Scandal Updates on
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
Possible headlines on the Enron saga following the guilty plea of Michael J. Kopper:
These are Jensen originals, although I probably shouldn’t admit it.
Duncan Williamson added "Kopper, bottomed."
Bob Jensen's threads on Enron humor can be found at http://www.trinity.edu/rjensen/fraud.htm#Humor
Reply by Tom Omer
Anthropologists speak of the Copper Age, the Bronze Age, and the Iron Age as steps or stages through which societies and cultures pass in the course of their advancement toward becoming true civilizations. It would appear we have entered the Kopper Age in accounting
Thomas C. Omer
Associate Professor Department of Accounting
University of Illinois At Chicago
The Art of Discovery: Finding the forest in spite of the trees.
An Accounting Paradox: When will accounting for an asset destroy the asset?
If you are following the accounting saga following the implosion of Enron and Andersen, I strongly recommend the Summer 2002, Volume 21, Number 2 of the Journal of Accounting and Public Policy --- http://www.elsevier.nl/inca/publications/store/5/0/5/7/2/1/
Baruch Lev Quote from Page 131 (from the reference above)
Baruch Lev Quite beginning on Page 133 (from the reference above)
Answer by Bob Jensen
I have to disagree with Professor Lev with respect his statement: " Enron did not have substantial intangibles." I think Enron, like many other large multinational corporations, invested in a type of intangible asset that has never been mentioned to my knowledge in the accounting literature. Enron invested enormously in the intangible asset of political power and favors. There are really two types of investments of this nature for U.S. based corporations:
I contend that large corporate investment in political power is sometimes the main intangible asset of the company. This varies by industry, but political favors are essential in agribusiness, pharmaceuticals, energy, and various other industries subject to government regulation and subsidies. Enron took this type of investment to an extreme in both the U.S. and in many foreign nations. Many of Enron's investments in political favors appear to violate the FCPA, but the FCPA is so poorly enforced that it seldom prevents huge bribes and other types of investments in political intangibles.
I provide you with several examples below.
Also see: "Where Was Enron Getting a Return for Its Political Bribes?" at http://www.trinity.edu/rjensen/fraud.htm#bribes
The extent to which Enron's investments and alleged investments in current and future political favors actually resulted in political favors will never be known. Clearly, Enron invested in some enormous projects such as the $3 billion power plant in India knowing full well that the investment would be a total loss without Indian taxpayer subsidies. Industry in India just could not pay the forward contract gas rates needed to run the plant.
Enron executives intended that purchased political influence would make it one of the largest and most profitable companies in the world. In the case of India, the power plant became a total loss, because the tragedy of the September 11 terror made the U.S. dependent upon India in its war against the Taliban. Even if the White House leaders had been inclined to muscle the Indian government to subsidize power generated from the new Enron plant in India, the September 11 tragedy destroyed Enron's investment in political intangibles and its hopes to fire up its $3 billion gas-fired power plant in India. The White House had greater immediate need for India's full support in the war against the Taliban.
The point here is not whether Enron money spent for political favors did or did not actually result in favors. The point is that to the extent that any company or wealthy employees invest heavily for future political favors, they have invested in an intangible asset and have taken on the intangible risk of loss of reputation and money if some of these investments become discovered and publicized in the media. In fact, discovery and disclosure will set government officials scurrying to avoid being linked to political payoffs.
Enron is a prime example of a major corporation focused almost entirely upon turning political favors into revenues, especially in the areas of energy trading and foreign power plant construction. As such, these investments are extremely high risk.
It is doubtful that political intangibles will ever be disclosed or accounted for except in the case of bankruptcy or other media frenzies like the Enron media frenzies.
August 28, 2002 reply from Craig Polhemus [Joedpo@AOL.COM]
August 28, 2002 reply from Bob Jensen
Great to hear from you Craig.
I agree that sometimes the accounting and/or media disclosure of investments in political favors may increase the value of those investments. Or it may have a neutral effect in some industries like agribusiness and oil where the public has come to expect that members of Congress and/or the Senate are heavily dependent upon those industries for election to office and maintenance of their power.
On the other hand, it is unlikely that accounting and media disclosure of the Enron investments in political favors, including the favors of linking foreign aid payments to Enron's business deals, would have either a positive or neutral impact upon the expected value of those political favors to Enron.
It is most certain that accounting and media disclosure political investments that are likely to violate the Foreign Corrupt Practices Act would deal a severe blow to the value of those intangible assets.
