Accounting Scandal Updates on August 20, 2002
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 

Sharing Professor of the Week  (Education, Teaching, Case Method, Enron)
Not all of Professor Bruner's online materials are are free, but he does have some free Website materials at http://faculty.darden.edu/brunerb/ 
I have also ordered some of his materials that can be purchased, because they really look interesting.

Some great materials (cases, papers, etc.) from one of the finest finance professors in the world are available online (for a fee).  I discovered these in the August 13, 2002 interview with Robert Bruner in a newsletter called FinanceProfessor News.  Sign up for the Free FinanceProfessor.com newsletter! Indeed have your classes do so as well. It is free and your name and address will never be given out or sold. http://www.FinanceProfessor.com 

HOME PAGE: http://faculty.darden.edu/brunerb/

Abstract: Socrates’ Muse: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=320808

Case: Enron 1986-2001 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=302155

Case: Enron’s Weather Derivatives http://papers.ssrn.com/sol3/papers.cfm?abstract_id=274195

Note to the Student: How to Study and Discuss Cases; http://papers.ssrn.com/sol3/papers.cfm?abstract_id=274201

Essay: “Opening a Course:” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=178748

Essay: “Setting expectations”: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=274203

Case Studies in Finance, Fourth Edition http://www.amazon.com/exec/obidos/ASIN/0072338628/finpapers/104-9378365-5272442

A complete listing for Robert Bruner on SSRN: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=66030

Educator: Courses, Cases and Teaching --- http://www.ssrn.com/update/fen/fen_educator.html 
Editors: Robert F. Bruner and Peter Tufano and Kent Womack
Darden Graduate School of Business Administration, University of Virginia and Harvard Business School and Dartmouth College

Major New Law in the Wake of the Accounting and Finance Scandals
SARBANES-OXLEY ACT OF 2002 --- http://financialservices.house.gov/media/pdf/H3763CR_HSE.PDF 
Provisions that include the following:

Most items of the original Sarbanes bill prior to the House and Senate Conference Committee revisions remain intact.  For a helpful summary, see http://www.aicpa.org/download/info/Summary%20of%20Sarbanes%20Bill%207-18-02.doc 

A detailed summary of the Act can be downloaded from http://www.fei.org/download/shepleranalze.pdf 

Hi Dan,

A detailed summary of the SO Act (which might better be termed the SOS Act) can be downloaded from http://www.fei.org/download/shepleranalze.pdf 

Bob Jensen's current threads on the act can be found at http://www.trinity.edu/rjensen/fraud082002.htm 

Two points made in the AAA meetings in San Antonio are that the jail time increase is largely a sham. There are no new funds at the Justice Department to enforce the new law, and there were few serious convictions in the past when the penalties were more limited. It is not likely that the threat of added jail time have deterred the executives recently arrested.

A second point is that the five-year rotation provision is very burdensome on small client audits. The example given by Robert Herdman is the case where a senior manager on a small audit is normally in line to become the audit manager. Having said this, I think the idea of rotation of lead partners is a very good idea.

There are many other provisions that have yet to be sorted out. I personally think the task of the oversight board (that I previously called the Lone Rangers when Harvey Pitt exposed the idea) is too overwhelming to be effective and efficient. What I truly hope is that the board restores substantive testing as a more serious component of auditing. Substantive testing may not be very effective in uncovering fraud, but the threat of serious substantive testing is an effective deterrent in many instances. There are rumors that substantive testing was steadily on the decline in Andersen audits. The extent to which this is a fact remains a research question.

What disappointed me in the SO Act is the failure to encourage and reward more whistle blowing. Therein lies the real power of keeping the system honest in a litigious society like the U.S.

What does seem to be working is the fear, among virtually all executives, that the future of equity markets is at stake unless the system is repaired in reality to a point where investors regain confidence in equity investments. Big corporations are now viewed as more criminal than the Mafia, because some CEOs make more money than Mafia leaders and have more power.

