Enron Updates on March 4, 2002
Bob Jensen at Trinity University

Bob Jensen's main document on the Enron scandal and other accounting frauds is at http://www.trinity.edu/rjensen/fraud.htm 

My second Philadelphia Inquirer Interview
February 24, 2002 Message from James Borden [james.borden@VILLANOVA.EDU

Here is a brief excerpt from an article entitled "Accounting Firms demand change, then they resist it".

...Accountants should have been championing change, not fighting it, several accounting professors said. "They say they're for motherhood, but they're selling prostitution," said Bob Jensen, an accounting professor at Trinity University in San Antonio, Texas.

You can read the full article at http://www.philly.com/mld/philly/business/2736217.htm 

Be aware that articles only stay freely available for about a week at the Philadelphia Inquirer.

Jim Borden Villanova University

Also see http://www.trinity.edu/rjensen/FraudPhiladelphiaInquirere022402.htm 

The above article refers to my commentary at http://www.trinity.edu/rjensen/fraud.htm#Blame 

The FASB is on the defensive in the Wake of Enron 

FASB Chairman Edmund L. Jenkins Testifies Before Congressional Committee
(Mr. Jenkins is also a former executive partner in the Andersen accounting firm.)

Norwalk, CT, February 14, 2002óIn testimony given today before the Subcommittee on Commerce, Trade, and Consumer Protection of the House Energy and Commerce Committee, chaired by Representative Cliff Stearns  (R ó FL), Financial Accounting Standards Board (FASB) Chairman Edmund L. Jenkins outlined the FASBís role in setting U.S. accounting and financial reporting standards and how they protect investors.

During his testimony, Mr. Jenkins assured Chairman Stearns that the FASB "is prepared and committed to work with the Subcommittee, the Securities and Exchange Commission (SEC) and all other constituents to proceed expeditiously to resolve any and all financial accounting and reporting issues that may arise as a result of Enronís bankruptcy."

Mr. Jenkins stated that the FASB, like most others, "does not know many of the facts relating to Enronís financial accounting and reporting." He added that Enron has publicly acknowledged in filings with the SEC, and the findings confirmed by the Special Investigative Committee of Enronís board of directors, that Enron did not comply with existing FASB standards in at least two areas. In addition, there may be other possible violations of existing requirements.

The FASB Chairman went on to outline his groupís ongoing work and projects aimed at providing significant improvement to various current requirements, including the accounting for special-purpose entities. Mr. Jenkins stated that the FASB has accelerated work on its consolidations project and plans to issue proposed guidance relating to special-purpose entities in the second quarter of this year. In response to concerns raised by SEC Chairman Harvey L. Pitt and others about the speed of the FASBís standard-setting activities, he commented that the FASB has undertaken several projects to improve its "efficiency and effectiveness without jeopardizing the openness, thoroughness and effectiveness of our open due process."

Mr. Jenkins pointed out that the FASB has no authority or responsibility with respect to auditing, independence or scope of service matters. As a result, the FASB and its accounting standards "cannot alone sustain the transparency necessary to maintain the vibrancy of our capital markets. Other market participants also must carry out their responsibilities in the public interest. Those participants include reporting entities, auditors and regulators."

In pledging the FASBís best efforts in that process, Mr. Jenkins concluded that "If anything positive results from the Enron bankruptcy, it may be that this highly publicized investor and employee tragedy serves as an indelible reminder to all of us that transparent financial accounting and reporting do matter and that the lack of transparency imposes significant costs on all who participate in the U.S. capital markets."

A copy of Mr. Jenkinsí remarks is attached. The complete testimony filed with the Subcommittee on Commerce, Trade, and Consumer Protection of the House Energy and Commerce Committee may be accessed from the FASBís website, www.fasb.org.