August 29, 2002 reply from Craig Polhemus [Joedpo@AOL.COM]
August 29, 2002 reply from Bob Jensen
I agree to a point. Certainly I think Phil Gramm, as a lame duck Senator, provided huge political favors through his wife Wendy, to Enron in various ways and most especially in the deregulation of energy markets such that Enron became the world's largest energy market trader. Whether or not he would have been so openly blatant if he were not a lame duck is an interesting question. I think the answer is yes, but you will probably argue no.
However, in the more numerous political favors sought by Enron in other countries, I don't think the lame duck thing is the issue. Mere disclosure of bribes to foreign officials subjects corporations to risk under the Foreign Corrupt Practices Act. Mere disclosure that foreign aid will be shut down and people will be allowed to starve if foreign governments to now provide huge favors to selected U.S. corporations will probably sink those political favors and make the government agencies disavow any link between themselves and deal making of corporations. Hence, corporations must operate in secret when resorting to these types of political favors such as those sought by Enron that are discussed at http://www.trinity.edu/rjensen/fraud.htm#bribes
I still stand by my argument that accounting for investments in most political intangibles will destroy the value of those intangibles. Most political intangibles are like mushrooms that lose their value if they must grow in sunlight.
August 28 reply from firstname.lastname@example.org
August 28 reply from E. Scribner [escribne@NMSU.EDU]
August 28, 2002
reply from Bob
August 28, 2002 reply from Richard C. Sansing [Richard.C.Sansing@DARTMOUTH.EDU]
Campbell forwarded this
link to Heisenberg's
August 29 reply from Craig Polhemus [Joedpo@AOL.COM]
Enron had 43 subsidiaries claiming Mauritius was their home base. Where in the heck is Mauritius?
In the Enron and related scandals, all eyes are focused upon how investors got ripped off. All along taxpayers were also getting ripped off in a number of ways, and especially this was the case of corporate income tax. The corporate income tax as a proportion of total government revenues has been shrinking annually due to corporate lobbying efforts to build in loopholes. One of the biggest loopholes is to move corporate headquarters offshore to places like Bermuda. Enron found even a really obscure place to declare as headquarters for 43 subsidiary corporations.
"That's Outrageous: Artful Dodgers," by Tucker Carlson, Reader's Digest, September 2002, pp. 47-48
When you think of Enron, you think of Houston. You probably don't think of Mauritius, a tiny island republic off the east coast of Africa whose chief export is sugarcane. But Enron was a major presence there, at least on paper. By the beginning of 2000, the energy company had no fewer than 43 subsidiaries in Mauritius--quite a presence in a country with a population one-fifth that of metropolitan Houston.
Why was Enron doing so much business on an island in the Indian Ocean? Taxes. Avoiding them. Enron may have failed as an energy company--it went spectacularly bankrupt earlier this year--but its accountants were masters at dodging the IRS. Enron paid no federal income taxes for four out of the past five years.
How did Enron pull this off? In part, by doing what many American companies have done: registering abroad. Individuals pay income taxes on what they earn, no matter where they earn it. Corporations play by different rules. They pay federal income taxes only on money that enters the United States. In other words, if your Mauritius-based company earns $10 million, and that money never comes back to the United States, you don't pay taxes on it. It's a nifty deal if you're a corporation, infuriating if you're an ordinary taxpayer. Over the next ten years, tax-dodging companies are expected to cost the U.S. Treasury $6 billion--money that will have to come out of your pocket and mine.
Don't be surprised if companies stiff Uncle Sam even worse. Countries that 15 years ago hosted far more cruise ships than corporations--Aruba, Barbados, the Bahamas, Bermuda--are now the legal home to a growing share of American industry. The lightly taxed Cayman Islands have become so popular with American companies that it is now the fifth largest financial center in the world.
And it's no longer just about re-incorporating overseas. Companies are also registering patents and trademarks in island hideaways, a clever way to keep royalties tax-free.
All this at a time when the United States is straining its treasury to fight a war against terrorism. Republican Senator Chuck Grassley of Kansas calls foreign tax havens an example of "profit over patriotism." He's right. But it's worse than that. Not only does offshore tax dodging hurt the United States, it often hurts the very shareholders it's supposed to benefit.
Consider the case of The Stanley Works corporation. Earlier this year, Stanley's shareholders voted to relocate the company's headquarters to Bermuda, joining fellow toolmaker Cooper Industries, and a number of other established American companies that have done the same in recent years. Shareholders made their decision largely on predictions by Stanley CEO John M. Trani, who said that a move to Bermuda would save the company $30 million in annual taxes and boost the stock price 11.5 percent during the first year alone.