If you missed Bill Kinney's presentation in Plenary Session 3 in San Antonio, you missed one of the most powerful and tearful presentations on the distorted power of top management over Boards of Directors, Audit Committees, Auditors, Analysts, and government officials in the federal and state legislatures. I hope to make Bill's PowerPoint slides available at my Website in the future (I only wish I could capture his tear stains on each slide).

Too many of our corporate watchdogs have become CEO pet rocks.

Bob Jensen

-----Original Message----- 
From: Dan Stone [mailto:dstone@UKY.EDU]  
Sent: Tuesday, August 20, 2002 9:37 AM 
To: AECM@LISTSERV.LOYOLA.EDU 
Subject: HR3763

I’m preparing to teach classes in accounting consulting & graduate accounting systems this year. I’m wondering if anyone has seen or created teaching materials related to HR3763 – the corporate & accounting reform bill (often called, “the Sarbanes-Oxley Act of 2002”). Obviously, there is much here that is relevant to our students.

I found some information at the following sites:

Law firm website: http://www.ffhsj.com/cmemos/020802_sarbanes_cover.htm 

FMS: http://www.fmsinc.org/cms/?pid=3253 

AICPA: http://www.aicpa.org/info/sarbanes_oxley_summary.htm 

Bob Jensen's summary of other proposed reforms can be found at http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

From the The Wall Street Journal Accounting Educators' Review on August 1, 2002

TITLE: Corporate-Oversight Bill Passes, Eases Path for Investor Lawsuits 
REPORTER: Richard B. Schmitt, Michael Schroeder and Shailagh Murray 
DATE: Jul 26, 2002 
PAGE: A1 
LINK: http://online.wsj.com/article/0,,SB1027614152831614080.djm,00.html  
TOPICS: Accounting, Audit Quality, Auditing, Code of Ethics, Consulting, Corporate Governance, Financial Accounting Standards Board, Regulation, Securities and Exchange Commission, Shareholder Class-Action Lawsuit, Standard Setting

SUMMARY: In response to a growing number of fraudulent financial reporting cases, Congress approved legislation with significant implications for the accounting profession. Questions focus on the nature of the changes and the future of accounting.

QUESTIONS: 
1.) Describe the major changes in the legislation passed by Congress. Briefly discuss positive and negative implications of each of the components of the legislation.

2.) Why was there a need for the changes included in the legislation? Compare financial reporting in 2001 to financial reporting in 1929. What changes were made in the early 30s in response to financial reporting in the late 20s? How do the changes of the early 30s compare to the legislation passed by Congress in 2002?

3.) Which of these changes will have the greatest impact on the accounting profession? Discuss how this change will affect the accounting profession in the future.

4.) What is a class-action lawsuit? Describe President Bush's position on class-action lawsuits. Is the legislation passed by Congress consistent with this position?

5.) How do you think that the increased threat of litigation will change the quantity and quality of accounting majors? What changes to accounting education are needed to prepare students for the future business environment?

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

--- RELATED ARTICLES --- 
TITLE: Governance Bill Has Major Consequences for Many 
REPORTER: Shailagh Murray and Michael Schroeder 
PAGE: A4 
ISSUE: Jul 26, 2002 
LINK: http://online.wsj.com/article/0,,SB1027634549164185880.djm,00.html 

~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ + ~ +

TITLE: Dock Workers, Operators Agree To Suspend Their Contract Talks 
REPORTER: Daniel Machalaba and Queena Sook Kim 
DATE: Jul 29, 2002 
PAGE: A6 
LINK: http://online.wsj.com/article_print/0,,SB1027893201979221560,00.html  
TOPICS: Information Technology, Managerial Accounting, Productivity

SUMMARY: Machalaba and Kim continue their reports on the state of contract negotiations between the unions and management on the West Coast docks. The issues remain the same: jobs versus technological innovation. The terminal operators and union representatives have agreed only to suspend talks aimed at reaching a new labor agreement.

QUESTIONS: 
1.) What is the theory of constraints? What is the principle bottleneck in the two West Coast docks? How does the Pacific Maritime Association go about dealing with this constraining factor?