About the Financial Accounting Standards Board (FASB)


Since 1973, the Financial Accounting Standards Board has been the designated organization in the private sector for establishing standards of financial accounting and reporting. Those standards govern the preparation of financial reports and are officially recognized as authoritative by the Securities and Exchange Commission and the American Institute of Certified Public Accountants. Such standards are essential to the efficient functioning of the economy because investors, creditors, auditors and others rely heavily on credible, transparent and comparable financial information. For more information about the FASB, visit our website at www.fasb.org

Bob Jensen's threads on proposed reforms in the wake of the Enron scandal are at  http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

From 3% to 10% is progress.  Whatever happened to the criterion on consolidation on the basis of control?
From the Washington Post

Outside Partners Must Put Up More Money

Article 1 of 10 found

Kathleen DayWashington Post Staff Writer
February 28, 2002; Page E1
Section: F
Word Count: 697

Hundreds of publicly traded companies will have to add billions of dollars of debt to their books or raise hundreds of millions of dollars from outside investors, because of action today by the group that sets national accounting standards. The Financial Accounting Standards Board voted to change the rules governing when partnerships can be kept off a company's books, in response to the role such entities played in the collapse of Enron Corp. The new rule would require that

Bob Jensen's SPE threads are at http://www.trinity.edu/rjensen//theory/00overview/speOverview.htm 

Pitt: Elevating the Accounting Profession
By: SmartPros Editorial Staff

Feb. 25, 2002 ó Securities and Exchange Commission chairman Harvey L. Pitt said in a speech Friday that the SEC needs to "ensure that auditors and accounting firms do their jobs as they were intended to be done."

Addressing securities lawyers in Washington D.C., Pitt outlined the steps the SEC intends to take to accomplish this goal.

Pitt said while "some would try to make accountants guarantors of the accuracy of corporate reports," it "is difficult and often impossible to discover frauds perpetrated with management collusion."

"The fact that no one can guarantee that fraud has not been perpetrated does not mean, however, that we cannot, or should not, improve the level and quality of audits," he added.

The SEC chief also mentioned present day accounting standards, calling them "cumbersome."

Pitt gave a brief overview of the solutions proposed by the SEC since the Enron crisis began for the accounting profession. He said the SEC is advocating changes in the Financial Accounting Standards Board, seeking greater influence over the standard-setting board and to move toward a principles-based set of accounting standards. In addition, the SEC is proposing a private-sector regulatory body, predominantly comprised of persons unaffiliated with the accounting profession, for oversight of the profession.

Pitt also said he is concerned about the current structure where managers and directors are rewarded for short-term performance. The SEC will work with Congress and other groups to improve and modernize the current disclosure and regulatory system.

"Compensation, especially in the form of stock options, can align management's interests with those of the shareholders but not if management can profit from illusory short-term gains and not suffer the consequences of subsequent restatements, the way the public does," he said.

Pitt said the agency will try to recoup money for investors in cases where executives reap the benefits from such practices.

As for dishonest managers, Pitt said the SEC is looking into making corporate officers and directors more responsive to the public's expectations and interests through clear standards of professionalism and responsibilities, and severe consequences for anyone that does not live up to his or her ficuciary obligations.

"We are proposing to Congress that we be given the power to bar egregious officers and directors from serving in similar capacities for any public company," said Pitt.

As a side note, the accounting profession's "brain drain" did not go unmentioned by Pitt. He said "the current environment -- with its scrutiny and criticism of accountants -- is unlikely to create a groundswell of interest on the part of top graduates to become auditors."

The SEC intends to help transform and elevate the performance of the profession to deal with this issue, he added.

"Bitter row dominates Enron hearing," BBC News, February 26, 2002 --- http://news.bbc.co.uk/hi/english/business/newsid_1841000/1841824.stm 

Enron's former chief executive Jeffrey Skilling has outraged Senators by insisting that he had not done anything wrong. 

His comments that Enron's collapse was caused by a "classic run on the bank" created such anger that the hearing degenerated into a slanging match at times.

The tension was heightened by the fact that Mr Skilling's testimony did not tally with the testimonies of two other key witnesses in the Enron affair.

Senators and witnesses alike grew increasingly frustrated as the hearing stretched on.

And Senator Byron Dorgan, who chaired the committee, expressed his discontent at the outcome.

"Somehow, it just doesn't fit," he said, referring to contradictions within Mr Skilling's speech as to how much or little he knew about what was going on.

"We don't seem to have got any closer, we'll have to keep digging," he concluded, saying it had been a miserable way to spend a day.

'Utter confusion'

Senators investigating the collapse of Enron had hoped to establish who was to blame by bringing several key witnesses together.

Enron's chief operation officer Jeffrey McMahon and "whistle blower" Sherron Watkins were seated at the same table as Mr Skilling.

While Mr Skilling denied knowledge of any financial problems when he resigned, Ms Watkins and Mr McMahon both said Mr Skilling had been warned of impending problems and had failed to act.

To the apparent disbelief of senators, Mr Skilling repeatedly stressed that he had not been aware of any wrongdoing.

Given his time over again, he said, he would not have acted any differently.

Mr Skilling's defence largely rested on the fact that he was not an accountant and could therefore not be expected to understand the complexity of the transactions that he approved.

Senators were far from satisfied, pointing to Mr Skilling's business qualifications and saying that it was his responsibility, as chief executive, to make sure that he did understand.

"There are times when that Harvard MBA shows through very well, but at other times you lapse into utter confusion about accounting," Senator Dorgan said.

Different accounts

"I have not lied, I have not duped Ken Lay," said Mr Skilling, referring directly to comments made by Ms Watkins during her previous testimony.

Mr Skilling said he had no idea how Ms Watkins had come to such conclusions.

Continued at http://news.bbc.co.uk/hi/english/business/newsid_1841000/1841824.stm 

From USA Today, February 21, 2002 --- http://www.smartpros.com/x33059.xml 

Firms Open Books to Investors Many try to allay accounting fears

Feb. 21, 2002 (USA TODAY) ó Companies are scrambling to remove any whiff of fiscal impropriety by being more forthcoming with financial reports.

Driving the moves: avoiding big share-price drops if company names get attached to accounting questions and defusing comparisons to Enron. ''Anybody with a confusing story is probably being penalized,'' says Janet Pegg, accounting analyst at Bear Stearns.

Accounting worries continued to hurt stocks Tuesday. The Dow Jones industrial average fell 158 points to 9745. The Nasdaq composite plunged 55 to 1751 -- its lowest since Nov. 2.

G. Peter Wilson, president-elect of the American Accounting Association, expects a series of pre-emptive moves by companies to defuse potential accounting-related questions. Already:

* IBM on Tuesday confirmed it will divulge more details about its income in earnings reports, including sales and losses from investments in other companies. Even so, IBM shares dropped for a second consecutive session to $99.54.

IBM, criticized for years for not revealing more financial information, changed its policy in response to requests by investors and analysts, it said. The New York Times reported Friday that IBM hadn't given investors enough details about the effect on earnings of a $300 million gain booked when it sold an optical unit last year.

* General Electric says it will disclose more details about its businesses, including its GE Capital unit, in its annual report in March. Krispy Kreme Doughnuts and PepsiCo also have recently said they'll disclose more financial details.

Meanwhile, Qwest Communications International, which has watched its shares plummet because of accounting concerns, last week said it will hold weekly conference calls, so investors and analysts can ask questions. ''I want to be out there making sure you are comfortable and you know what Qwest is about,'' Qwest CEO Joe Nacchio said in a conference call.

Experts say other companies will likely take similar steps. The shift, some warn, could create even more investor uncertainty in the short run. ''When investors look carefully under the hood for the first time, they may not like what they see,'' says Hugh Johnson, chief investment officer at First Albany.

Investors will get a better look at companies at the end of March, when most of them file their annual reports. ''Investors are going to get a lot more information than they ever got before,'' Pegg says.

Adds Chuck Hill, director of research for Thomson Financial/First Call, which tracks analysts' earning estimates: ''We are going to see better disclosure, particularly on (items) they would try to hide.'' The most common: Sales of assets, such as real estate or a division, that ''make earnings look better than they really are,'' Hill says.

-- By Jon Swartz and Noelle Knox

From the Chicago Tribune, February 19, 2002  --- http://www.smartpros.com/x33006.xml 

International Standards Needed, Volcker Says

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

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

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

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

But the 74-year-old economist also blamed the new complexity of corporate finance for contributing the problem. "The fact is," Volcker said "the accounting profession has been hard-pressed to keep up with the growing complexity of business and finance, with its mind-bending complications of abstruse derivatives, seemingly endless varieties of securitizations and multiplying, off-balance-sheet entities. The new profession of financial engineering is exercising enormous ingenuity in finding ways around established accounting conventions or tax regulations," he said.

This complexity -- some of it necessary -- Volcker said, probably meant that it would be difficult if not impossible to simplify financial reports to the degree called for by corporate and accounting critics. Critics have said that many companies have confused investors about the true state of their companies' financial affairs by using impenetrably dense language in reports.

But Volcker said the sophisticated nature of some transactions requires investment analysts to interpret a company's true position for investors. He cited off-balance-sheet transactions such as the limited partnerships used by Enron as an example of such complex arrangements.

"But of course, (analysts have) been an issue, too," said Volcker, alluding to widespread criticism of stock analysts for continuing to recommend that investors buy Enron's stock even after the company's dubious accounting practices became publicly known.

Analysts have often had conflicts of interests, touting stocks of companies with which their firms had or hoped to have underwriting or other business relations.

Volcker was joined on the panel by Sir David Tweedie of Britain, chairman of the International Accounting Standards Board. That board is a global version of the Financial Standards Accounting Board or FASB, the Connecticut-based organization that sets the rules U.S. accountants must follow.

Both Volcker and Tweedie urged Congress to support the international board, because the globalization of financial flows means investors worldwide would benefit from common accounting standards. While the United States' accounting standards are widely seen as the most comprehensive in the world, some deficiencies exist, said Tweedie. Adoption of tougher international standards could solve that problem, he said.

-- By Frank James

From the Chicago Tribune, February 19, 2002  --- http://www.smartpros.com/x33008.xml 

Accounting Experts Say Limiting Consulting Only Offers Good Start to Reforms

Feb. 19, 2002 (Knight Ridder/Tribune Business News) ó Recent moves by the five major U.S. accounting firms to limit their consulting work are a good start, but they fall short of resolving the conflicts of interest that cloud the audits they perform, many accounting experts say.

"This step alone is not a magic bullet that will fix the deeper problems of the system," said Richard Breeden, a former chairman of the Securities and Exchange Commission, which regulates U.S. stock and bond markets.

The Enron case has sparked a barrage of criticism of the industry's practice in which accounting companies hold lucrative consulting contracts with the same companies they audit. Chicago-based Andersen, Enron's auditor, had $27 million in annual consulting contracts with the Houston energy trading company.

Three of the so-called Big Five accounting firms have announced they will either sell their consulting business or drop some of their most controversial consulting services. The other two firms previously dropped consulting over the past two years.

The consulting contracts are only part of the problem, some experts say. The audit contracts themselves, they point out, are so large that they create their own conflicts for auditors reviewing the financial reports of major clients.

Andersen, formerly known as Arthur Andersen, received $25 million a year to act as Enron's auditor. (SmartPros Editor's Note: In light of recent events, Andersen has distinguished its U.S. firm from its global operations by calling its U.S. firm Arthur Andersen.)

Whether it's consulting or audit contracts, the potential conflict is the same. Auditors are supposed to protect investors by making sure a company's financial reports are accurate. But their paycheck comes from the companies. If a company wants to stretch the accounting rules, its auditor may feel pressured to go along because it wants its contract renewed for the following year.

