Enron Updates on February 14, 2002
Bob Jensen at Trinity University


Updates and issues in the accounting, finance, and business scandals --- http://www.trinity.edu/rjensen/fraud.htm 

Many of the scandals are documented at http://www.trinity.edu/rjensen/fraud.htm 


For those of you who are still confused about special purpose entities (SPEs) and how they are used and/or abused, I added a section called "DIRTY NUMBERS Off Balance Sheet--And Out Of Control" in a module near the top of http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm 

I think the above short module provides a nice summary of use and abuse.

I also added a new section on "Suggested Reforms" at http://www.trinity.edu/rjensen/fraud.htm#SuggestedReforms 

My Thirty Seconds of Fame:  Suspected Conflicts of Interest on Enron's Supposed Independent Audit Committee

Enron Hearings
Congressional hearings continue today. Several key players are expected to appear before various committees, including the chairman of Enron's audit committee. NPR's Emily Harris reports. --- Listen to this audio segment containing interviews with Bob Jensen (Trinity University) and Charles Horngren (Stanford University).  

Anyone interested in listening to the NPR story with Professors Jensen and Horngren can go to the following site and click on Enron Hearings:

Under Enron Hearings Report on February 7, 2002

Marc Rubin Miami University

An MP3 recording of this is available at http://www.cs.trinity.edu/~rjensen/jensennpr.mp3 
But the original rendition is much better at http://search.npr.org/cf/cmn/cmnpd01fm.cfm?PrgDate=02/07/2002&PrgID=3 

My message to Professor Charles Horngren at Stanford University on February 7, 2002
(Bob Jaedicke was the head of Enron's Audit Committee and on the Board of Directors for for over 15  years.  I guess he is still head of that Committee and on the Board.  He is an Emeritus Professor of Accounting and former Associate Dean and Dean of the Graduate School of Business at Stanford University.)

Hi Chuck,

If its any consolation, I pretty much said the same thing as you said about Bob in our NPR interviews. Bob taught the first accounting course (a doctoral seminar) that I ever took in accounting. He was an excellent teacher, a man who questioned before he answered, and a man of the highest morals and integrity.

I said all of that in the interview, but those parts were left on the cutting room floor in favor of your remarks to the same effect.

I was, however, critical of Enron's Audit Committee. You only have to look at Enron's published financial statements to see glaring red flags that the Audit Committee should have challenged. I think that both the Audit Committee and Enron's Board of Directors got bedazzled by the slickest con artists of the 21st Century.

Bob Jensen

The NPR program did a great job in showing how Enron executives compensated the Audit Committee in various ways. Bob had a straight salary of $60,000. But some of the other Audit Committee members received benefits beyond their straight salaries (e.g., consulting fees and grants to their institutions). This just reinforces my lack of respect for the audit committees allowed by the SEC. In fact it reinforces my lack of respect for the SEC, but what's new?

Ed Scribner called my attention to Bob Jaedicke's testimony on February 7, 2002 --- http://energycommerce.house.gov/107/hearings/02072002Hearing485/Jaedicke798.htm 

My critical, truly gut wrenching in this instance, comment is at the end of this module!

Although I am skeptical of much of the testimony and press statement of Enron insiders, I tend to believe Bob Jaedicke given my long history of knowing him, taking a doctoral seminar from him, having dinners in his house in my post-doctorate years, and respecting his "sterling contributions" (Dr. Horngren's words) to the Stanford Graduate School of Business both as a senior professor, Associate Dean, and eventually as its highly respected Dean.


The Board recognizes that these transactions had catastrophic consequences for Enron—in an environment already made difficult by investments that were otherwise performing poorly in its broadband, retail energy and water businesses. In retrospect, and with the knowledge of the duplicity of its employees and the failures of its advisers, the Board deeply wishes that it had never agreed to these transactions. The Board, however, did not – and could not -- have foreseen that significant information about these transactions would be withheld from it.

The Board cannot be faulted for failing to respond to information that was concealed from them, or that was actively misrepresented to them. It is not accurate to suggest that the Board “did not effectively meet its obligation with respect to the LJM transactions” when the record is replete with evidence that—without Board approval—the most senior management of Enron was willing to enrich itself at company expense, to deceive the Board and to disregard its fiduciary obligations of candor to the Company and its shareholders. Indeed, it seems evident—from a review of the Chewco, Raptor and Southhampton transactions—that no amount of process or oversight would or could have prevented the actions of these employees.

Of equal importance, there is absolutely no suggestion that the Board was in any way personally interested in these transactions. The Board acted at all times with a good faith belief that these transactions—though they presented risks—were in the company’s best interests and were being carefully structured and reviewed by internal and external professionals to ensure that they were done properly.

Finally, the Board did consider these transactions carefully, attended to the risks created by Mr. Fastow’s conflict of interests, and was repeatedly assured by company management and by the company’s advisers that these transactions were appropriate and in the Company’s best interests. While others may differ with that business judgment, it is incorrect to imply that the Board’s decision to authorize the transactions was reached carelessly or without considered attention to, and good faith reliance upon, the information made available to us at the time. This is the proper role of a board of directors—but it simply was not adequate to prevent the deliberate and improper actions of certain of the Company’s employees.

What happened at Enron has been described as a systemic failure. As it pertains to the Board, I see it instead as a cautionary reminder of the limits of a director’s role. We served as directors of what was then the seventh largest corporation in America. Our job as directors was necessarily limited by the nature of Enron’s enterprise—which was worldwide in scope, employed more than 20,000 people, and engaged in a vast array of trading and development activities. By force of necessity, we could not know personally all of the employees. As we now know, key employees whom we thought we knew proved to be dishonest or disloyal.

The very magnitude of the enterprise requires directors to confine their control to the broad policy decisions. That we did this is clear from the record. At the meetings of the Board and its committees, in which all of us participated, these questions were considered and decided on the basis of summaries, reports and corporate records. These we were entitled to rely upon. Directors are also, as the Report recognizes, entitled to rely on the honesty and integrity of their subordinates and advisers until something occurs to put them on suspicion that something is wrong.

We did all of this, and more. Sadly, despite all that we tried to do, in the face of all the assurances we received, we had no cause for suspicion until it was too late.

Thank you

Robert Jaedicke 
Enron Board of Directors Chairman of Audit and Compliance Committee

Bob Jensen's Comment
I tend to believe and agree with what Bob says about the role of the Board of Directors. What is left unsaid is the difference between the role of the Board of Directors and the role of the Audit Committee. It would seem that the Audit Committee, under Dr. Jaedicke's leadership, failed badly on its intended mission. But then what's new with Audit Committees in most corporations?

The National Public Radio revelations of possible conflicts of interest among some of the Audit Commmittee members (other than Dr. Jaedicke) are contained in the following document:

Under Enron Hearings Report on February 7, 2002

Warren Buffett 
Three years ago the Berkshire Hathaway CEO proposed three questions any audit committee should ask auditors: 

(1) If the auditor were solely responsible for preparation of the company's financial statements, would they have been done differently, in either material or nonmaterial ways? If differently, the auditor should explain both management's argument and his own. 

(2) If the auditor were an investor, would he have received the information essential to understanding the company's financial performance during the reporting period? 

(3) Is the company following the same internal audit procedure the auditor would if he were CEO? If not, what are the differences and why? Damn good questions. 

Andersen Was Not Forthcoming to the Audit and Compliance Committee

"Web of Details Did Enron In as Warnings Went Unheeded," by Kurt Eichenwald and Diana Henriques, The New York Times, February 10, 2002 --- http://www.nytimes.com/2002/02/10/business/10COLL.html?ex=1013922000&en=9d7bdc3f0778ea09&ei=5040&partner=MOREOVER 

The opportunity to cross to-do's off the list came just one week later, on Feb. 12. That day, the Enron board's audit and compliance committee held a meeting, and both Mr. Duncan and Mr. Bauer from Andersen attended. At one point, all Enron executives were excused from the room, and the two Andersen accountants were asked by directors if they had any concerns they wished to express, documents show.

Subsequent testimony by board members suggests the accountants raised nothing from their to-do list. "There is no evidence of any discussion by either Andersen representative about the problems or concerns they apparently had discussed internally just one week earlier," said the special committee report released last weekend.