2.) If the capacity of this constrained factor should increase, what effects would it have on shippers? Wholesalers? Retailers? Consumers? Union workers?

3.) Re-read the related article. What would happen to the productivity measure discussed in that article should the status quo be maintained? Would it stay the same? As a practical matter, what can the customers of the docks do to mitigate the problems of the constrained facility? Whether the docks are updated with new technology or not, what is the long-range effect on the number of union jobs at those docks?

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

--- RELATED ARTICLES --- 
TITLE: West Coast Docks Face a Duel With Union About Technology 
REPORTERS: Daniel Machalaba and Queena Sook Kim 
PAGE: A2
ISSUE: May 12, 2002 
LINK: http://online.wsj.com/article_print/0,,SB1021587751767361880,00.html 

 

AICPA News Alert

Dear Fellow CPA: 

This is a time of unprecedented change for the CPA profession. Scrutinized on Capitol Hill and under attack from the media following Enron, WorldCom and other high profile business failures, our profession’s self-regulation and sacred trust have been called into question.   In the wake of this turbulent environment, President Bush signed into law on July 30, 2002, the most significant legislation affecting the accounting profession since 1933-- the Sarbanes-Oxley Act of 2002. 

This new legislation brings uncharted waters for the CPA profession, particularly in the areas of standard setting and quality review.  The AICPA has been studying these changes and is here to provide you with the information you need to navigate this complex situation.  This e-mail highlights both our efforts during the past months and provides several items: (1) a summary of the new legislation, (2) a list of the provisions that will most affect the accounting profession, and (3) an overview of resources to help you understand the legislation and its impact on the profession.  You will continue to receive similar updates in the months ahead.

One of the resources we have created to help members work through the legislation is a toll-free number.  Members who have questions about the new law and how it will impact their firm or company, should call 866-265-1977.  The hotline will be staffed Monday through Friday for the remainder of 2002.  More details, as well as a list of other resources, are available later in this e-mail.

As we move forward to address these developing issues, let us be clear. We are determined to restore the public’s faith, and the faith of our members, in the honorable credential of CPA.  Our profession’s core values always have been and will be: integrity, competence, and objectivity.  As the vision statement that grew out of the grassroots efforts of CPAs across the nation asserts, CPAs are the trusted professionals who enable people and organizations to shape their future.

Hundreds of thousands of CPAs serve the public interest each and every day.  We cannot allow a handful of CPAs and the fierce search for blame to taint the 340,000 CPAs in this country who stand by our values and make hard, ethical decisions without hesitation.

Unfortunately, the media, political and legislative fervor have frequently drowned out our simple and unshakeable message: This profession and its professional association cannot and will not tolerate any member in corporate America who seeks to commit fraud.  Nor will we tolerate any AICPA member who performs substandard work and veers away from the fundamental code of ethics and responsibilities that have defined the CPA profession for over a hundred years.  These are values we have labored long and hard to communicate to the press, to the public and to our membership.

We have walked a difficult road these past few months, determined to do the right thing by the public and by the honorable men and women in this profession.  Developing meaningful reforms that protect the public interest and restore confidence in the accounting profession has been our primary focus. Thousands of volunteer and staff hours have been committed to educating and testifying before Congress, working with the media, analyzing the issues and identifying new reforms. In the end, the new legislation recently signed by President Bush does reflect our influence in measures that distinguish between auditors of publicly traded companies and those of private entities.

The Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 dramatically affects the accounting profession and impacts not just the largest accounting firms, but any CPA actively working as an auditor of, or for, a publicly traded company or any CPA working in the financial management area of a public company.

Essentially, the Act creates the five-member Public Company Accounting Oversight Board (PCAOB), which has the authority to set and enforce auditing, attestation, quality control, and ethics (including independence) standards for public companies.  It is also empowered to inspect the auditing operations of public accounting firms that audit public companies as well as impose disciplinary and remedial sanctions for violations of the board’s rules, securities laws and professional auditing standards.

Other provisions affecting the profession include requiring the rotation of the lead audit partner and reviewing audit partner every five years and extending the statute of limitations for the discovery of fraud to two years from the date of discovery and five years after the act (previously one year and three, respectively). The bill restricts the consulting work public company auditors can perform for their public audit clients and establishes harsh penalties for securities law violations, corporate fraud and document shredding.  To read a detailed description of the Sarbanes-Oxley Act, go to http://www.aicpa.org/info/sarbanes_oxley_summary.htm.

The ramifications of some of the provisions in the Sarbanes-Oxley Act will become known only as the SEC and the new Public Company Accounting Oversight Board begin implementing the bill.  We will continue to analyze the legislation and keep you informed of how it will impact the profession.  These are the areas you should be aware of:
 

 AICPA Support for Meaningful Reform


 There is no question that the provisions of the Sarbanes-Oxley Act are challenging.  Shortly after Enron’s collapse, we realized that the public who relies on the services of public company auditors no longer accepted our system of self-regulation and that we needed to take the lead in pursuing significant reform.  We called for meaningful changes to strengthen the capital market system and increase public confidence.  We advocated—

 

 

Our calls were ultimately heard by Congress and many of our goals are reflected in the final Sarbanes-Oxley Act. 

But it will take more than legislation to restore investor confidence in the capital markets and in the audit function.  We continue to encourage the FASB to address the meaningfulness of the financial reporting model and the related disclosures.  Also, fundamental changes are forthcoming to the audit risk model currently under consideration by the AICPA’s Auditing Standards Board.  In the near term, we expect the Auditing Standards Board to issue a new standard on fraud, which will significantly enhance the auditor’s procedures and processes to detect material fraud in financial statements.
 

Your Professional Resource

To help you understand the ramifications of the Sarbanes-Oxley Act of 2002, the AICPA is developing several resources.  A new toll-free number is available for any questions your firm or company may have about the legislation, how it will be implemented and how to comply.  The hotline will be staffed Monday through Friday for the remainder of 2002. Call 866-265-1977 and select the option that is most appropriate for your firm or company.  You will receive a response within twenty-four hours.
 

In addition, the AICPA will be creating periodic Webcasts to brief members on issues as they emerge, as well as short video clips and news alerts that will be sent to members through e-mail.  To change your e-mail address, please call Member Satisfaction at 888-777-7077 or e-mail memsat@aicpa.org.

Firm leaders also are encouraged to attend “A Profession in Crisis…Preparing Today for Tomorrow,” scheduled for November 11-13 in Phoenix, Arizona.  This symposium, developed by the AICPA MAP Committee, will discuss the reforms on Capitol Hill, the latest developments in the profession, perspectives from government and legislative leaders, as well as provide a forum for questions in an interactive Town Hall.  Event highlights include an address by David M. Walker, Comptroller General of the United States, and a dialogue with Joseph Berardino, former CEO of Arthur Andersen.  For more information or to register, please visit  http://www.aicpa.org/conferences/crisis_profession.htm or call toll free 888-777-7077/direct 201-938-3000.  PCPS member firms can also find information at www.pcps.org/member/member_resources.html.

We are also working to determine the appropriate role of the SEC Practice Section within the framework of the new oversight board and to work with the SEC to establish an orderly transition of SEC Practice Section activities.  Additional regulations will be forthcoming from the SEC and the PCAOB.  We will keep you informed as this process moves forward.  In the meantime, all of our standard setting work will continue.  There is important work that needs to be done and it is in the best interest of the public and the profession to keep those activities moving forward during this new era.

Our Council and Board of Directors have been our unwavering guide during the past months.  With representatives from every segment of the profession-- seven from small firms; four from medium firms and two from large firms; four from business and industry; one each from government and education; and three public members-- the Board continues to be your voice, sharing your thoughts and concerns.

As the national professional home for CPAs, we share your deep concern over this situation and its effect on our business communities and profession. Rest assured that the AICPA will continue to be on the frontlines in the media and on Capitol Hill, sharing the profession’s core values and the unwavering ethical commitment for which CPAs have always been known.  We are dedicated to restoring the public confidence in the CPA as America’s most trusted financial advisor and guardian of the public interest.

Yours sincerely,

James G. Castellano, CPA
Chair of the Board


Barry C. Melancon, CPA
President and CEO

Visit http://www.aicpa.org/info/index.htm for more information on federal and state legislation, the profession’s response, exposure drafts, communications to members, financial reporting and other related issues.

To share your comments, please send an e-mail to AICPANewsUpdate@aicpa.org.

To opt out or opt in to all AICPA electronic mailings, please send an e-mail with your membership number to memsat@aicpa.org.

"Merrill Defends Enron Research But Analyst Says Pressure Existed,"
Charles Gasparino and Randall Smith, Wall Street Journal, July 31, 2002

During more than two decades as a stock-research analyst, many of them covering big energy companies, John Olson has spoken with many top executives. But none of those conversations stood out like the one he had with Kenneth Lay. In the late 1990s Mr. Lay, the Enron Corp. chief executive, was unhappy that Mr. Olson, then at Merrill Lynch & Co., had placed a "neutral" rating on Enron stock, and wanted him to upgrade his call, the analyst says. Mr. Olson says in an interview that Mr. Lay told him he "just didn't get it."

But Mr. Olson, now 60 years old, says he wouldn't budge. So Mr. Lay complained to Merrill investment bankers who at the time were denied Enron investment-banking business and the lucrative underwriting fees they produced. "We are for our friends," Mr. Olson says Mr. Lay told him. It was only after Mr. Olson left Merrill under pressure in August 1998 that Merrill eventually did win tens of millions of dollars in Enron banking business and upgrade the company's stock to an "accumulate." It is "very, very clear why I left Merrill," says Mr. Olson, now at Sanders Morris Harris, a small Houston securities firm. "There was a clear preference for positive recommendations regarding Enron, and I wasn't going to give them that."

A Merrill spokesman vigorously denies that Mr. Olson was forced out because of his negative calls. "We had a consolidation in research," says Merrill spokesman Bill Halldin. A spokeswoman for Mr. Lay said he had no comment. What is undeniable is the close relationship between Merrill and Enron, which was the focus of a congressional hearing Tuesday. The hearing -- which focused on previously disclosed transactions Merrill did with Enron, as well as Mr. Olson's dealings with the former energy company -- has turned up the heat at Merrill and comes as federal investigators begin to zero in on the roles of big securities firms and banks in Enron's spectacular collapse last year. "Investors trusted you," Democrat Richard Durbin of Illinois said at Tuesday's hearing. "They believed you were the cop on the beat. Instead, you were the dog in the lap." G. Kelly Martin, president of Merrill's international-brokerage division, responded that the research process is "rigorous" and operates as a separate part of the firm. But he added, "We don't get everything right, as human beings."

Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/fraud.htm#Cleland 

From The Wall Street Journal Accounting Educators' Review on July 27, 2002

TITLE: Merrill Changes Methods Analysts Use for Estimates 
REPORTER: Karen Talley DATE: Jul 24, 2002 
PAGE: C5 
LINK: http://online.wsj.com/article/0,,BT_CO_20020724_009399.djm,00.html  
TOPICS: Accounting, Earnings Forecasts, Financial Accounting, Financial Analysis, Financial Statement Analysis

SUMMARY: Merrill Lynch & Co. has reported that it will begin forecasting both GAAP based earnings estimates in addition to pro forma earnings measures. To accommodate Merrill Lynch & Co., Thomson First Call will collect and report GAAP estimates from other analysts.

QUESTIONS: 
1.) Compare and contrast GAAP earnings and pro forma earnings?

2.) Why do analyst forecast pro forma earnings? Will GAAP earnings forecasts provide more useful information than pro forma earnings forecasts? Support your answer.

3.) Discuss the advantages and disadvantages of analysts forecasting both pro forma and GAAP earnings. Should analysts continue to provide pro forma earnings forecasts? Should analysts also provide GAAP earnings forecasts? Support your answers.

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 pro forma reporting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma 

Citigroup, J.P. Morgan Chase: Big Fees and Favors in Enron Dealings --- http://www.smartpros.com/x34810.xml 

“The evidence indicates that Enron would not have been able to engage in the extent of the accounting deceptions it did, involving billions of dollars, were it not for the active participation of major financial institutions willing to go along with and even expand upon Enron’s activities,” Roach said at the hearing of the investigative panel of the Senate Governmental Affairs Committee.

Both Citigroup, the nation's largest financial institution, and J.P. Morgan Chase have called the arrangements appropriate.

"The transactions we entered into with Enron were entirely appropriate at the time based on what we knew and what we were told by Enron," claimed a Citigroup announcement Tuesday on its Web site. "We were assured that Enron’s auditors had approved them and we believed they were consistent with accounting rules in place at the time."

Tuesday's tumble in stock prices for both Citigroup and J.P. Morgan Chase came as investigators for the Senate's Permanent Subcommittee on Investigations said Citigroup and J.P. Morgan Chase assisted Enron for years by lending the collapsed energy trader billions of dollars through disguised commodity trades. The Subcommittee also said that some banks, including Citigroup, helped Enron hide debt in the months prior to Enron's bankruptcy.

Bob Jensen's "Rotten to the Core" threads are at http://www.trinity.edu/rjensen/fraud.htm#Cleland 

From the New York Stock Exchange --- http://www.nyse.com/abouthome.html?query=/about/report.html 

The NYSE Board of Directors has approved new standards and changes in the corporate governance and practices of NYSE-listed companies.

The following is the principal text of the related rule filing submitted by the Exchange to the Securities and Exchange Commission on August 16, 2002.

August 16, 2002: Corporate Governance Rule Filing

June 6, 2002: Original Recommendations of the Corporate Accountability & Listing Standards Committee

Related Information:

August 2002 Newsletter Article: NYSE Approves Measures to Strengthen Corporate Accountability

Aug 1, 2002: Webcast of Nightly Business Report's CEO Roundtable

Aug 1, 2002 Press Release: NYSE Approves Measures to Strengthen Corporate Accountability

  July 9, 2002: NYSE's Dick Grasso Statement on President Bush's Speech on Corporate Responsibility

Your Market July 2002: Straight Talk for Investors from the New York Stock Exchange

June 20, 2002: Statement from NYSE Chairman and CEO Dick Grasso on SEC's Proposed Rules on Accounting Profession Oversight Board

June 2002 Newsletter: Accountability Report Sets Higher Bar

June 6, 2002 Press Release: NYSE Board Releases Report of Corporate Accountability and Listing Standards Committee

Related Regulations:

Press Info:

Research Analyst Conflict of Interest

Auditing Articles from CFO.com --- http://www.cfo.com/channelarchives/1,5509,775|2|1,00.html 

Auditing

Audit Regulation
Beast or Burden?
August 01, 2002

Big Five Get Low Grades for Performance
Survey shows that auditors mostly fail to uncover bookkeeping irregularities, and often fail to warn about clients headed for Ch.11.
July 12, 2002

Is Auditor Rotation Coming?
Some lawmakers want companies to rotate their independent auditors. Is this such a good idea?
June 05, 2002

Teetering on the Brink -- But No Audit Warning
Report: auditors often fail to provide caution in filings of foundering companies; more likely to raise concerns about smaller clients.
April 25, 2002

Auditors Get a Near-Failing Grade, say Clients
Survey reveals rating for auditors lags far behind marks for other service providers. Corporate clients say value, not values, the problem.
April 12, 2002

Audit Committee Recruiting a Tough Sell
Can't give It away.
April 01, 2002

Wrong Numbers
The bank's telecom bill was cut by between 5 and 10 percent during the first year.
January 01, 2002

Are You the Gatekeeper? SEC's Hunt Reminds Auditors of Their Role
Commissioner worried investors may confuse pro forma results with audited financial statements.
October 30, 2001

Life in a Fishbowl
Audit committees have been under intense scrutiny -- and seem to be the better for it.
July 01, 2001

Let’s Get Ready to Rumble
SEC to vote Wednesday on auditor independence rule.
November 13, 2000

Continued at http://www.cfo.com/channelarchives/1,5509,775|2|1,00.html  

The Securities and Exchange Commission (SEC) has filed charges against Adelphia Communications Corp. and arrested the founder and members of his family. http://www.accountingweb.com/item/87019 

Viewing telecom’s scandals through a forensic lens 
Anyone who cares to watch the evening news recalls the recent Justice Department publicity stunts involving Scott Sullivan, former chief financial officer for WorldCom, and several members of the Rigas family who founded Adelphia Cable. http://www.americasnetwork.com/an/an.cgi?id=scandals-28593.html 

What AT&T sees in Qwest’s accounting

Qwest’s recently disclosed accounting irregularities amount to an admission that the company has been illegally offering long-distance service within its region, AT&T charged this week. AT&T made its allegations in motions filed with the Arizona and Minnesota public utility commissions. http://www.americasnetwork.com/an/an.cgi?id=qwest-28597.html

James E. Copeland, Deloitte & Touche's chief executive officer, recently called for the creation of a National Financial Review Board (NFRB) to investigate business failures --- http://www.smartpros.com/x34786.xml 

Aggressive Accounting Practices Examined --- http://www.smartpros.com/x35027.xml 

Aug. 16, 2002 (The Internal Auditor) — A recent study suggests that aggressive accounting techniques -- or earnings management attempts -- such as those allegedly practiced by WorldCom and Xerox, may be common in the business world.

Question:
What ten companies have the most "inflated" measures of profit?

Answer:
"Shining A New Light on Earnings, BusinessWeek Editorial, June 21, 2002 --- http://www.standardandpoors.com/Forum/MarketAnalysis/coreEarnings/Articles/062102_coredata.html 

How much does a company truly make? It's hard to tell these days. To boost the performance of their stocks, companies have come up with a slew of self-defined "pro forma" numbers that put their financials in a favorable light. Now ratings agency Standard & Poor's has devised a truer measure known as Core Earnings.

The Goal: to provide a standardized definition of the profits produced by a company's ongiong operations. Of the three main changes from more traditional measures of profits two reduce earmings: Income from pension funds is excluded and the cost of stock options are deducted as an expense. The other big change boosts earnings by adding back in the charges taken to adjust for overpriced acquisitions. Here are the top 10 losers and winners under Core Earnings:

"IBM, Microsoft and Cisco cited in 'inflated profits' report:  At a loss to explain profits," Jon Bernstein, Silicon.com, July 2002 --- http://www.silicon.com/bin/bladerunner?30REQEVENT=&REQAUTH=21046&14001REQSUB=REQINT1=54257 

Three of IT's leading lights are overstating their financial health, according to a report from credit rating agency Standards and Poor's (S&P).

The report, which comes in the wake of the WorldCom affair, attempts to re-state the profits of a number of leading US firms in attempt to strip them down to 'core earnings'.

Using its own measure of profitability, S&P estimates that IBM's earnings for 2001 are down $2.87bn and Microsoft's are down $2.26bn. Meanwhile, Cisco's losses for 2001 stand at $2.52bn compared to the $1.01bn the company stated.

S&P says that US Inc has been boosting profits by excluding acquisition charges and including income from pension funds.

WorldCom faces collapse after a $3.8bn accounting fraud was exposed last week. WorldCom stands accused of treating running costs as capital expenditure.

For related news, see:
Xerox: the next WorldCom?
www.silicon.com/a54242
Worldcom - the winners and the losers
www.silicon.com/a54227
Worldcom-it is hits British university network
www.silicon.com/a54218
WorldCom fraud shock sends stock markets tumbling
www.silicon.com/a54177

Bob Jensen's threads on the S&P conceptualization of "core earnings" are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#CoreEarnings 

Enron's Empire:  How Government and International Agencies Used Taxpayers Money to Bankroll the Energy Giant's International Investments," by Daphne Wysham and Jim Vallette Special to CorpWatch April 11, 2002 --- http://www.corpwatch.org/issues/PID.jsp?articleid=2279 

The US public is only just beginning to comprehend the devastating domestic impact of Enron's financial machinations and dirty deals. However, the part of the story that has been eclipsed until now, is that Enron's international empire, which was fraught with charges of human rights and environmental abuses, was built on a foundation of about $7 billion in taxpayer money. This $7 billion came from institutions whose mandates range from poverty alleviation to promoting the US Merchant Marines or German exports, yet Enron convinced each that it was in their interest to promote the capitalization of Enron.

Since Enron's inception in 1992, at least 20 agencies, representing the U.S. Government (leading the way with over $3 billion), the British, Italian, French, German, and Japanese governments, as well as the Inter-American Development Bank, the European Union and the World Bank, approved $7 billion in financing toward overseas projects in which Enron had substantial involvement. Enron leveraged this public finance into a worldwide web of power and energy projects with an array of political interventions from local politicians to the Vice President of the United States. Enron's overseas operations rewarded shareholders temporarily but often punished the people and governments of foreign countries it targeted with price hikes and blackouts worse than those suffered by Californians in 2001.

In desperately poor countries where Enron operated, these hardships sparked protests or riots. Local government leaders were, in many cases, implicated in the scandals or in the violent suppression of dissent.

For example:

While all this was occurring, the US Government and other public agencies continued to advocate for Enron, threatening poor countries like Mozambique with an end to aid if they did not accept Enron's bid on a natural gas field. Enron was so intertwined with the US Government in many people's minds that they assumed, as the late Croatian strongman Franjo Tjudman did, that pleasing Enron meant pleasing the White House. For Tjudman, he hoped that compliance with an overpriced Enron contract might parlay into an array of political favors, from softer treatment at The Hague's War Crimes Tribunal to the entry of his country into the World Trade Organization.

Only when Enron's scandals began to affect Americans did these same government officials and institutions hold the corporation at arm's length. And only when Enron leadership revealed their greed on home turf did it became the biggest corporate scandal in recent US history.

The World Bank and Enron: A Converging Agenda

The history of Enron's rise and fall would be incomplete without some background on the public agencies that assisted the corporation in its global expansion. It is important to begin with the World Bank, this institution more than any other often creates an agenda that other bilateral and multilateral development banks follow.

The World Bank began investing in oil and gas following on the heels of the Organization of Petroleum Exporting Countries (OPEC) oil embargo and oil price shocks of the 1970s. The rationale for this investment was clear: The US, an oil- and gas-dependent nation with limited indigenous sources of oil, needed to diversify its sources of non-OPEC oil and gas. Administration officials were concerned that OPEC had a virtual monopoly on the fuels, and could raise prices at whim, sending shockwaves throughout the global economy. The secondary concern, particularly for Northern investors, was the fact that, as oil prices rose, so, too, did developing countries' inability to service their debt. The U.S. worried that these countries, already strapped for cash, would default on their loans.

And so it was just days after former President Ronald Reagan assumed office in January 1981 that their administration began dismantling World Bank conventions and initiatives. One of the first areas to which the Reagan administration turned its attention was the World Bank's investment in the energy sector. The Bank had revealed its intention to increase investments in energy, but the US Treasury wrote that, without deregulation and privatization of the oil and gas industry abroad, such investment would support regimes that were not friendly to private investors and multinational oil companies.

In a report entitled, An Examination of The World Bank Energy Lending Program, the office of the US Treasury's Assistant Secretary prescribed measures the World Bank should take to encourage private investment in oil and gas development. The report's authors noted that the World Bank,