Trani's projections may be right. And for him, that would be good news. His stock options alone would increase in value by $17.5 million in a single year. Add a higher salary, bonuses, a retirement package, and Trani's profit from the relocation could eventually total $385 million.
Meanwhile, many investors would initially get the shaft, in the form of capital gains taxes they would pay when the company leaves the country. The New York Times calculated that even if Stanley's stock price goes as high as Trani says it will, these shareholders "will barely break even after taxes." As for the government, it would lose $240 million in corporate income taxes from Stanley over the next eight years.
Bottom line: Taxpayers lose, shareholders lose, the CEO makes $385 million. You do the math.
In fact, many did. Stanley's decision to leave the country caused such an uproar, the company put it on hold. Its shareholders will vote again later this year.
The rest of America can vote too--not on whether to flee to the Caribbean, but on whether to change the laws in their own country. That's the patriotic solution to dodging taxes.
Bob Jensen's threads on tax fraud and scandals can be found at http://www.trinity.edu/rjensen/fraud.htm#TaxFraud
August 21 reply from Fred Salzer [fsalzer@SEMPRE.COM]
I had never heard of it (Mauritius) before, either. Interesting info at:
August 21 reply from George Lan (University of Windsor) --- George Lan [glan@UWINDSOR.CA]
I happen to be from Mauritius, a tropical island in the Indian Ocean (a couple of hundred miles off the big island of Madagascar). Mark Twain once said that "God created Mauritius first and made a copy for Paradise." Mauritius is also the land of the legend of Paul and Virginie (written in a book by Bernandin de Saint Pierre) and is famous for a rare English stamp. It's main claim to fame (up tro now) is that it was the land of the dodo bird. (It is extinct because it could not fly--the big birds did not have to fly because there were no humans on the island until the Dutch settlers came and started shooting them for fun). It seems that Enron has gone the way of the dodo!
Born in Port-Louis, Mauritius
August 28, 2001
A federal grand jury has indicted Scott Sullivan, WorldCom's former top finance executive, on charges of conspiring to commit securities fraud, securities fraud and making false filings with the SEC. Also indicted was Buford Yates, a former accounting executive.
For more information, see: http://online.wsj.com/article/0,,SB1030552014176140875,00.html
The Sarbanes-Oxley Act is complicated, confusing and open to interpretation. To help companies set priorities, experts point to four major changes that take effect this month. http://www.accountingweb.com/item/88823
- CEO/CFO certification. Effective August 29, 2002, the chief executive officers and chief financial officers of all companies that are required to file periodic reports with the Securities and Exchange Commission (SEC) must personally certify that their quarterly and annual reports are both accurate and complete. The SEC issued a proposed rule that would cover this requirement.
- Loans to directors and officers. SEC registrants are prohibited from making many types of personal loans to their directors and executive officers. This ban was effective on enactment of the law. Loans made prior to that date were grandfathered, but these loans cannot be modified or renewed. It is not yet clear whether the ban applies to employee benefits that can be construed as loans, (e.g., broker-assisted loans used when executives exercise stock options). The SEC is expected to clarify the requirements in the coming weeks.
- Insider trading reports. Effective August 29, 2002, corporate insiders (directors, executive officers, and greater-than-10 percent beneficial owners) of U.S. public companies must file reports of transactions in the companies' securities by the second day after the execution of the transaction. The SEC issued supplemental information that clarifies this requirement.
- Whistle-blower protection. Effective on enactment, employees who provide information regarding conduct that the employee reasonably believes violates U.S. securities or anti-fraud laws are protected from retaliatory actions, including termination of employment. Companies may want to review their personnel policies to see if they need to be revised in light of the new law.
How are leading business schools changing course content and curricula in the wake of the recent accounting, finance, and corporate governance scandals?
Answer from Fortune Magazine
"Scandal 101: Lessons From Ken Lay: Actual business school course excerpts and class highlights," by Julie Schlosser, Fortune, September 2, 2002, Page 52 --- http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=209148
CASE WESTERN RESERVE UNIVERSITY
Part 1: The Short Road From Unbelievable Success to Unmitigated Disaster
Part 2: Enron 101
"The class features a discussion of how Ken Lay became addicted to success. Students must write an ethical analysis of what went wrong at Enron using either an Aristotelian or a Kantian framework."
UNIVERSITY OF PENNSYLVANIA
Ethics and Management
"[The class] does not attempt to convert sinners to saints, preach absolute truths, or deter the morally vulnerable."
NEW YORK UNIVERSITY
From a session called "Truth and Disclosure": "Exaggeration and bluffing are...part of the business game, but how much is too much?"
UNIVERSITY OF CALIFORNIA AT IRVINE
The Enron Case
"One of the classes will be a lecture by [Sherron Watkins]." The alumni network will be funding an overflow room.
Fraud: The Dark Side of Business
"Topics include legal aspects of fraud, Ponzi and pyramid schemes."
Ethics and Law for Executives
"For the past ten years, 2% of students attending the three-day course have quit their jobs within seven days, citing ethical reasons."
The Moral Leader
"This course relies heavily on works of fiction, including Macbeth, The Secret Sharer, The Last Tycoon, Remains of the Day, and I Come as a Thief, to examine in-depth the practical moral issues that managers face."
UNIVERSITY OF TEXAS AT AUSTIN
Management of Auditing and Control
One session has been titled "Executive Compensation: Is Jail Time Necessary?" Another session delves into Anatomy of Greed: The Unshredded Truth From an Enron Insider, which was penned by a University of Texas alum.
UNIVERSITY OF MARYLAND
Business Ethics (Spring 2003)
"A visit to a federal prison provides a unique opportunity to speak with former-executives-turned-inmates about the serious consequences of compromising ethical standards."
"Financial Misdeeds Go From Boardroom to Classroom at California Universities," Smartpros, August 22, 2002 --- http://www.smartpros.com/x35095.xml
The Copeland Initiative --- http://www.deloitte.com/vc/0,1029,sid=2283&cid=4173,00.html
Recovery in Our Capital Markets Linked to Ethics and Trust, Says Deloitte & Touche CEO Copeland
Contact: Paul Marinaccio
Deloitte & Touche LLP
Cleveland, OH, August 16, 2002 - James E. Copeland, Jr., the chief executive of Deloitte & Touche and its global organization, Deloitte Touche Tohmatsu, today discussed the importance of assets such as individual integrity to rebuilding public confidence in the U.S. financial system.
In a speech today at The City Club of Cleveland, a leading forum for public debate and discussion, Copeland said everyone who leads institutions needs to find ways to influence and encourage ethical, competent behavior.
He also made public new Deloitte & Touche initiatives to build on internal practices that engender high professional standards, and reiterated his call for creation of a National Financial Review Board -- an independent body to probe the causes of corporate failures.
"All leaders in the capital markets have a responsibility to create a positive expectation -- an expectation of ethical and technical excellence -- within their organizations," said Copeland. "Our profession and our firm must continually consider new ways that we can better protect the public interest. When you see the pain associated with any audit failure, it's clear we must do better -- and we will."
"We cannot and should not accept risk that is the result of illegal activity, unethical behavior or gross incompetence," he said. And while it is necessary to prosecute and otherwise condemn the misconduct of the few, Copeland stated it is equally necessary to demonstrate the incentives to act ethically and earn the trust of the market.
The first measure announced by Copeland is the deployment of Deloitte & Touche corporate compliance and ethics services professionals to perform an extensive self-examination of the firm. For more than 10 years, the firm has helped clients establish or improve their ethics programs and ensure better compliance. "Now, we're going to become our own client," Copeland said.
Specifically, these professionals will assess the firm's opportunity to:
- Improve the ability of its people to recognize behaviors and environmental characteristics that raise ethical issues, in client organizations and within Deloitte & Touche, and to respond consistently and properly every time.
- Structure ethical compliance programs to facilitate more timely and consistent responses to ethical concerns.
- Reexamine the content of its professional education curriculum to make certain ethics are sufficiently emphasized and our expectations properly communicated.
Second, in addition to rotating the lead audit partner every five years, as required by new legislation, Copeland said Deloitte & Touche will apply the five-year partner rotation policy to all audit partners who are responsible for auditing major international subsidiaries.
Similarly, he said Deloitte & Touche will enact a policy of applying rotation requirements to all professionals serving public audit clients in any capacity - even those below the partner level.
"Ethics, integrity and quality are the foundation of our culture," said Copeland "We work very hard at applying those principles to the work we do on behalf of the investing public and on behalf of the clients who've placed their trust in us."
National Financial Review Board
During the speech, Copeland also shared his outline for the creation of an independent federal agency, modeled on the National Transportation Safety Board, to investigate major corporate failures. Staffed with skilled professionals, the board would be tasked with performing reviews of each failure and issuing detailed public reports on the causes.
"The scope of the problems at Enron was first disclosed last October," he remarked. "We are now nearing the end of the summer -- some 10 months later -- and we are still not sure exactly what caused the failure or how to prevent the next one."
To advance the concept, Deloitte & Touche assembled a team of professionals with deep knowledge of auditing, forensic accounting, risk management and public administration. Under Copeland's direction, the group will explore specific potential models of how the agency could be structured, governed and financed.
"Investors are angry," he commented. "Investors also expect to understand why so many business failures happened -- and what can be done to prevent similar failures from happening again."
The proposed board would not replace business investigatory roles performed by the Justice Department, Congress or the SEC, but would work in concert with these agencies and report to Congress on ways to avert future disasters.
The Fraud Advisory Panel in the United Kingdom --- http://www.fraudadvisorypanel.org/
The Panel's role is to alert the nation to the immense social and economic damage caused by fraud and help both public and private sectors to fight back. It is dedicated to a holistic approach and the long view. The Panel works to:
- originate proposals to reform the law and public policy on fraud
- develop proposals to enhance the investigation and prosecution of fraud
- advise business on fraud prevention, detection and reporting
- assist in improving fraud related education and training in business and the professions establish a more accurate picture of the extent, causes and nature of fraud
Established in 1998 through a public spirited initiative by the Institute of Chartered Accountants in England and Wales, the Panel exists to challenge complacency and supply remedies.
The Panel is an independent body of volunteers drawn from the law and accountancy, banking, insurance, commerce, regulators, the police, government departments and public agencies. It is not restricted by seeing the problem from any single point of view but works to encourage a truly multi-disciplinary perspective. The Panel is given a serious hearing as a consequence and has contributed to the new, and more vigorous attitude in government towards fraud.
Bob Jensen's threads on fraud can be found at http://www.trinity.edu/rjensen/fraud.htm
"Pro-Forma Earnings Reporting Persists," by Shaheen Pasha, Washington Post, August 16, 2002 --- http://www.washingtonpost.com/wp-dyn/articles/A25384-2002Aug16.html
While many on Wall Street are calling for an end to pro forma financial reporting given widespread jitters over corporate clarity, it's clear from second-quarter reports that the accounting practice is a hard habit to break.
Publicly traded companies are required to report their results according to generally accepted accounting principles, or GAAP, under which all types of business expenses are deducted to arrive at the bottom line of a company's earnings report.
But an ever-increasing number of companies in recent years has taken to also reporting earnings on a pro forma – or "as if" – basis under which they exclude various costs. Companies defend the practice, saying the inclusion of one-time events don't accurately reflect true performance.
There is no universal agreement on which expenses should be omitted from pro forma results, but pro forma figures typically boost results.
Indeed, as the second-quarter reporting season dwindles down with more than 90 percent of the Standard & Poor's 500 companies having reported, only Yahoo Inc., Compuware Corp. and Xilinx Inc. made the switch to reporting earnings under GAAP, according to Thomson First Call.
While a number of S&P 500 companies, including Computer Associates International Inc. and Corning Inc., made the switch to GAAP in the first quarter, that still brings the number to 11 companies in total that have given up on pro forma over the last two quarters.
"It's disappointing that at this stage we haven't seen more companies make the switch to GAAP earnings from pro forma," said Chuck Hill, director of research at Thomson First Call.
Continued at http://www.washingtonpost.com/wp-dyn/articles/A25384-2002Aug16.html
Bob Jensen's threads on pro forma reporting are at http://www.trinity.edu/rjensen//theory/00overview/theory01.htm#ProForma
The James Bonds of This Century
Accountants Favored Over Lawyers in Dating Poll --- http://www.smartpros.com/x35086.xml
Accountants are still licking their wounds from the recent stream of corporate scandals and Arthur Andersen's collapse. Perhaps this will speed up the healing process ...
A recent poll conducted by Date.com, an online dating community, found that singles would prefer to date an accountant rather than go out with the perennial butt of sarcastic jokes, the trial lawyer.
Furthermore, to show just how far accountants remain from the bottom of the dating pool, they might be happy to learn they are preferred as dates by a better than four-to-one margin over the lowly house burglar.
We should point out that Date.com gave the survey participants just three choices of occupations: house burglar, trial lawyer and accountant.
Put into perspective, perhaps it's not such great news after all!
As was pointed out in a recent cartoon in The New Yorker, women/men are drawn to men/women who live on the edge of danger. That explains the results in the above poll.
Bob Jensen's threads on the Enron/Andersen scandals are at http://www.trinity.edu/rjensen/fraud.htm
Bob Jensen's SPE threads are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm
Bob Jensen's threads on accounting theory are at http://www.trinity.edu/rjensen/theory.htm
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