wing that the only alternative to the world as it is to return to living in caves. That is nonsense. As the principle of equifinality in open systems theory suggests, there are literally an infinitude of possiblilities. As Kevin Phillips (certainly no "pinko") observes in his latest book, democracy and capitalism are not synonymous as so many would have us believe. The reason I am participating in the formation of AIA is to help create an organization that can provide for free and informed discussion about the current state and future of our profession (which I do not believe is synonymous with the AICPA or the economic vitality of the Big 4) and the role it might play in a democratic society. Paton and Littleton observed a long time ago that the modern corporation posed unique problems for democratic societies. Corporations are not "private" but public institutions accountable to the people who permit them, through chartering, to engage in their activities. The role of accounting, according to P&L, is to facilitate social controls. Recent events should persuade anyone concerned about the health of our democracy that the current system, of which the FASB is a central part, is not doing that job very well. I encourage everyone on this network (particularly practitioners from whom something very important has been taken by the international oligopolistic accounting industry) to visit to find out more about AIA and to contribute your energies and your voice to one of the most important debates in the history of our profession. 

PF Williams

P.S. Eliminating FASB may be a viable remedy and should not be dismissed out of hand.

Bob Jensen's threads on proposed reforms are at 

Todd Boyle's A PETITION for deregulation of financial reporting --- 

We petition the AICPA, SEC, and Congress of the USA to change the laws governing financial disclosure and reporting by publicly listed companies as follows:


Insiders should not have better information than stockholders.

1. WEB ACCESS:  publicly listed companies should be required to maintain interactive, electronic interfaces available to the public providing all of today's required interim and annual financial statements and SEC reports.  This website should be required to provide drilldown into details whenever such details or links exist, to support a reported fact. This website should provide appropriate navigation, search, and query tools.

2. MACHINE READABLE:  Information should be published through machine-readable interfaces, as well as human-readable interfaces.  Electronic interfaces (i.e. functions, methods, APIs) should provide all of the drilldown, navigation, search and query capability required under the law (1) above.

3. STANDARDS-BASED TECHNOLOGY:  interfaces should be compliant with vendor-neutral standards for protocols, syntax, and semantics.  To qualify as a "Standard" under this law, would require minimum levels of transparency, vendor-neutrality, and governance of the Standards Organization that publishes the technology standard. 

4. GREATER DETAIL IN DISCLOSURE:  the scope of information required should be expanded to include breakdowns of the numbers reported in audited financial statements into reasonable and meaningful details. Each of those meaningful breakdowns should be further decomposed to disclose individual transactions larger than a material threshhold such as $10,000. 

5. GREATER TIMELINESS OF DISCLOSURE: the scope of information should, furthermore, be expanded to include *all* completed transaction data (including unaudited information) available in the accounting and information systems of the company more than 24 hours old. Transaction data includes orders, invoices, etc. together with any details of the surrounding contract or terms of trade necessary for understanding the transaction entry.

6. LEVELS OF ACCESS:  the level of detail to be provided in these new disclosures should be proportionate to the percentage of ownership plus long term debt held by the requestor of information, and should reach 100 percent of accounting detail for every holder of greater than 3% of the company or $1 million in equity+long term debt, whichever is less.

7. ACCOUNTABILITY:  this proposal would require new categories of interim, unaudited accounting information. New standards should be established to provide reasonable but not excessive, reliability and accountability for this new, interim, unaudited accounting information.


1. DIGITAL SIGNATURE BY BOTH PARTIES:  No sale, purchase or other transaction or contract involving any publicly listed company should be enforceable by the courts in the U.S. or its states, unless that contract is digitally signed by both parties to the contract and if material, maintained for inspection by Owners within the disclosure system in (B) above.

2. MATERIALITY: This provision should apply to contracts, sales, trades etc above a material threshhold such as  $10,000. 

This provision would require agreement upon minimum standards for electronic trade and settlement. The costs of  implementation would be recovered by reductions in downstream bookkeeping, accounting, and settlement that follow from decisions to buy or sell.  Everything after that point determined by contract, would become increasingly automated after any standard is established, benefiting individuals and small companies as well as Enterprise.


Government regulation of an information industry is futile.

The public accounting industry has continually grown less competitive, more inefficient, and more costly since the 1930s when mandatory audits began. The industry has effectively maintained barriers to entry or competition, and effectively dictated the kinds of information included in financial reports in a self-serving manner.  In 1930s local data did not exist and CPAs added an enormous additional value.  Today, local information is abundant, and CPAs only limit and modulate the disclosure of that data. 

The entire regulatory burden and reporting standards applied to the largest companies (Big GAAP) is applied to every small CPA and business in the country, and enforced by state regulators. This is an economic injustice to smaller businesses and individuals.

All of these phenomena are relics of an earlier age. Financial information is just like any other information, and government involvement in the information process is destructive and counterproductive.  

1. Licensing requirements for CPAs should be removed. 

2. Owners and investors should freely choose, within a free market, their financial information provider based on objective quality, reputation, and the quality and methodology they apply to financial reports.  Providers highly skilled in data management would be allowed to publish financial statements. 

3. Definitions of terms used in financial statements (GAAP) should be determined solely by Owners and investors, as a matter of contract with their reporting providers or with officers and management. Government enforcement of GAAP terminology promulgated by private, unelected groups of CPAs, should end. Alternative definitions of GAAP should be encouraged, and Owners and investors should take responsibility for understanding them.

4. Software agents and robots should be granted equal rights to the provision of audit and accounting services as human CPAs. Discrimination against robots or software agent audits, failure of management to provide requested information or other obstruction of their function should be prohibited.

Todd Boyle CPA
23 jan 2002 updated 3 Feb 2003


In November 1999, the IASC Staff published a discussion paper, Business Reporting on the Internet. The discussion paper was authored by four academics, two from a university in Singapore, one from the UK and one from the USA.   Although this paper, and all papers by Accountancy standards bodies and regulators, argued for stronger codes of conduct, it provides an encyclopedic report on the abuses within today's false reporting system.

In January 2000, the US Financial Accounting Standards Board published a steering committee report that addresses issues similar to those covered in the IASC study. The FASB report is available on line: Electronic Distribution of Business Reporting Information (PDF version 302kb).

The Canadian Institute of Chartered Accountants has published a similar study, and the Auditing & Assurance Standards Board of the Australian Accounting Research Foundation has published an auditing guidance statement on the subject, but these are not available on line.

In the late 18th century the words of an American lawyer, Patrick Henry, helped persuade Congress to pass legislation protecting the public's right to know. "The liberties of a people never were, nor ever will be, secure, when the transactions of their rulers may be concealed from them."

Bob Jensen's threads on proposed reforms are at 



My new and updated documents the recent accounting and investment scandals are at the following sites:

Bob Jensen's threads on the Enron/Andersen scandals are at  
Bob Jensen's SPE threads are at  
Bob Jensen's threads on accounting theory are at  

Bob Jensen's Summary of Suggested Reforms --- 

Bob Jensen's Bottom Line Commentary --- 

The Virginia Tech Overview:  What Can We Learn From Enron? --- 



Professor Robert E. Jensen (Bob)
Jesse H. Jones Distinguished Professor of Business Administration
Trinity University, San Antonio, TX 78212-7200
Voice: 210-999-7347 Fax: 210-999-8134  Email: