Scandal Updates on April 20,
Bob Jensen at Trinity University
Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm
Last week, the
Securities and Exchange Commission approved
the release for public comment of proposed
rules that would modernize and improve the
timeliness of its system of corporate
disclosures. The proposed changes recognize
the importance of the Internet and move
companies closer to real-time reporting.
Some see these changes as long overdue.
Despite widespread improvements in
information technology, the shorter filing
deadlines proposed by the Commission would
represent the first change in more than 30
I guess the SEC did not read about Ebenezer at http://www.trinity.edu/rjensen/cpaaway.htm#2020
magazine published its listing of the 500
largest U.S. companies this year, it listed
Enron as No. 5 based on nine- month revenue
figures. Next to Enron's name were a
question mark, exclamation point, and a
cross-reference to a separate article about
the Revenue Games People (like Enron) Play.
"No question about it," the
article concludes, "the creativity of
corporate accounting knows no bounds."
But corporate accountants didn't catch the
brunt of the magazine's criticism. Auditors
April 22 Updates from SmartPros
Andersen U.K. to Begin Layoffs; Fired Andersen Employees Sue International Guidance Helps Auditors Assess E-Commerce Risk Xerox Case Could Hinder KPMG Partner Andersen Offices to Merge with KPMG; Firm's End Predicted Big Five Firms Court Andersen Employees, Clients John Hancock Sues Enron, Andersen Officers, Directors Andersen to Close Training Center
No More Trips to St. Charles --- http://www.smartpros.com/x33711.xml
Andersen to Close Training Center
April 17, 2002 (Knight Ridder/Tribune Business News) —
As the Andersen accounting firm continues its effort to strike a deal with the Justice Department to settle an obstruction of justice charge, the fallout of the Enron Corp. scandal is eliminating the longstanding professional training group at Andersen's huge St. Charles facility.
As part of the 7,000 jobs Andersen recently said it would cut, an estimated 500 will be in the firm's widely respected learning group, which has responsibility for in-house training.
For the firm to survive given the disintegration of its overseas network, substantial loss of major clients and dwindling new business, Andersen is cutting back the scope of its operations. This in effect means that its learning group has been axed, according to sources close to the beleaguered Chicago-based accounting firm.
"Andersen's worldwide training organization is being shut down," said one Andersen executive Monday. "This was announced by firm leadership Thursday, April 11th at the end of business. This will involve the layoff of all of the nearly 500 global training professionals."
Sources at the campus had feared that the firm's restructuring could have a dramatic impact on its training facility but few suspected Andersen would ditch the function all together.
The firm is thought to be looking at several alternative uses for the college-style St. Charles campus, which will remain open but with a "drastically" scaled down staff. All that now keeps the facility open is a contract to train employees for Accenture Ltd., formerly Andersen Consulting until the two firms split at the end of 2000.
At the time of the divorce, Accenture struck a five-year deal to train some of its 60,000 employees at the site, which it said recently it planned to continue and for which it pays an estimated $50 million annually, according to one source.
The St. Charles training center has been the envy of the accounting industry for its rigorous classes and professional atmosphere. Andersen bought the former home of a Catholic women's college north of downtown St. Charles in 1970 to use as its Center for Professional Education.
After an $80-million expansion in the late 1980s, the leafy 150-acre campus can accommodate 1,675 guests. It has 145 meeting rooms, three auditoriums, a fitness center and a bar. Andersen spends about $240 million, or 6 percent of its U.S. revenue, on training, much of which went to finance the St. Charles Campus.
Andersen sources at the campus said the firm has looked at a possible sale of the site, which is now valued in excess of $120 million. But potential buyers are hard to identify at present.
Andersen executives are said to be still formulating a long-term plan for the site given its scale and the current Accenture services agreement. The firm is also looking at opt-out clauses for lease agreements for three nearby office blocks, which are now unlikely to be required to house the facility's support and training staff.
Continued at http://www.smartpros.com/x33711.xml
Accounting Graduates Find Andersen Job Offers Rescinded Amid Woes --- http://www.smartpros.com/x33759.xml
A Sampling of Links from PowerWeb --- http://www.dushkin.com/powerweb/0072827564/
moreover... Partner Says Andersen Feared Probe -Paper...
iWon Mon Apr 22 05:37:00 CDT 2002
Partner says Andersen feared inquiry in Aug.-NYT...
iWon Mon Apr 22 04:54:00 CDT 2002
Andersen withering away...
Atlanta Business Chronicle Mon Apr 22 04:48:00 CDT 2002
401(k) 'fixes' won't prevent another Enron...
The Augusta Chronicle Mon Apr 22 04:43:00 CDT 2002
Andersen's Dutch arm to merge with Deloitte & Touche...
iWon Mon Apr 22 04:42:00 CDT 2002
Accounting firms face uncertain future...
Orlando Business Journal reg Mon Apr 22 04:39:00 CDT 2002
Hard times for CEOs and boards...
Sacramento Business Journal Mon Apr 22 03:01:00 CDT 2002
Enron 'Key' Issue for Democrats...
Roll Call Online Mon Apr 22 01:52:00 CDT 2002
There are some gems in the memoranda links on an Enron timeline at http://www.wikipedia.com/wiki/Enron/Timeline
Enron Sold Recipes on How to Cook the Books and Provided Its Own Chefs as Teachers --- http://www.trinity.edu/rjensen/fraud041202.htm#CreativeAccountingRecipes
Ever heard of Enron? Unusual funds shift boosts PeopleSoft results --- http://www.techblog.com/blogarchive/000484.html
Human resources software powerhouse PeopleSoft pulled a nifty accounting trick that has helped it turn development costs into income, the San Jose Mercury News reports. As reporter Elise Ackerman explains, in 1999 when Craig Conway took over PeopleSoft, the company knew it needed to rewrite its desktop software for the Internet and knew that process would cost a bundle. "But thanks to a creative accounting maneuver by his predecessor, PeopleSoft founder David A. Duffield, Conway didn't have to worry about crushing development costs," Ackerman reports. Six months before, Duffield had set up a subsidiary with $250 million. "PeopleSoft hired that subsidiary, Momentum Business Applications, to write new software, and Momentum, in turn, hired PeopleSoft programmers at a markup. The arrangement transformed the high cost of creating new programs into a source of revenue for PeopleSoft." As Ackerman discovered, not everyone in the business world finds the set up entirely kosher. "It is within the boundaries of generally accepted accounting principles, but it is really an intent to deceive," the story quotes Peter Knutson, an associate professor emeritus of accounting at the University of Pennsylvania's Wharton School. Worth reading.
"Bush's Aggressive Accounting," by Paul Krugman, The New York Times, February 5, 2002 --- http://www.jhu.edu/~pugwash/pugwash/articles/politics/krugman020502.html
Senator Kent Conrad actually got it wrong yesterday when he criticized the Bush administration's new budget for its Enron-like accounting. Last year's budget, the one that included that big tax cut, was the one with a strong touch of Enron about it. This year's budget involves a different, though equally pernicious, kind of aggressive accounting. Enron's illusion of profitability rested largely on "mark to market" accounting. The company entered into contracts that would yield profits, if at all, only over a number of years. But Enron jumped the gun: it treated the capitalized value of those hypothetical future gains as a current profit, which could then be used to justify high stock prices, big bonuses for executives, and so on.
And that's more or less what happened in last year's budget. The Bush administration took a bullish 10-year surplus projection — a projection that had a built-in upward bias, and in any case should have been regarded as no more than a guess — and treated it as if it were hard fact. On the basis of those surplus fantasies the administration — aided by an audit committee, otherwise known as the U.S. Congress, that failed to exercise due diligence — gave itself a big bonus in the form of a huge tax cut.
A year later the wrongness of the assumptions behind last year's budget is there for all to see, and in a rational world the administration would be called to account for misleading the American public. But instead the Bush administration has turned to the political equivalent of another increasingly common accounting trick: the "one-time charge."
According to Investopedia.com, one-time charges are "used to bury unfavorable expenses or investments that went wrong." That is, instead of admitting that it has been doing a bad job, management claims that bad results are caused by extraordinary, unpredictable events: "We're making lots of money, but we had $1 billion in special expenses associated with our takeover of XYZ Corporation." And of course extraordinary events do happen; the trick is to make the most of them, as a way of evading responsibility. (Some companies, such as Cisco, have a habit of incurring "one-time charges" over and over again.)
How Stock Options Become an Accounting Trick --- http://www.brill.com/news/2002/03/06/eng-thestreet_personal_fin/eng-thestreet_personal_fin_123749_253_042800191324.html
It's certainly good news for investors that bellwether companies such as General Electric (GE:NYSE - news - commentary - research - analysis), IBM (IBM:NSYE - news - commentary - research - analysis) and American International Group (AIG:NSYE - news - commentary - research - analysis) have announced that they will release more detailed information on their financials.
The changes will include more detail on the performance of individual business units, gains and losses from the sale of assets, and off balance sheet partnerships. It's unlikely that the extra information will be enough to enable investors to easily understand these three companies -- the authors today of truly inscrutable financial statements -- but it's a start.
Unfortunately, no CEO is volunteering to take on the biggest accounting issue hanging over U.S. companies and their stocks right now. Today's accounting rules for stock options make up the most powerful tool available for manipulating earnings. Stock options accounting is the 800-pound gorilla lurking in every discussion of accounting reform taking place right now: Everyone knows the issue is too big to ignore, but everyone worries that a serious fix would take down the entire technology sector -- and perhaps more.
That's not to say that absolutely no one is talking about it. Jeffrey Skilling, former CEO of Enron, brought up the topic at his recent appearance before the Senate Commerce Committee. Taunted by California Democratic Sen. Barbara Boxer for defending the right of a CEO to use his company's stock to improve his company's reported earnings, Skilling shot back that companies do it all the time. "You issue stock options to reduce compensation expense and therefore increase your profitability."
The rejoinder was particularly effective because Skilling, and everyone else in the room, knew that Boxer represents Silicon Valley, which lives and dies on stock options. In the mid-1990s, Boxer worked hard to kill accounting rules that would have ended the ability of companies to inflate their earnings through the use of stock options.
That battle went like this: Stock options clearly have value. Companies offer them to valued employees instead of cash compensation or as an extra reward for special achievement. Options are dangled in front of CEOs and other managers to motivate them to reach certain revenue or earnings targets. And financial analysts have even invented ways to value these options in the publicly traded market for options, where investors who want to hedge or leverage positions in a stock can buy the right to buy or sell shares at specific prices in the future.
But according to current accounting rules, companies that issue millions of shares of options each year don't have to charge a dime in cost against earnings. In 1993 the Financial Accounting Standards Board proposed rules -- pages and pages of them -- on how companies should value the options at the time they were issued and how they should subtract them from earnings.
After a bitter fight that included high-level congressional lobbying against the rules, the Financial Accounting Standards Board withdrew a key part of its proposal. Companies would not have to deduct the cost of options from their reported earnings unless they wanted to do so. Instead, they could provide a footnote to their financials stating what earnings per share would have been if the cost of options (calculated using the widely accepted Black-Scholes method for valuing options) had been deducted from earnings. And that's where investors can find the number today -- if they care to search for it. Small Print, Big Numbers That fine print hides some big numbers. In 2000 Intel (INTC:Nasdaq - news - commentary - research - analysis), for example, reported earnings of $1.73 a share. Pro forma earnings after deducting for the cost of options came to $1.40 a share, according to the company's 10-K filed with the Securities and Exchange Commission. At Cisco Systems (CSCO:Nasdaq - news - commentary - research - analysis), another big user of options, charging the cost of options against earnings would have increased the loss per share in the fiscal year that ended in July 2001 to 38 cents from the reported 14 cents. At eBay (EBAY:Nasdaq - news - commentary - research - analysis), including the cost of options would have reduced earnings for 2000 from a reported profit of 19 cents a share to a loss of 36 cents a share. And at Microsoft (MSFT:Nasdaq - news - commentary - research - analysis), accounting for the cost of options would have resulted in earnings of 91 cents a share for the year ended June 2001, instead of the reported $1.32 a share. You'll find these numbers in the footnotes to a company's financial statements in its annual 10-K.
The reductions in earnings per share at these technology companies -- 20% at Intel, for example -- are dwarfed by the drop in earnings per share at new technology companies that had to reprice options after their stocks tanked in 2000. Some of these companies had to issue huge numbers of new options in 2001 -- or still face the necessity of doing so in 2002 -- because options issued in 1999 and 2000 were so far underwater that they were valueless to the employees they were designed to compensate and motivate. Brocade Communications Systems (BRCD:Nasdaq - news - commentary - research - analysis), for example, issued 20 million options in April 2001 to workers whose existing options were underwater. For the fiscal year that ended in October 2001, Brocade reported earnings per share of 1 cent. By including the cost of options, that figure transforms into a pro forma loss of $2.68 a share.
But this is all just part of the way that options accounting distorts corporate earnings. The bigger problem -- and the much more lucrative side of options as far as corporate cash flow is concerned -- becomes evident when a company that has issued options to its employees goes to pay its tax bill. At this point a company gets to deduct the difference between the cost of the options at the exercise price and their market price.
For example, let's take a company whose employees exercised a million options in 2000. Those options had an initial average strike price of $80 a share. The initial Black-Scholes value of those options (taking into account such factors as the volatility of the stock, the time until the option expires, and the relationship between the price of shares and the price at which the option allows the option holder to buy shares) was roughly $20 a share. But the stock has moved up in price since the options were granted, and as the stock soared in price, the right to buy shares at $80 became increasingly valuable. By 2000, those options using the same Black-Scholes valuation method were worth $40 each. The company would, therefore, have been able to take a $40 million tax deduction for the "cost" of those options -- even though the initial "cost" was just $20 million. The higher the stock had climbed in price, the bigger the tax deduction would have been.
Have you noticed what's really so lucrative about this kind of tax accounting? The tax deduction expands along with any climb in the value of the stock. And it's not limited by the initial Black-Scholes cost of the option. Juicy Tax Break The resulting tax break can be very juicy indeed -- although it's not easy to find in a company's financial statements. You'll see it, though, if you go to the corporate cash flow statement and look for a line with a name like "Tax benefit from employee stock plans." That's how the figures are labeled in Intel's 2000 10-K, for example. That year, Intel's total tax break from options came to $887 million. At Cisco the total for fiscal 2001 came to $1.4 billion. At eBay it came to a comparatively paltry $37 million. And at Microsoft, a princely $2.1 billion in fiscal 2001.
In most years, I'd give any effort to reform this set of accounting and tax rules no chance at all. Lined up against reform you'll find the same powerful coalition of technology companies and politicians that killed tighter rules back in the mid-1990s. These folks are motivated to defend the status quo with energy and cash, and they have a lot of the latter. Reform, on the other hand, lacks a natural and energized constituency. You may be outraged that Intel can claim $1.73 a share in earnings when it really made $1.40, and that the company is getting a $900 million tax break from the U.S. Treasury to boot. But if you're an Intel shareholder directly or through a mutual fund, do you really want to see Intel's shares take another hit in exchange for accounting accuracy? Personally I believe that the long-term benefits to the capital markets of honest numbers are worth the short-term pain to individual stocks, but as an Intel shareholder I have to admit that I feel ambivalent about any call for reform, even my own.
However, thanks to the Enron fraud and scandal, this isn't a normal year, and the proponents of options accounting reform have come up with an ingenious strategy. (Especially ingenious because the Senate can't force the Financial Accounting Standards Board to adopt any specific accounting rules.) As written into Senate Bill 1940, it would offer companies a choice between keeping some of their tax breaks and giving up their accounting freebie. Companies that included the cost of options in their reported earnings numbers would, under the terms of the bill, still get to claim a tax deduction for the full cost of the option. Companies that didn't include the cost of options in their reported earnings wouldn't be entitled to a tax deduction at all. And all deductions would be limited to the original Black-Scholes value of the option -- no more sky's-the-limit deductions if the stock price soared like a rocket.
The bill's backers -- on the Democratic side of the aisle, Sens. Carl Levin, Richard Durbin and Mark Dayton, and on the Republican side, John McCain and Peter Fitzgerald -- still face a tough fight even to get this legislation out of the Senate Finance Committee. And I suspect that the legislation has even less chance of success in the House of Representatives.
But the Enron scandal, and the other investigations into the activities of companies such as Global Crossing (GBLXQ.OB:OCT BB - news - commentary - research - analysis), could produce a surprise with the potential to create enough investor anger to push proposals like this into law. Watch the progress of SB 1940 carefully. If it gets out of committee, this bill could make technology investors even more nervous than they are now.
Rice professor examines Enron meltdown --- http://www.rice.edu/projects/reno/rn/20020228/Templates/dharan.html
The best single source (not concise) of the many Raptor deals is the Powers Report: The 208 Page February 2, 2002 Special Investigative Committee of the Board of Directors (Powers) Report--- http://news.findlaw.com/hdocs/docs/enron/sicreport/
From the FEI Foundation
FALLOUT FROM ENRON
In the February FEI-NACT Treasurers Newsletter, see the link to the "Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp." (Powers Report): http://i.cnn.net/cnn/2002/LAW/02/02/enron.report/powers.report.pdf . Cheryl de Mesa Graziano, Manager of Research at the FEI Research Foundation, analyses the Powers Report in a recent Issues Alert http://www.fei.org/rfbookstore/PubDetail.cfm?Pub=110 .
It highlights Enron's failures in executing the transactions involving Special Purpose Entities (SPEs) and emphasizes oversight shortfalls at many levels, including conflicts of interest and corporate governance issues. Of special interest are analyses of two key SPEs, the Chewco transactions and the LJM transactions. Graziano comments: "The problem was that Chewco was financed primarily with Enron debt, rather than at-risk equity from an outside investor. The Powers Report estimates that Chewco was more than 50% short (at least $6.6 mill!ion) of the 3% required equity."
The Spring 2002 issue of Strategic Investor Relations includes the article, "Fallout from Enron: The Finance Function Perspective," by FEI President Phil Livingston. Livingston discusses the causes of the crisis, what happened at Enron, and his recommendations for change. Click here for the full article: http://www.ii-sir.com/common/getArticle.asp?ArticleID=18020 . Enron has also influenced the agendas of both the SEC and the FASB, as Francine Mellor of Ernst & Young discusses in her column below.
RECENT DEVELOPMENTS AT THE SEC AND THE FASB Francine Mellors, Ernst & Young, New York
SEC RELATED ISSUES Informative And Timely Disclosures The SEC plans a series of rule proposals to improve the financial reporting and disclosure system. The first rule would codify FR-60 and require MD&A disclosure about critical accounting policies. The second should significantly expand the number of events that must be reported in a Form 8-K filing. That rule proposal also is expected to accelerate the filing of the Form 8-K following reportable events. A third is expected to accelerate the deadline to file annual and quarterly reports with the SEC. The SEC said that it intends to propose accelerating the due date of Form 10-K from 90 days after year-end to 60 days, and quarterly reports on Form 10-Q from 45 days after quarter-end to 30 days.
Other SEC rule proposals are expected to require more timely reporting of significant transactions by corporate insiders, and to require timely posting by public companies of their SEC reports on their company websites. Click here for copies of current SEC proposals: http://www.sec.gov/rules/proposed.shtml .
(The FEI Research Foundation staff is currently preparing MD&A Trends and Techniques: What's New for 2001, an Issues Alert that scheduled for late April release. This report will summarize current best practices in preparing MD&A, including critical accounting policies, forward-looking information and sensitivity analysis, credit rating information, and segment information analysis. Check availability at http://www.fei.org/rfbookstore/default.cfm .)
Accounting Roundtables The SEC hosted three recent Financial Disclosure and Auditor Oversight roundtables in New York City, Washington, D.C. and Chicago; others may follow. An "Investor Summit" is scheduled in May to solicit input from investors. The roundtables discussed potential reform measures to improve corporate disclosure requirements and restructure the regulation of the accounting profession. The financial disclosure panel discussions focused on the information needs of investors, making financial disclosures more intelligible, and accelerating financial communications. The auditor oversight panel discussions focused on the structure, membership and funding of a new accounting and auditing oversight body. For a transcript of the March 4 Roundtable, click here: http://www.sec.gov/spotlight/roundtables/accountround030402.htm . For information about other Roundtables, click here: http://www.sec.gov/spotlight/accounting2.htm .
SEC Reporting Following Andersen Indictment On March 18, the SEC issued guidance for Andersen clients in light of the March 14 indictment of Arthur Andersen LLP. It addresses procedural matters in a variety circumstances that Andersen clients may encounter in SEC filings. The SEC will accept financial statements audited by Andersen provided Andersen continues to provide specific assurances regarding its audits. The SEC has adopted a number of relief measures, effective immediately, to minimize potential disruption if an Andersen client must or chooses to change auditors. Check availability at http://www.sec.gov/news/headlines/andersenreqs.htm .
New Project on SPEs at the FASB The FASB's project on consolidations has been on its agenda for almost 20 years. The project was tabled in January 2001 after several FASB members questioned the "operationality" of certain provisions of the proposed consolidation model as set forth in the original Exposure Draft (i.e., the four presumptions of control). Many felt the problem was special purpose entities (SPEs) and not the basic more than 50% long-standing rule. Due to recent changes in the Board's membership and because of Enron's downfall, the project was rekindled in the 4Q01 to address issues involving SPEs.
The Board has tentatively concluded that additional interpretive guidance relating to identifying and accounting for SPEs will be issued in the form of a proposed Interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and FASB Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, (the Interpretation). Statement 140 qualifying SPEs will be excluded from the scope of the interpretive guidance. The FASB plans to issue an Exposure Draft soon and to finalize the Interpretation by July 31, 2002.
The Interpretation's objective is to provide consolidation accounting guidance for SPEs, recognizing that the ARB 51 and Statement 94 control-based approach does not adequately consider the uniqueness of SPEs in which controlling rights may not be substantive. SPEs typically have limited abilities and enter into activities that are specified by predetermined arrangements. As a result, the FASB is redirecting the focus of determining whether or not a primary beneficiary should consolidate an SPE to the economic substance of the SPE and away from an assessment of control over the entity. Under the proposed Interpretation, entities that lack sufficient independent economic substance will have to be consolidated by their primary beneficiary.
The fundamental issues revolve around the characteristics of an SPE (i.e., when does an SPE exist), determining whether it has sufficient independent economic substance, and determining the party that is the primary beneficiary. The primary beneficiary is assumed to control the activities of the SPE and establishes its control either through the documents that establish the SPE or some other mechanism.
Another significant issue revolves around multi-seller/multi-lease conduit entities that lack sufficient independent economic substance. The Board has tentatively agreed that multi-seller/multi-lease conduit entities that lack sufficient independent economic substance and in which a single primary beneficiary cannot be located, would generally have to be disaggregated and each transferor/lessee would record its own assets and related portion of the obligations.
The proposed Interpretation in its preliminary form will mean that most off-balance sheet leasing arrangements, as well as most structured financing arrangements, in their current forms would not hold up to the proposed guidelines and will likely be consolidated by their primary beneficiaries at the effective date of the Interpretation. It is expected that the final Interpretation will be effective for all SPEs on the first day of the first fiscal year beginning after December 15, 2002 (January 1, 2003 for calendar year-end companies); thus, there will be no grandfathering. However, all SPEs created after the issuance of the final Interpretation (July 31, 2002) are expected to have to apply the new guidance.
(Cheryl de Mesa Graziano has written an FEI Research Foundation Issues Alert, Special Purpose Entities: Understanding the Guidelines. For free download click here: http://www.fei.org/rf/download/SPEIssuesAlert.pdf . This Issues Alert describes the basic characteristics of an SPE, provides a simple timeline of the Enron SPEs, and summarizes existing accounting guidance for SPEs. This is a must read if you have any dealings with SPEs.)
Faces Crisis of Competence,
Not Integrity "
Andersen-itis" Isn't What Ails the Industry --- http://www.smartpros.com/x33636.xml
The real cause for concern is a crisis of competence that is eroding customer satisfaction with external auditors in corporate America, says an April 2002 survey of companies that purchase outside accounting services conducted by NFO WorldGroup, one of the world's leading providers of research-based marketing information and counsel.
Using the NFO TRI*M Index, an innovative relationship and reputation management tool, businesses using outside auditors give the profession an overall performance score of 61 equivalent to a D grade. By comparison, general B2B services average 80 (B). Top performing businesses with the strongest relationships fall in the range of 90 to 100 (A).
This low rating is reflected in client evaluation of auditor performance. Fifty-five percent of the respondents ranked overall performance of their auditor as excellent or very good, compared to 70 percent to 75 percent typically seen in the professional services. Similarly, only 55 percent said they definitely or probably would recommend their auditors to business colleagues, versus 75 percent to 80-percent for the professional services category.
"These weak scores should be a clear warning bell that the accounting profession has serious, fundamental client relationship problems that are different from the issues dominating the headlines about Andersen and Enron," explained Shubhra Ramchandani, stakeholder management practice leader for North America, NFO WorldGroup, and leader of the TRI*M study. "The problem isn't integrity -- it is value. Most clients rate their outside accountants' business ethics very highly, but what they question is the performance and value of the services they receive. The NFO TRI*M research reveals some vital insights into what the profession can do to raise its D grade to an A for customer satisfaction and loyalty."
According to the TRI*M results, the respondents gave HIGH performance marks to auditors in regards to:
- "Company I can trust"
- "Employees that are committed to personal ethics"
- "Culture of business integrity"
- Commitment to "maintaining a position of independence as an auditor."
However, the industry scored AVERAGE to BELOW AVERAGE on critical performance factors like:
- "Expertise in my industry"
- "Has a staff we can rely on for providing the right advice"
- "Has a staff that is responsive to our needs"
- "Is dedicated to being a reliable advisor for the financial aspects of our business"
- "Capability to provide expert advice and insights on business risks associated with accounting treatments"
- "Has a staff that is competent in understanding complex financial structures used by some businesses"
- "Competence in recommending the right level of financial controls"
- "Readiness to address auditing needs in an environment of changing regulations"
- "Provides solutions to help us make business decisions that are in the best interests of our company and its shareholders"
- "Has the confidence of investors for providing appropriate disclosure to flag business risks"
- "Is well prepared for the future"
- "Communicates with us effectively"
Loss of Reputation is a Kiss of Death
for a Public Accounting Firm: An Empirical Study
Andersen Audits Increased Clients' Cost of Capital Relative to Clients of Other Auditing Firms
Especially note the graph after October 1991!
"The Demise of Arthur Andersen," by Clifford F. Thies, Ludwig Von Mises Institute, April 12, 2002 --- http://www.mises.org/fullstory.asp?control=932&FS=The+Demise+of+Arthur+Andersen
From Yahoo.com, Andrew and I downloaded the daily adjusted closing prices of the stocks of these companies (the adjustment taking into account splits and dividends). I then constructed portfolios based on an equal dollar investment in the stocks of each of the companies and tracked the performance of the two portfolios from August 1, 2001, to March 1, 2002. Indexes of the values of these portfolios are juxtaposed in Figure 1.
From August 1, 2001, to November 30, 2001, the values of the two portfolios are very highly correlated. In particular, the values of the two portfolios fell following the September 11 terrorist attack on our country and then quickly recovered. You would expect a very high correlation in the values of truly matched portfolios. Then, two deviations stand out.
In early December 2001, a wedge temporarily opened up between the values of the two portfolios. This followed the SEC subpoena. Then, in early February, a second and persistent wedge opened. This followed the news of the coming DOJ indictment. It appears that an Andersen signature (relative to a "Final Four" signature) costs a company 6 percent of its market capitalization. No wonder corporate clients--including several of the companies that were in the Andersen-audited portfolio Andrew and I constructed--are leaving Andersen.
Prior to the demise of Arthur Andersen, the Big 5 firms seemed to have a "lock" on reputation. It is possible that these firms may have felt free to trade on their names in search of additional sources of revenue. If that is what happened at Andersen, it was a big mistake. In a free market, nobody has a lock on anything. Every day that you dont earn your reputation afresh by serving your customers well is a day you risk losing your reputation. And, in a service-oriented economy, losing your reputation is the kiss of death.
Gelernter Blames Enron Collapse On Hierarchical File ... ... Please. The guys at Enron were able to sneak by all the safeguards of the law ... have used cryptic terms like "CHEWCO" instead of "my unethical accounting trick" --- http://nooface.net/articles/02/02/21/1640254.shtml
And that's the way it was on April 20, 2002 with a little help from my friends.
Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm
March 2000, Forbes named AccountantsWorld.com as the Best Website on the
Web --- http://accountantsworld.com/.
Some top accountancy links --- http://accountantsworld.com/category.asp?id=Accounting
For accounting news, I prefer AccountingWeb at http://www.accountingweb.com/
Another leading accounting site is AccountingEducation.com at http://www.accountingeducation.com/
Paul Pacter maintains the best international accounting standards and news Website at http://www.iasplus.com/
How stuff works --- http://www.howstuffworks.com/
Jensen's video helpers for MS Excel, MS Access, and other helper videos are at http://www.cs.trinity.edu/~rjensen/video/
Accompanying documentation can be found at http://www.trinity.edu/rjensen/default1.htm and http://www.trinity.edu/rjensen/HelpersVideos.htm
Robert E. Jensen (Bob) http://www.trinity.edu/rjensen
Jesse H. Jones Distinguished Professor of Business Administration
Trinity University, San Antonio, TX 78212-7200
Voice: 210-999-7347 Fax: 210-999-8134 Email: email@example.com