Tone at the Top

AUDIT COMMITTEE MEMBERS AND BOARDS of directors are taking a fresh look at potential risks within their organizations following the Enron debacle. What financial reporting red flags and key risk factors should your organization know? Read more in Tone at the Top, The IIA’s corporate governance newsletter for executive management, boards of directors, and audit committees.  http://www.theiia.org/ecm/newsletters.cfm?doc_id=739 

Note especially the February 2002 edition at http://www.theiia.org/iia/publications/newsletters/ToneAtTheTop/ToneFeb02.pdf 

In response to the Enron situation, The Institute of Internal Auditors (IIA) is conducting Internet-based “flash surveys” of directors and chief audit executives (CAEs). The purpose of these surveys is gaining information — and sharing it in an upcoming Tone at the Top — on how audit committees and other governance entities monitor complex financial transactions. We encourage you to participate by typing in www.gain2.org/enrontat  

Hi John,

There are some activists with a much longer and stronger record of lamenting the decline in professionalism in auditing and accounting. For some reason, they are not being quoted in the media at the moment, and that is a darn shame!

The most notable activist is Abraham Briloff (emeritus from SUNY-Baruch) who for years wrote a column for Barrons that constantly analyzed breaches of ethics and audit professionalism among CPA firms. His most famous book is called Unaccountable Accounting.

You might enjoy "The AICPA's Prosecution of Dr. Abraham Briloff: Some Observations," by Dwight M. Owsen --- http://accounting.rutgers.edu/raw/aaa/pi/newsletr/spring99/item07.htm 
I think Dr, Briloff was trying to save the profession from what it is now going through in the wake of the Enron scandal.

I suspect that the fear of activists (other than Briloff) is that complaining too loudly will lead to a government takeover of auditing. This in, my viewpoint, would be a disaster, because it does not take industry long to buy the regulators and turn the regulating agency into an industry cheerleader. The best way to keep the accounting firms honest is to forget the SEC and the AICPA and the rest of the establishment and directly make their mistakes, deceptions, frauds, breakdowns in quality controls expensive to the entire firms, and that is easier to do if the firms are in the private sector! We are seeing that now in the case of Andersen --- in the end its the tort lawyers who clean up or clean out the town.

The problem with most activists against the private sector is that they've not got much to rely upon except appeals for government intervention. That's like asking pimps, whores, and Wendy Gramm to clean up town.  You can read more about how Wendy Gramm sold her soul to Enron at http://www.trinity.edu/rjensen/fraud.htm#Farm 

Bob Jensen

On Account of Enron an Industry Changes 
As Enron rages, the call for stricter oversight is reaching a crescendo among legislators, regulators and shareholders. Looking to avoid the taint of financial impropriety, real or imagined, many companies aren't waiting for revised rules. http://www.newmedia.com/default.asp?articleID=3371 

Message from Roger on February 5, 2002

The Enron mess appears to have prompted the UK government to initiate its own review of accounting practices --- see http://www.thetimes.co.uk/article/0,,5-2002060957,00.html  

Maybe this will spread to other countries


Roger Collins 
Associate Professor 
UCC School of Business


Auditing Firms Should Not Drop Consultancy Services
Otherwise its CPA:  Career Passed Away

Ernst & Young's Turley: How Accounting Can Get Back Its Good Name In the Wall Street Journal, EY Chairman Jim Turley outlines a series of reforms to help the accounting profession respond to challenges in the post-Enron business environment. Included in the recommendations: a ban on the sale of IT consulting services to audit clients and the attempt to make financial statements more understandable

"How Accounting Can Get Back Its Good Name," by Jim Turley, Chairman, Ernst & Young

Never before has the accounting profession faced what it faces today. The fundamental underpinning of our profession -- our integrity -- is being challenged. What started as a problem for Enron and its auditor has become a problem for all auditing firms. Part of it is perception. But much is quite real. We have to deal with both.

I have been asked repeatedly what the profession should do to get back its good name. The reasons behind business failures and accounting restatements are quite complex, and it is important to bring balance to the issue.

First, let's deal with some outstanding issues. Two years ago, Arthur Levitt, then chairman of the Securities and Exchange Commission, proposed regulations that would largely ban the delivery of information technology consulting services to audit clients of the firms. It's time to adopt these restrictions. Ernst & Young supported the proposals then, and our position hasn't changed today. Recently other firms have joined our position. So let's just get it done.

I know some cynics will say that we've sold our consulting practice and therefore wouldn't be giving up much. But that's missing the point. We sold our practice because we thought it was the right and strategic thing to do. And Ernst & Young, as the leader in internal audit services, will be the firm most impacted by the restriction on internal audit services. But again, we think it's the right thing to do.

Second, we should create a new regulatory body for the profession. It should have its own funding, offices and staff. It should have direct power over the profession's disciplinary and audit quality control programs, replacing the current "peer review" process in which firms review each other. To ensure maximum public credibility, this oversight should come from a body other than the American Institute of Certified Public Accountants, because many believe it has not maintained its historic focus on professional responsibility.

While auditor independence and professional discipline are critically important, reforms in those areas alone won't prevent another Enron. We need to address other issues as well.

Financial disclosure needs to be more forthright and understandable. SEC Chairman Harvey Pitt placed this on the top of his agenda even before the current crisis. The problems with financial statements are well-known: They focus on historical information instead of current and trend information; are hard to understand; and haven't kept pace with modern corporate complexities. Additionally, companies report a single earnings per share number, as if their results were that precise. Investors might be better served by a range that reflects the reality of business uncertainties.

We need new rules, new standards, new disclosures. The Financial Accounting Standards Board, which has responsibility for rulemaking in this area, must move more quickly and with more foresight.

There are other steps that should be considered. Let's strengthen audit committees' independence to ensure they provide oversight of management's actions. Let's make it clear that auditors are to be hired and fired by the audit committee, not management. Let's make it a criminal offense to lie to the outside auditor.

Another idea to consider is the formation of a multi-disciplinary National Transportation Safety Board-like organization, which would immediately investigate the causes of a corporate "crash" and recommend steps needed to prevent a recurrence. Like the NTSB, this group's sole focus would be on prevention, not discipline.

These are all good ideas. But some changes being discussed would do more harm than good.

For instance, there is no need to ban all non-audit work for audit clients. Many so-called non-audit services are so closely linked to the audit that as a practical matter only the auditor can provide them. Another service -- tax -- has always been provided by auditors to their clients. I have yet to see one client facing a business issue that didn't have both accounting and tax ramifications.

Mandatory auditor rotation -- that is, a requirement that clients periodically switch their audit firm -- is being urged by some. That would likely reduce audit quality in both the early and late years of an audit "term." A better approach, if change is really needed: a staggered rotation of all partners and staff on the engagement -- providing a continuous flow of new eyes and objectivity, while maintaining the institutional knowledge that helps ensure audit quality.

A client recently asked me what I thought to be the worst possible outcome of the current situation. I told him it would be the implosion of Arthur Andersen, which would create an immediate supply/demand mismatch in the audit profession, coupled with legislation by Congress that unduly restricted the profession -- making it unappealing for students to enter the profession or long-time auditors to stay in it. Add to this the imposition of too many requirements on audit committees, and we could end up with nobody wanting to do audits and nobody wanting to serve on audit committees.

That's my nightmare. The client looked at me, concerned, and said, "This could happen."

But people who know me say I'm an undying optimist. I am. And I believe that with all the people looking at my profession, people who are searching for solutions, we won't make the mistakes that would lead to my nightmare, but instead will take the right steps to ensure a stronger profession, better financial reporting and stronger capital markets. ____

Mr. Turley is chairman of Ernst & Young.

Bob Jensen's Commentary
In spite of Mr. Turley's reminder that Ernst & Young supported Arthur Levitt's failed SEC "proposed regulations that would largely ban the delivery of information technology consulting services to audit clients of the firms" and, thereby, took a position opposite of most other large accounting firms, I still have to argue that retrenchment of accounting firms into audit services apart from consultancy is not the solution to restoring the image of accountancy.  Auditing by and of itself is neither a dynamic nor a very profitable industry.  I still argue for both consultancy and auditing coupled with warranties (like insurance) on the liabilities backing those services.  Thus, buyers of services could then purchase various warranty options that would pay either the clients or shareholders/creditors for failed consultancy and/or audit services.  
See http://www.trinity.edu/rjensen/fraud.htm#Bottom 

Also see http://www.trinity.edu/rjensen/cpaaway.htm 

Also see http://www.trinity.edu/rjensen/damages.htm 

Andersen's CEO, Joseph Berardino, spoke to the House Committee on Financial Services Tuesday, further explaining his firm's role in the restatements of Enron's financial statements and describing his vision of the direction accounting should take in the future. http://www.accountingweb.com/item/71208 

I thank a number of you for having called my attention to the FEI's guidelines for SPE usage:

The Financial Executives Institute issued its own explanatory report on SPEs in January 2002 in the wake of the Enron scandal.  It attempts to explain why they are used, how they are used, and the background of standards literature on this topic.  Go to http://www.fei.org/download/SPEIssuesAlert.pdf 

The above guidelines make a little more sense if you read them in the context of Denny Beresford's remarks on SPEs and my other threads on Special Purpose Entities at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm 

In the above document I also pasted some key excerpts from the FEI guidelines.

For those of you who are still confused about special purpose entities (SPEs) and how they are used and/or abused, I added a section called "DIRTY NUMBERS Off Balance Sheet--And Out Of Control" in a module near the top of http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm 

A February 12, 2002 message from Eckman, Mark S, CFCTR [meckman@att.com]

The SPE module is very good.  I would like to add a couple of notes on the composition of the EITF to understand how we arrived at this point.

Since the inception of the EITF, 11 participants represent a 'Who's Who' of financial services and  companies that have major stakes in financial services.




John R. Edman 

General Motors Corporation

Bernard R. Doyle 

General Electric Company

Philip D. Ameen 

General Electric Company

Susan S. Bies 

First Tennessee National Corporation

Peter E. Jokiel 

CNA Insurance Companies

Thomas E. Jones 


Paul B. Lukens 

CIGNA Corporation

Kathy F. Zirolli 

Aetna, Inc.

Marc D. Oken 

NationsBank Corporation

David H. Sidwell 

J.P. MorganChase

Gaylen N. Larson 

Household International, Inc.

Also, three previous members of the EITF have moved to positions on the FASB, including the current Chair.  Considering a total population of only 85 participants, these are rather significant representations.

While the profession has begun to address the independence of the auditor and auditee on a serious basis, vested interests abound that have not been discussed. 

I really hated to learn about the following.

Seven months ago Deloitte & Touche was adamant about not separating its consultancy from the rest of the firm. But a lot has changed in seven months, and the Big Five firm has now announced plans for separating its audit from its consulting services. In so doing, it joins Andersen, KPMG, PricewaterhouseCoopers and Ernst & Young, making support for this audit reform unanimous among the Big Five. http://www.accountingweb.com/item/71210 

Thank you for the update Barbara.  I added your message to http://www.trinity.edu/rjensen/fraud.htm#Professionalism 

It is interesting to juxtapose the Tribune's article on E&Y (my former employer) against "How Accounting Can Get Back Its Good Name," by Jim Turley, Chairman, Ernst & Young which you can read near the very bottom of http://www.trinity.edu/rjensen/fraud.htm 

We expect professions to fail, but why is our profession failing so badly and so often? 

Bob Jensen

Chicago-based Grant Thornton added yet another side to the multi- dimensional debate about the reforms needed to restore confidence in the accounting profession. "As the leading global firm dedicated to the needs of middle market companies," the firm feels that "growth should never be at the expense of public trust." The firm proposes to restore the profession's credibility with a five-point program. http://www.accountingweb.com/item/71066 

In the U.S., the Enron collapse continues to be the subject of investigations by at least ten congressional committees. But the fallout has grown increasingly global in scope, and global companies are taking action to achieve the needed reforms without waiting for U.S. lawmakers. Find out how Unilever, CGNU, and Disney are responding to the current climate of change in the accounting profession. http://www.accountingweb.com/item/70949 

Message on February 2, 2002 from Chuck Pier [texcap@HOTMAIL.COM

I haven't seen anyone mention that one hour of the Diane Rehm show on NPR today was on accounting practices. The panel consisted of Dave Cotton, who wrote a recent Washington Post piece on who should hire the auditors, Lynne Turner, former chief accountant at the SEC and now on the faculty at Colorado State, Bob Kueppers, a partner at D&T, and Damon Silvers, an attorney at the AFL-CIO.

The converstation was quite lively. My guess is the devil is wearing a coat because I thought it would be a cold day "down there" before I would like an attorney's (Silvers) ideas over an accountant's (Kueppers). However, Lynne Turner and Dave Cotton did an excellent job representing the profession. I do however admire Mr. Kueppers coming on the show and speaking on behalf of the Big 5.

You can listen to the show byusing this link: http://www.wamu.org/dr/ 

You then need to scroll down to February 7.

Chuck Pier

From The Wall Street Journal Educators' Reviews on February 7, 2002

TITLE: Dirty Books? Accounting Debacles Spark Calls for Change: Here's the Rundown 
REPORTERS: Steve Liesman, Jonathan Weil, and Michael Schroeder 
DATE: Feb 06, 2002 PAGE: A1 
LINK: http://online.wsj.com/article/0,,SB1012944567711561840.djm,00.html  
TOPICS: Auditing, Financial Accounting, Fraudulent Financial Reporting

SUMMARY: This article gives a good summary of proposed changes to the practice and regulation of the accounting and auditing profession in the wake of the Enron scandal.

1.) Summarize the proposed changes described in the article regarding each of the following areas: auditing firms' consulting practices, the audit standard setting process, the peer review process run by the AICPA to examine firms' implementation of audit procedures, and the accounting standards setting process.

2.) Describe the arguments for and against limiting audit firms' ability to provide consulting services. Do you think that providing consulting services can make audit firms more effective? Or do you think that conflict of interest issues overrule any such benefits?

3.) How are auditing standards currently established? What are the pros and cons of the current system? Of the proposed system described in the article?

4.) What are the concerns with the accounting standards setting process at the FASB? Who have been the constituents to whom the FASB have "caved in" on significant accounting issues?

5.) What information about consulting and auditing services must public companies disclose?

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

Proposed solutions to salvage the accounting profession by the AICPA and the SEC's Harvey Pitt are a "collection of cosmetic half-measures."  Dave Cotton proposes more drastic measures.

Peter Firmin called my attention to "CPAs (and I'm One) Can Reverse Their Losses" by Dave Cotton, The Washington Post, Sunday, January 27, 2002; Page B01 --- http://www.washingtonpost.com/wp-dyn/articles/A41302-2002Jan26.html 
The latter portion of the article is quoted below:

We can restore trust in the CPA profession, and there are two ways to do that with minimal government intervention, red tape and regulation. One is to make accounting firms work directly for the people with the most to lose -- investors. Let's set up a system by which the stock exchanges would use a competitive process to select CPA firms to audit the financial statements of companies whose stock is traded on their exchanges. That would take auditors off the payroll of the firms they're supposed to be monitoring.

Another measure would be to beef up the strength of the accounting industry's ethics review panel. I have just started my second stint as a member of the ethics committee of the American Institute of Certified Public Accountants (AICPA) and I have seen ethical lapses that resulted in millions of dollars of losses get punished with as little as 16 hours of continuing education. Meanwhile, only state accountancy review boards -- with varying levels of ability, different standards and their own potential problems of cronyism -- possess the power to strip an accountant of his or her license.

Unfortunately, the plan announced Jan. 17 by Securities and Exchange Commission Chairman Harvey Pitt and my own organization, the AICPA, is a collection of cosmetic half-measures. Setting up an autonomous body to oversee ethics enforcement, discipline and SEC practice-monitoring processes is not a bad idea, but it does not address the root causes of the Enron debacle.

Nor is it enough, as many people have suggested, to prohibit accounting firms from collecting lucrative consulting fees from the companies they are auditing. That's only half the solution. Andersen got $27 million in Enron consulting fees in a single year and $25 million for the Enron audit. Take away the consulting fees, and the audit fees are still enough to undermine independence and cloud auditor judgment.

Better to simply end the links between companies and their auditors than to establish new mechanisms to monitor a relationship that naturally lends itself to abuse. Even though in theory the auditors are employed by independent directors representing the interests of shareholders, in reality the chummy relationship between management and directors often glazes over any distinction between them. And the interests of potential investors and lenders have been neglected. If auditors went to work for the stock exchanges, the exchanges could pay them by either billing the publicly traded companies or pooling money derived from a new, small (it would be very small) surcharge to trading transactions. Or both.

Relieved of the fear that they might be dismissed by corporations for being "too tough," auditors could focus on telling investors what they need to know -- and alerting accounting and auditing standard-setters about emerging techniques of dubious propriety. Andersen knew long before Enron's demise that the company's use of special-purpose entities to keep debts and losses off its balance sheets was an "aggressive" accounting treatment. (Translation: questionable or misleading.) It would have been seen as a "disservice" to Enron management, to say the least, for Andersen to have informed the Financial Accounting Standards Board or the Auditing Standards Board -- which set accounting industry guidelines -- that a new standard was needed in that area.

The new audit process would be more contentious, at least in the short term. But eventually firms would compete on the basis of being "tough but fair." The exchanges would also be able to compete for investors by touting their ability to provide honest audits. The CPA industry would change, too. The 11 largest CPA firms audit the vast majority of publicly traded companies now. The change I propose would probably result in several dozen or perhaps hundreds of firms competing for these audits. In some cases, audits could become less lucrative. In others, where they would no longer be used as loss-leaders to win consulting contracts, audits could become more expensive. But they might actually be worth something.

CPA ethics enforcement also needs an overhaul. The current process was never designed to be the punitive process that the public thinks it is, or that it should be. It was designed to be remedial.It recognizes that accounting is complex and that honest people make mistakes.

In addition, AICPA is a voluntary-membership organization, not a licensing board. The ethics committee lacks subpoena power, and, therefore, effective investigative power. The worst the committee can do is expel someone from the organization. This happens five to 10 times a year, usually in cases when a CPA refuses to cooperate with the committee. But that doesn't affect an accountant's license or prevent him or her from continuing to practice. More typically, when the AICPA ethics committee finds that a CPA has violated professional standards, it orders continuing professional education classes. A CPA found to have violated an accounting standard in connection with a multibillion-dollar corporate collapse, causing massive damage to investors and the public, might receive this sort of minimal sanction. Since all AICPA members are required to get 40 hours of continuing education classes per year anyway, this is not much of an imposition. Moreover, unless a CPA is expelled or suspended from AICPA, punishment or censure by the ethics committee remains a secret.

The deferral procedure is another flaw. A CPA under investigation about ethics can ask the AICPA to defer its investigation until other investigations and legal proceedings are resolved. The ethics committee members, volunteers who are eager to avoid subpoenas, always agree. As a result, accountants who have committed the most egregious ethical lapses -- the ones resulting in SEC investigations, bankruptcy and litigation -- can often continue to practice for 10 years or more after the alleged violation until all the cases are resolved.

The ethics committee should be given the power to revoke a CPA's license to practice. Currently, licenses are issued on a state-by-state basis. While the state accountancy boards can levy fines and take licenses, in many cases investigations are not very rigorous. Accountancy regulation usually falls under a state's department of commerce; a typical investigator may examine a CPA one week and a dog-grooming parlor the next. Understanding accounting principles and auditing standards is not usually a requirement to be a state licensing investigator. Congress should establish national rather than state-by-state licensing. Accounting and auditing standards don't change from state to state. Licensing requirements shouldn't either.

These measures should still be accompanied by moves to prohibit accounting firms from performing consulting services for audit clients. This should, and would, have been done long ago, except that the bigger accounting firms control the AICPA, which writes the Code of Professional Conduct, the profession's ethics rules. Many of the people involved in that ethics rule-writing process honestly thought we could maintain our independence and objectivity while performing such lucrative services. Human nature is what it is, however. Records reportedly show that when Andersen managers mulled whether to drop Enron as a client because of accounting risks, they discussed the hope that fees from Enron could grow to $100 million a year. Fee growth should be irrelevant in deciding whether a client is too risky. At the very least, Andersen's hopes about Enron fees created the appearance that its audit judgment was affected.

My colleagues will condemn me for this recommendation, but it is essential if we want to restore public confidence in the audit process. Andersen's defense that $100 million is only a drop in the bucket compared with its multibillion-dollar global revenue is a red herring. The Enron engagement team members in Andersen's Houston office cared not a whit for Andersen's worldwide revenue. They cared about not losing their bread-and-butter client -- the source of their individual livelihoods. This is an untenable position in which to put anyone.

Finally, the AICPA must be restored to its proper role as a professional association. A news story in last week's Washington Post referred to the AICPA as a "lobbying and trade group." Once, the AICPA was devoted to protecting our profession's reputation and future. Instead, for at least the past three years, the AICPA's leadership has squandered resources and energy on an ill-fated "global-credential" concept and a quest for profit-making spinoffs such as a dot-com Web portal. We need to return our attention to the AICPA's core purpose, and work with Congress and others to restore auditor independence. "Let's ask a CPA" should be the first thought that comes to mind when someone wants objective, accurate answers to business questions. It once was. It can be again.

Dave Cotton is a partner with Cotton & Company LLP, an auditing firm in Alexandria, and a member of the AICPA's Professional Ethics Committee's Technical Standards Subcommittee. The opinions expressed in this article do not necessarily represent the views of the AICPA.

I discuss some systemic problems that cannot be solved at http://www.trinity.edu/rjensen/fraud.htm#Bottom .   There are some that can be solved but,  in the above module I hold out little hope for Harvey Pitt's proposed "Lone Ranger" solution.

There are some other systemic problems for which Dave Cotton's proposal makes better sense to me.  However, given the oligopoly of only a few large international auditing firms, I think his proposal of choosing firms offers false hopes

"An Analysis of Restatement Matters: Rules, Errors, Ethics, For the Five Years Ended December 31, 2002," free from the Huron Consulting Group --- http://www.huronconsultinggroup.com//files/tbl_s6News/PDF134/112/HuronRestatementStudy2002.pdf 

 Objective: Analyze issues relating to public companies that filed restated financial statements (10-K/ A's and 10-Q/A's) during the five-year period from January 1, 1998, through December 31, 2002.

Purpose: The purpose of our analysis was to identify common attributes within these restatements including the size of the companies, their industry, and ultimately the underlying accounting error that necessitated the restatement. Procedures:

• Performed a search of all 10K/A and 10Q/A filings in the Edgar database from 1998 through 2002 using the keywords "restate," "restated," "restatement," "revise," and "revised."

• Refined search to include only "restatements" defined as a restatement of financial statements that was the result of an error, as defined in APB 20. Our report excludes restatements due to changes in accounting principles and non-financial related restatements.

• Prepared a database and input relevant information for each restatement identified, including the following fields: Company Name; SIC Code; Annual Revenues (from most recent filing); Footnote Disclosure Describing the Restatement Issue; Classification of Restatement Issue; Restating 10K or 10Q; Auditor of Record (limited to amended annual financial statements). 

Filed restatements went from 158 in 1998 to 330 in Year 2002. Major accounting issues in all years seem to be Revenue Recognition, Reserves/Accruals/Contingencies, Equity, Acquisition Accounting, and Capitalization/Expense of Assets.

Note the following:

Not only have the number of restatements been on the rise, but also the number of public registrants is actually decreasing, which makes the restatement growth during the past few years even more dramatic.

Important Database of the Week --- From the Scout Report on February 1, 2001

LLRX.com: Business Filings Databases http://www.llrx.com/columns/roundup19.htm 

This column from Law Library Resource Xchange (LLRX) (last mentioned in the September 7, 2001 Scout Report) by Kathy Biehl becomes more interesting with every revelation of misleading corporate accounting practices. This is a straightforward listing of state government's efforts to provide easy access to required disclosure filings of businesses within each state. Each entry is clearly annotated, describing services offered and any required fees (most services here are free). The range of information and services varies considerably from very basic (i.e. "name availability") to complete access to corporate filings. The noteworthy exception here is tax filings. Most states do not currently include access to filings with taxing authorities.

I added the above to my evolving monster on accounting and securities fraud at http://www.trinity.edu/rjensen/fraud.htm

A message from Andrew Priest on February 34. 2002

Yahoo! is carrying this news story in respect of Tyco International. Apparently the firm spent $US8 billion in its past three fiscal years on more than 700 acquisitions that were never announced to the public. The story is at http://au.news.yahoo.com/020205/2/3vlo.html  .

Is this another Andersen client? :-) Seriously does anyone know who the auditor is on this one?

Andrew Priest

The auditor is PricewaterhouseCoopers (PwC)

A survey of Canadian business executives shows immense support for auditing reforms. Find out what reforms scored highest on their list. http://www.accountingweb.com/item/70425 

A survey of Canadian business executives shows immense support for auditing reforms. The reforms that scored highest were:


This response seems somewhat surprising in view of two other findings:


Some press accounts attribute the seemingly contradictory results to differences between big accounting firms and smaller ones. They point out that many survey respondents typically come from small to mid-sized companies not audited by large accounting firms.

When asked how much confidence they have in the ethics of the (presumably larger) firms auditing large publicly traded companies, the executives were decidedly less kind, ranking these firms only a 4.7 out of a possible 7.

The American Accounting Association recently published a monograph (with CD ROM) -- Studies in Accounting Research Volume No. 33. Empirical Research in Auditor Litigation: Considerations and Data 
By Zoe-Vonna Palmrose Published 2000, 90 pages. Members $15.00 Nonmembers $20.00

Craig Polhemus, American Accounting Ass [AAACraig@AOL.COM

I added the message below from Amy Dunbar to my threads at http://www.trinity.edu/rjensen/fraud.htm 

Yesterday (February 6, 2002) both Baruch Lev and Roman Weil testified in front of the House Committee on Energy and Commerce. You can get more details at http://energycommerce.house.gov/107/hearings/02062002Hearing483/hearing.htm 

Dunbar comment: I like Weil's contrast of the tax code with FASB rules.

"You might now think about the parallels of the above with our tax collection system, where prin­ciples alone cannot suffice. The principle: tax income. The principle re­quires thousands of pages of tax code, regulations, and court decisions to implement. Can financial accounting be different? I think yes. The tax collector and the taxpayer play a zero-sum game-what one pays, the other gets. Financial accounting doesn't have that property and in addition has the auditor to interpret the rule book."

Sometimes I do think of tax as a "game," and the best player wins. And tax is a zero-sum game in another sense if we assume that the amount of revenue to be collected is fixed: what one group of taxpayers doesn't pay, another group will pay. Thus the concern with the so-called

Amy Dunbar [ADunbar@SBA.UCONN.EDU

The Now Infamous 3 Percent Rule

Hi George,

I added my comments below to http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm 

I suspect that the decision to set it at 3% is arbitrary, but as Denny Beresford pointed out, there is a rationale for setting it small since most SPEs are intended to be enormous projects (such as a pipeline) in which even 3% is a lot of money.

I think that some outsider equity (e.g., 3%) is required to cushion value changes of the SPE's assets agains value changes of the SPE's debt. It is my understanding that the SPE should generally have valued assets (let's call it "skin" for reasons explained below) equal to or greater than the value of the debt. The theory is that debt risk is thereby covered, and off-balance-sheet treatment of special projects is thereby covered --- and there can be theoretical and financing reasons for keeping special projects off the consolidated balance sheet.

In theory, the assets of the SPE should have "skin" in the sense that they are also assets that would appear on the consolidated balance sheet if the SPE was consolidated. For example, if General Electric decided to build a pipeline across Africa, GE could co-sign billions in debt/leases of an SPE. The SPE would then borrow the cash and commence to build the pipeline. The SPE's assets would be cash, land, pipes, etc. These have "skin."

The infamous Enron whistle blower (Ms. Watkins), who sent anonymous letters to CEO Ken Lay and Andersen top brass, pointed out that most of the Enron SPEs set up by CFO Fastow "had no skin." By this she meant that the SPE assets were simply Enron stock certificates instead of being cash, land, pipes, and other assets that would be assets if the SPEs were consolidated. Enron, however, could not book its own common stock as an asset.  You can read Ms. Watkins wording at http://www.trinity.edu/rjensen/fraud.htm#Hoax

As long as Enron's stock was above $80 per share, the "value" of the stock in the Enron SPEs exceeded the current value of the debt that was secretly being kept off Enron's consolidated balance sheets. However, when Enron's share prices took a nose dive, the current value of the SPEs' debt greatly exceeded the value of its Enron shares and everything imploded to Enron's ground zero. Had there be some real "skin" other than Enron's shares to offset the value of the debt, Enron would not have imploded.

Hence, just because a company has SPEs does not mean that there is a high risk of imploding like Enron. The value of the SPE's "skin" is what you need to investigate to evaluate the real underlying risk.

Enron was just too thin skinned in most of its 3,000+ SPEs.

What may be missing in accounting for an SPE may be the continual monitoring of fair value of real skin that should not fluctuate wildly in value (unlike Enron share values used as skin).

By real skin, I mean hard cash or hard assets like cash, real estate, and construction assets.

You really don't mind if you co-signed your kid's second mortgage on a house as long as the value of the house is much higher than the balance on that note payable. In case of default, you should get most of your money back even if your kid only has 3% invested of his or her own money. This sort of SPE is not so troublesome.

But if you co-sign to pay for your kid's college education, and the kid does poorly and flunks out in the senior year, then you may get nothing in the case of loan default. This sort of SPE should be booked all along as your debt.

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

-----Original Message-----
From: glan@UWINDSOR.CA [mailto:glan@UWINDSOR.CA ]
Sent: Wednesday, February 13, 2002 9:15 AM
What is the rationale for the 3% rule re SPEs?

Maybe this issue has been raised before and I have missed it. Pardon my ignorance, but I am somewhat unclear about the rationale for the 3% rule. In one of the bookmarks in Bob Jensen's library (the one dealing with SPEs), it is mentioned that "according to the accounting regulation, the company establishing the SPE can contribute the remaining 97% and it still qualifies for off- balance sheet treatment." Why 3% and not say 5% or 25%? What is the logic behind the 3% rule? Can consolidation be avoided even though there is control?

George Lan
University of Windsor

Reply from Richard Fern

Bob, George, et. at:

EITF 90-15, Reponses to Question 3: "The initial substantive residual equity investment should be comparable to that expected for a substantive business involved in similar leasing transactions with similar risks and rewards. The SEC staff understands from discussions with Working Group members that those members believe that 3 percent is the minimum acceptable investment."

So, the Working Group (formed to propose a consensus to the EITF Task Force) thinks that 3% is the minimum (not that the SEC thinks that 3% is the minimum).

Why did the Task Force's come up with 3%? Anyone know?

richard fern 
eastern ky. university


Study Finds Auditors Not Compromised Over Consulting --- http://www.marshall.usc.edu/Web/Press.cfm?doc_id=4084 

Researchers Mark L. DeFond and K.R. Subramanyam at USC's Leventhal School of Accounting (part of the Marshall School of Business), with K. Raghumandan at Texas A&M International University, find no association between consulting service fees and the auditor's propensity to issue a going concern opinion. Issuing a going concern opinion means that the auditor must be able to objectively evaluate firm performance and withstand client pressure to issue a clean opinion.

The SEC recently adopted new regulations requiring public companies to disclose all fees paid to their outside auditors. The SEC suspects that accounting firms are too dependent financially on their clients that purchase both auditing and consulting services to be objective, to maintain independence and to report possible conflicts of interests.

Contradicting the SEC's concerns, DeFond and Subramanyam and their co-author also demonstrate that higher audit fees (after controlling for consulting fees) actually encourage greater auditor independence. Firms are more likely to issue going concern opinions for clients paying higher audit fees.

The study analyzes 944 financially distressed firms with proxy statements that include audit fee disclosures for the year 2000, including 86 firms receiving first-time going concern audit reports. Examining the total fees charged, the researchers find that consulting fees have no effect on the incidence of going concern reports, and that higher audit fees actually increase the propensity of auditors to issue going concern reports, contrary to SEC suspicions.

The authors conjecture that the reputation and litigation damages associated with audit failure are greater for larger clients (for example such as Enron), encouraging auditors to be more conservative with respect to their larger clients.

"The loss of reputation and litigation costs provide strong incentives for auditors to maintain their independence," says DeFond. "Our study provides evidence that these incentives outweigh the economic dependency created by higher fees."

DeFond specializes in economics-based accounting and auditing research. He serves as the Joseph A. DeBell Professorship in Business Administration at USC's Leventhal School of Accounting, part of the Marshall School of Business, and is a CPA with six years' experience at a "Big Five" firm.

K.R. Subramanyam (SU-BRA-MAN-YAM) specializes in earnings management and valuation. His research on the effects of the SEC's fair disclosure rule earned him national attention in 2001.

Click here to Download PDF Report

Reply from E. Scribner [escribne@NMSU.EDU

A related study on SSRN picked up by Jim Mahar at FinanceProfessor.com newsletter:


Using 2001 data, Frankel (MIT), Johnson (Michigan State), and Nelson (Stanford) report evidence "consistent with arguments that the provision of non-audit services strengthens an auditor's economic bond with the client and that investors price this effect."

Ed Scribner 
New Mexico State

Bob Jensen's Opinion

The problem with the above type of empirical research is the same as the Achilles' Heel of most capital markets research and price theory in general. Most studies deal with the pricing at the margin. Similarly, in managerial accounting cost-profit-volume analyses, we deal in a "relevant range" of volume and then simply extrapolate to fixed cost at a zero volume (intercept) outside that range.

The empirical study in question does not deal with the real problem --- which is fear of extending the relevant range to the zero intercept. In plain English this means that the auditing firms, especially at the local level, tremble in fear of losing a gigantic audit/consulting client like Enron. It is true that the Enron audit/consulting fees were less than half of one percent of Andersen's international revenues, but these fees possibly contributed to half or more of Andersen's huge Houston Office fixed costs and profits.

I don't think that consulting revenues are the problem on a relative basis. Suppose the Houston Office had fixed costs of $100 million per year. Suppose the contribution of the Enron auditing and consulting revenue was $50 million. Further suppose that if the Houston Office did not offer any consulting services, the fixed costs would be $50 million and the contribution of the Enron audit revenue would be $25 million. In both cases, Andersen would have a difficult time walking away from the audit, which is why FEI President Phil Livingston asserts that the "Local audit partner does not have the backbone to stand up to a client and walk away." --- http://www.fei.org/download/Enron01_24_02.ppt 

As long as one client is paying for 50% of the fixed costs, it really doesn't matter what the level of those fixed costs are in the context of not wanting to give up that 50%.

What would be stimulating to me is the transcript of an internal Andersen meeting (I think it was about a year ago) in which the firm seriously began deliberations about dropping Enron as a client. Andersen no doubt had similar meetings regarding other troublesome clients. In most cases, as with Enron, Andersen kept the troubled client if the client was an enormous source of revenue for a local office.  

What would interest me is what it would have taken to get Andersen to drop Enron and other enormous clients?

Are there any studies of why CPA firms dropped enormous clients before the media disclosed serious problems with the client?

My gut feel is that CPA firms do not tend to drop a huge client until the news media reports a brewing scandal within the troubled client.  Even after Andersen received Watkin's confidential whistle blower warning, in August 2001, that bad accounting was contributing to the "implosion" of Enron, the auditing firm did not drop Enron or even warn the Audit Committee.  Andersen simply did not want to drop this huge source of local office revenue as long as the public was not aware the Accounting problems at Enron.

"Let's Play to Our Strength," by James G. Castellano, Chairman of the AICPA, Based Upon His October 2002 Acceptance Speech, Journal of Accountancy, February 2002, pp. 52-55 - http://www.aicpa.org/pubs/jofa/feb2002/castel.htm 

As stewards of this profession, as guardians of the public trust placed in us, we must look inward and outward during the coming year. Listening, assessing, collaborating and implementing, ushering in change: That’s the kind of leader I am and that’s the kind of leader I ask you to be.

With all the amazing and fascinating changes happening in and around our profession, I’m passionate about being a CPA, as I know you are. We can make that passion contagious. We can carry it back to our state societies, to our firms, to our companies, to our schools, to our government offices. By wearing our professional passion on our sleeves, by making our CPA designation our proud calling card, we’ll send the following message, which is in total harmony with the Vision:

Here we are: CPAs with a proud past, a successful present and a future of unlimited promise, all based on our reputation for objectivity and integrity.

Here we are: CPAs playing to our strength, now more than ever

Forwarded by Dick Haar on February 11, 2002
Bob Jensen's threads on what Enron got from political bribes can be found at 

Senator Joseph Leiberman
706 Hart Senate Office Building
Washington, D.C. 20510

RE: Enron Investigation

Dear Senator Leiberman,

I watched your Sunday morning appearance on Face the Nation with intense interest. Inasmuch as I own a fair amount of Enron stock in my SEP/IRA, I'm sure you can understand my curiosity relative to your investigation.

Knowing you to be an honorable man, I feel secure that you will diligently pursue the below listed matters in an effort to determine what part, if any, these matters contributed to the collapse of Enron.

1. Government records reveal the awarding of seats to Enron executives and Ken Lay on four Energy Department trade missions and seven Commerce Department trade trips during the Clinton administration's eight years.

a. From January 13, 1995 through June 1996, Clinton Commerce Secretary Ron Brown and White House Counsel Mack McLarty assisted Ken Lay in closing a $3 billion dollar power plant deal with India. Four days before India gave final approval to the deal, Enron gave $100,000 to the DNC. Any quid pro quo?

b. Clinton National Security Advisor, Anthony Lake, threatened to withhold aid to Mozambique if it didn't approve an Enron pipeline project. Subsequent to Mr. Lake's threats, Mozambique approved the project, which resulted in a further $770 million dollar electric power contract with Enron. Perhaps, if NSA Advisor Lake had not been so busy strong-arming for Enron, he might have been focused on something obliquely related to national security like, say, Mr. Bin Laden? Could it be that a different, somewhat related, investigation is warranted?

c. In 1999, Clinton Energy Secretary Bill Richardson traveled to Nigeria and helped arrange a joint, varied, energy development program which resulted in $882 million in power contracts for Enron from Nigeria. Perhaps if Energy Scretary Richardson had been more focused on domestic energy, we might have avoided:

i. The severe loss of nuclear secrets to China and concurrently ii. developed more domestic sources of energy.

d. Subsequent to leaving Clinton White House employ, Enron hired Mack McLarty (White House Counsel), Betsy Moler (Deputy Energy Secretary) and Linda Robertson (Treasury Official). Even a person without a high school diploma (no disrespect to airline security screeners) can see that this looks like Enron paying off political favors with fat-cat corporate jobs, at the expense of stockholders and Enron pension employees.

e. Democratic Mayor Lee P. Brown of Houston (Enron headquarter city), received $250,000 just before Enron filed Chapter 11 bankruptcy. Isn't that an awful lot of money to throw away right before bankruptcy?

The Democratic National Committee was the recipient of hundreds of thousands of dollars from 1990 through 2000. The above matters appear to be very troubling and look like, smack of, reek of, political favors for campaign payoffs. I know you will find out.

2. Recently, former Clinton Treasury Secretary Robert Rubin called a top U. S. Treasury official, asking on Enron's behalf, for government help with credit agencies. As you well know, Rubin is the chairman of executive committee at Citigroup, which just coincidentally, is Enron's largest unsecured creditor at an estimated $3 billion dollars.

3. As you well know, Mr. Leiberman, Citigroup is Senator Tom Daschle's largest contributor ($50,000) in addition to being your single largest contributor ($112,546). This fact brings to mind some disturbing questions I feel you must answer.

a. Have you, any member of your staff, any Senate or House colleagues, any relatives or any friends of yours, been asked by Citigroup to intercede on their behalf, in an effort to recover part or all of Citigroup's $3 billion, at the expense of Enron's shareholders, employees and or Enron pensioners?

b. Did your largest contributor, Citigroup, have anything to do with the collapse of Enron?

c. Enron has tens of thousands of employees, stockholders and pensioners who have lost their life savings. How will you answer their most obvious question? Do you represent Citigroup, your largest contributor, or do you represent the Enron employees, et al, who stand to lose if Citigroup recovers any of its $3 billion?

During Sunday's Face the Nation, both you and Senator McCain praised Attorney General Ashcroft for recusing himself from the Justice Department investigation because he had once received a contribution from Enron. I know in my heart, that, being the honest gentleman you are, you will now recuse yourself because of the glaring conflict of interest described above. I also know that you will pass this letter to your successor for his or her attention.

Very truly yours,

Robert Theodore Knalur

Enron:  Bankruptcy Court Link http://www.nysb.uscourts.gov/ 
The 208 Page February 2, 2002 Special Investigative Committee of the Board of Directors Report--- 
Alternative 1:  http://nytimes.com/images/2002/02/03/business/03powers.pdf 
Alternative 2:  http://i.cnn.net/cnn/2002/LAW/02/02/enron.report/powers.report.pdf 
Alternative 3:  Part One | Part Two
| Part Three | Part Four

"Web of Details Did Enron In as Warnings Went Unheeded," by Kurt Eichenwald and Diana Henriques," The New York Times, February 10, 2002
The article by Eichenwald and Henriques is the best summary of the 200+ page Powers report that I have seen to date

Andersen's negative response to the above report  --- 
Statement of C. E. Andrews, Global Managing Partner, in response to Enron special committee report February 2, 2002 — The report issued today by Enron’s special committee is troubling on many levels. Nothing more than a self-review, it does not reflect an independently credible assessment of the situation, but instead represents an attempt to insulate the company’s leadership and the Board of Directors from criticism by shifting blame to others. http://www.andersen.com/website.nsf/content/MediaCenterEnronResources!OpenDocument   

I tend to agree with Andersen on this point.

The leadership of the National Conference of CPA Practitioners (NCCPAP) announced their concerns regarding the fallout from the events surrounding Enron. The leadership of the organization believes that this situation has the potential to permanently tarnish the reputation of this country's Certified Public Accounting community. http://www.accountingweb.com/item/70219 

The accounting profession has united under the aegis of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in an organized effort to develop comprehensive guidance on risks, including the kinds of business risks that toppled Enron. http://www.accountingweb.com/item/70534 

To Margaret Wente
Canada's Globe and Mail newspaper

Dear Margaret,

My friend Roger Collins sent me the link to your article "How to Succeed (Until You Get Caught)"

You wrote a very funny article, including the comments:

"We're living in the age of testosterone capitalism."

"Is there a cure for this condition? I doubt it. Boys will be boys. It's enough to make a girl put all her savings in a sock."

NBC News also did a module painting the Enron men as evil thieves and Enron women as the pure innocents. But I would like to remind you that there was at least one Mata Hari who filled her pantyhose with Enron payoffs --- http://www.trinity.edu/rjensen/fraud.htm#women 

"New SEC rules would force firms to be more open," by Noelle Knox, USA TODAY, February 14, 2002 --- http://usatoday.com/money/energy/enron/2002-02-13-sec-changes.htm 

Regulators unveiled rules Wednesday that would close inside-trading loopholes, require companies to file financial reports more quickly and increase what they must report.

The Securities and Exchange Commission proposed more than a dozen rules that take aim at the lack of disclosure that led to Enron's collapse. The rules also would end exemptions that allowed some executive stock sales to go unreported for up to a year.

"We want to make sure investors have a better picture of a company a lot sooner," SEC Chairman Harvey Pitt said.

The proposed rules would:

Require that companies report all stock transactions by officers and directors "within days." Currently, executives have up to a year to disclose stock sold to their company.

Shorten the filing time for annual reports (10Ks) to within 60 days of the end of a fiscal year and the time for quarterly reports (10Qs) to within 30 days of the quarter's end. Companies now have 90 days to file 10Ks and 45 days to file 10Qs. The filings follow strict guidelines and provide much more detailed financial information than the earnings press releases companies issue shortly after a quarter ends.

Expand the list of what must be disclosed to shareholders in "significant event" filings known as 8Ks. Companies would have to include events that could trigger a default — such as changes in debt ratings or securities transactions with officers and directors — "within days." Companies also would have to report if ethics and conduct rules are waived for officers, directors or other key employees.

Daniel Weaver, a business professor at New York University, said, "Those would be good changes. Any time you reveal information to the public, it becomes self-enforcing."

Bob Jensen's threads on the Enron aftermath reforms are at 

From Information Week Daily on February 14, 2002

** IT Caught Up In Enron Aftermath

Accounting questions erupting along a fault line opened by the Enron Corp. debacle have prompted the federal government to propose stricter reporting rules that are likely to impact IT departments at public companies.

The Securities and Exchange Commission is recommending, among other things, that annual reports be filed within 30 days of the end of the fiscal year rather than the current 90 days. Quarterly reports would have to arrive within 30 days of a quarter's close instead of 45. Insider trades also would have to be reported sooner. The SEC wants to dramatically shorten the reporting deadline. One bill, proposed by U.S. Sen. Jean Carnahan, D-Mo., would require execs to report their company- stock transactions within 24 hours. The SEC also wants to expand the kinds of significant events that must be reported.

Meta Group analyst John Van Decker gives companies overall a "B-" in terms of having the right financial-consolidation software--which can help companies gather financial data from multiple units quickly--and other tools. "Companies have a lot of legacy processes, including old client-server versions of consolidation software, and there's typically a lot of manual intervention during the consolidation process," which causes delays, he says. Those problems are exacerbated when they have disparate enterprise resource planning systems, he says.

Lanier Worldwide Inc. is one company that has benefited from automated financial reporting. For several years, the company has been using Hyperion Solutions Corp. software for consolidation, CIO Sean Magee says. He says Lanier closes each month in two business days. Lanier no longer files with the SEC, though--it was acquired last year by Ricoh Co. Ltd. and is no longer a standalone publicly traded company. - Sandra Swanson

Go deeper. Read The Games Played With Your Money Need More Oversight http://update.informationweek.com/cgi-bin4/flo?y=eF3v0BcUEY0V20BVjZ0AI 

IM Software Helps Firms Comply With SEC Rules http://update.informationweek.com/cgi-bin4/flo?y=eF3v0BcUEY0V20ikW0AT 

Bob Jensen's threads on the Enron aftermath reforms are at 

Oh Oh Again: PricewaterhouseCoopers lax audits of Gazprom

Welcome to the first issue of BusinessWeek Online's European Insider. This weekly newsletter contains highlights of news, analysis, commentary, and regular columns that cover Europe specifically, as well as other stories with wide international impact.

**If you would like to keep receiving this free newsletter, please subscribe at http://www.clickaction.net/ClickAction?c=1&p=14109&i=14&func=S_survey . **



Gazprom: Russia's Enron?

Angry investors are accusing PricewaterhouseCoopers of lax audits of Gazprom. Did the accounting firm ignore the energy giant's insider dealing and shady asset transfers?



Can UBS Tame Enron's Wild Traders?

That's the key question facing the Swiss bank as it prepares to take over the Texas company's energy-trading business


I added this to Bob Jensen's threads on accounting and securities fraud at http://www.trinity.edu/rjensen/fraud.htm 

Message in Reply to John Donahue at Trinity University

Hi John,

There are some activists with a much longer and stronger record of lamenting the decline in professionalism in auditing and accounting. For some reason, they are not being quoted in the media at the moment, and that is a darn shame!

The most notable activist is Abraham Briloff (emeritus from SUNY-Baruch) who for years wrote a column for Barrons that constantly analyzed breaches of ethics and audit professionalism among CPA firms. His most famous book is called Unaccountable Accounting.

You might enjoy "The AICPA's Prosecution of Dr. Abraham Briloff: Some Observations," by Dwight M. Owsen --- http://accounting.rutgers.edu/raw/aaa/pi/newsletr/spring99/item07.htm  
I think Briloff was trying to save the profession from what it is now going through in the wake of the Enron scandal.

I suspect that the fear of activists (other than Briloff) is that complaining too loudly will lead to a government takeover of auditing. This in, my viewpoint, would be a disaster, because it does not take industry long to buy the regulators and turn the regulating agency into an industry cheerleader. The best way to keep the accounting firms honest is to forget the SEC and the AICPA and the rest of the establishment and directly make their mistakes, deceptions, frauds, breakdowns in quality controls expensive to the entire firms, and that is easier to do if the firms are in the private sector! We are seeing that now in the case of Andersen --- in the end its the tort lawyers who clean up the town.

The problem with most activists against the private sector is that they've not got much to rely upon except appeals for government intervention. That's like asking pimps, whores, and Wendy Gramm to clean up town.  You can read more about how Wendy Gramm sold her integrity to Enron in the following two links:  



Bob Jensen

A Bit of Humor and Misc. Modules of the Week

Cartoon Forwarded by Dick Haar

Although tax law is not regarded as exciting by most, every so often the creative interpretation of the rules by taxpayers can make even a mundane tax case most interesting. 2001 was no exception, as taxpayers who were called to court tried to justify how they creatively applied the complex rules of federal tax law. http://www.accountingweb.com/item/70471 

Forwarded by Kevin Kobelsky [kobelsky@MARSHALL.USC.EDU

The Accountant
The Academy Awards site says "Two brothers whose farm is on the brink of bankruptcy consult an accountant who has some highly unconventional money-making suggestions" How Enronesque.  The character here seems like he's got a quite a personality...--- http://www.ginnymule.com/accountant/gallery.html 

The O'Dell brothers are desperate. The Accountant is here to help. Not just to save the family farm, but to stop a national conspiracy, and prove that Billy Bob Thornton ain't a real person. 

How far will these boys go to save a way of life? Fires, amputations... cold-blooded murder?

Elliot Kamlet found us Morgan Miller's Review --- http://www.filmthreat.com/Reviews.asp?File=ReviewsOne.inc&Id=1667 

"The Accountant" takes place on a large Southern farm. Although it's filled with grand fields and wide open space, this farm feels small and claustrophobic. In fact, it feels like the stage. As I was watching this film, I felt as if I were at the theater, maybe off-Broadway somewhere. In particular, I was reminded of Edward Albee. Writer/Director Ray McKinnon plays the Accountant. With his big sideburns, his quaffed pompadour, and his thin face, the Accountant is quite an eccentric. He drives up to the farm in a 1935 Chevy Truck; he emerges clad in a dusty old brown suit, as if he were a creature from another era altogether.

David O'Dell (Eddie King), a farmer, is in a lot of trouble financially. He's steeped in so much debt that he cannot afford to maintain his family's fifth generation farm. Tommy (Walton Coggins), his less idealistic, more modernized brother, is responsible for bringing in the Accountant. Once he adds up the facts and figures, the Accountant tries to find a way to save the O'Dell Farming Dynasty. The schemes and solutions he concocts are of a frightening nature, involving possibly the murder of Mrs. O'Dell in order to benefit from her life insurance policy.

Nothing ever really happens in "The Accountant." This film is all talk. Ray McKinnon's darkly-comic analysis of an incarcerated Southern culture is not unlike Edward Albee's observations about the captivity of New York City's unsuspecting inhabitants in his one act play, "Zoo Story." The Accountant himself shares certain similarities with Albee's aggressive vagrant Jerry. Just as Jerry was trying to force the unsuspecting Peter see his cage, the Accountant tries to do the same for David O'Dell.

The Accountant, in his ramblings, believes the United States to be involved in a conspiracy against the South. Southern culture is disappearing. He forces David to form doubts about his idol, Billy Bob Thornton. Is he even a real person? Or has Thornton just been a creation of the corporate establishment?

Ray McKinnon, himself a native of Georgia, may be sincere with the messages contained within his story, but his methods of translating them to the screen are questionable. What we have here is essentially a stage play occupied by three characters who drone on and on with one speech after another for thirty-eight straight minutes. It feels flat. As a result, "The Accountant" fails to live up to its potential. While it's crisply and sharply shot on 35mm, and in widescreen, the film itself lacks visual interest. The compositions are rather bland and two-dimensional. It would have been a much more absorbing experience had McKinnon chosen to go a step further and taken advantage of the tools of cinema, in order to create a more involving world for his quirky characters to occupy.

In an Enron tort litigation trial, the defense attorney was cross-examining a pathologist.

Attorney: Before you signed the death certificate, had you taken the auditor's pulse?

Coroner: No.

Attorney: Did you listen to the heart?

Coroner: No.

Attorney: Did you check for breathing?

Coroner: No.

Attorney: So, when you signed the death certificate, you weren't sure the man was dead, were you?

Coroner: Well, let me put it this way. The man's brain was sitting in a jar on my desk. But I guess he still managed to audit Enron.

Forwarded by Mark Eckman

I don't know if you read or like Dave Barry's work, but this one is just too good to pass up.

 Explaining the Enron collapse through simple financial terms

Knight Ridder Tribune

 If you're an average layperson, your grasp of high finance consists of knowing your ATM code. So you're probably bewildered by this scandal surrounding the collapse of Enron, which had been the seventh-largest corporation in America.

 Today we're going to explain the Enron story, using simple financial terms that you can understand, such as "dirtballs."

 Q. How, exactly, did Enron make money?

 A. Nobody knows. This is usually the case with corporations whose names sound like fictional planets from Star Wars. Allegedly, Enron was in the energy business, but when outside investigators finally looked into it, they discovered that the only actual energy source in the entire Enron empire was a partially used can of Sterno in the basement of corporate headquarters. Using a financial technique called "leveraging," Enron executives were able to turn this asset into a gigantic enterprise whose stock was valued at billions of dollars.

 Q. What does "leveraging" mean?

 A. Lying.

 Q. Why didn't Wall Street realize that Enron was a fraud?

 A. Because Wall Street relies on "stock analysts." These are people who do research on companies and then, no matter what they find, even if the company has burned to the ground, enthusiastically recommend that investors buy the stock. They are just a bunch of cockeyed optimists. When the Titanic was in its death throes, with the propellers sticking straight up into the air, there was a stock analyst clinging to a railing, asking people around him where he could buy a ticket for the return trip.

 Q. So the analysts gave Enron a favorable rating?

 A. Oh, yes. Enron stock was rated as "Can't Miss" until it became clear that the company was in desperate trouble, at which point analysts lowered the rating to "Sure Thing." Only when Enron went completely under did a few bold analysts demote its stock to the lowest possible Wall Street analyst rating, "Hot Buy."

 Q. What other stocks are these analysts currently recommending?

 A. Mutual of Taliban.

 Q. Doesn't Enron have a board of directors whose members are responsible for overseeing the corporation?

 A. Yes. They are paid $300,000 a year.

 Q. So how could they have allowed this flagrant deception to go on?

 A. They are paid $300,000 a year.

 Q. But didn't Enron have outside auditors? Why didn't they discover and report these problems?

 A. Yes, Enron had one of the most venerable auditing firms in the nation.

 Q. What do you mean by "venerable?"

 A. We mean "stupid." As a result, Enron executives were able to deceive the auditors via slick and sophisticated accounting tricks.

 Auditor: OK, so you're saying you made $600 million in profit.

 Executive: Correct.

 Auditor: Can I see it?

 Executive: Sure! It's right here in my desk! UH-oh! The drawer is stuck!

 Auditor: Wow! Just like last year!

 Q. What should be done to punish the Enron executive dirtballs who, knowing the company was in trouble, cashed in their own stock and screwed thousands of small investors?

 A. In the interest of putting this ordeal behind us, we believe they should receive only a slap on the wrist.

 Q. Really?

 A. With a hatchet.

 Q. Isn't that a pretty severe punishment?

 A. Actually, it has been deemed harmless.

 Q. By whom?

 A. Wall Street analysts.

Accounting Instructions From Donald Ramsey

Does this make any sense?

Permanent Accounts Evergreens

Temporary Accounts Continuing Perennials

Noncontinuing Annuals

Prior Period Corrections Weeds

Forwarded by Glen Gray

A company is interviewing candidates for a new position. 

The first candidate is an engineer. The interviewer says, "I only have one question, what is 2 plus 2?" The engineer pulls out his calculator and punches in the numbers and says, "4.000000." 

The next candidate is a lawyer. She says 4, but wraps her answer in legalize. 

The third candidate is a CPA. When asked what is 2 plus 2, he looks around and looks at the interviewer and says, "Whatever you want it to be."

Updates following the Enron Scandal

Bob Jensen's Threads on Accounting Fraud, Forensic Accounting, Securities Fraud, and White Collar Crime 

Bob Jensen's Commentary on the Above Messages From the CEO of Andersen
     (The Most Difficult Message That I Have Perhaps Ever Written!)

My paper on "Damages" at http://www.trinity.edu/rjensen/damages.htm 

Suggested Reforms (Including those of Warren Buffet and the Andersen Accounting Firm)  

Bottom-Line Commentary of Bob Jensen:  Systemic Problems That Won't Go Away  


And that's the way it was on February 14, 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 


In 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/ 


Bob 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 


Professor 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:  rjensen@trinity.edu