"They're humans," said Lynn Turner, a former SEC chief accountant. "...They want the next contract, and they know what it takes to get that. At the same time, they've got to serve the investors. That's a tough job."

In fact, getting out of consulting could increase pressures on auditors because they will financially depend on renewal of their audit contracts, Breeden told lawmakers this week at a Senate hearing that featured five former SEC chiefs.

Harold Williams, who was President Carter's SEC chairman, recommended that companies be required to change auditors every five to seven years. He also said that companies should be forced to keep the auditor for the full period, making it hard for a company's executives to fire the auditors if they were unhappy with an audit.

Breeden, SEC chairman under the first President Bush, supported fixed, multi-year contracts for auditors rather than the current practice of annual contracts. But he said the cost to business of changing auditors at the end of each contract would be too high.

Audit fees would rise because a new accountant would have to learn the company's finances.

Williams said the expense would be worth it.

"I view all of these potential costs as acceptable if it reinforces auditor independence," he said.

The head of one of the Big Five firms argued that changing auditors would lead to more audit failures, not fewer.

"Rotation of auditors would routinely result in the loss of huge stores of institutional knowledge necessary to effectively audit businesses like Enron," said Jim Copeland, the chief executive officer of Deloitte & Touche.

One former SEC chief agreed.

"Forcing a change of auditors can only lower the quality of audits and increase their costs," said Roderick Hills, chairman under President Ford. "The longer an auditor is with a company, the more it learns about its personnel, its business and its intrinsic values. To change every several years will simply create a merry-go-round of mediocrity."

But Arthur Levitt Jr., SEC chairman under President Clinton, said the proposal deserves serious consideration, if only "to ensure that fresh and skeptical eyes are always looking at the numbers."

On the consulting issue, several of the former SEC chiefs called for congressional action to mandate the now-voluntary moves by the accounting firms to get out of the business.

"Now that that horse seems to be out of the barn, it might not be too controversial to lock down the barn door," Breeden said. "Legislation here can prevent backsliding and competitive pressures (to return to consulting) once the spotlight is off."

-- By Ken Moritsugu

From The Omaha-World Herald on February 21, 2002 --- http://www.smartpros.com/x33023.xml 

Accountants Wear Enron Black Eye Accounting education feels the pain

Feb. 21, 2002 (THE OMAHA WORLD-HERALD) ó Did'ja hear the joke about the Arthur Andersen accounting firm and its audit of Enron Corp.?

Well, probably not.

Despite Andersen's involvement in the Enron mess, amid accusations that debt was hidden and profits were exaggerated, the accounting firm has largely been ignored by late-night comedians.

There are barbs for President Bush and Kenneth Lay:

"Enron CEO Kenneth Lay has sold all of his Enron stock. I guess we all knew that. In fact, the only thing he owns now is the Bush administration." - David Letterman

And Vice President Dick Cheney hasn't escaped.

"It was cold today. I was rubbing my hands together more than Dick Cheney at an Enron payday." - Jay Leno

But while these and other public figures were having their comic images shaped for America nightly over the Enron affair, the Andersen company and the accounting profession itself seem to have flown under the humorists' radar.

Maybe the generic jokes about accountants are on target after all.

Q."When does a person decide to become an accountant?"

A. "When he realizes he doesn't have the charisma to succeed as an undertaker."

Actually, jokeproof or not, the Enron scandal has succeeded in tainting the image of the professional bean counter in the eyes of many people, including some of those in the accounting profession.

And some in the profession think that the scandal may even dissuade some students from entering a career that they otherwise may have pursued. That would hit especially hard at a profession already experiencing declines in the number of young people graduating with an accounting degree.

At the same time, some people in the business are also hoping that both the public and the policy-makers hold off making judgments about their profession until all the evidence is in. And they most fervently hope that no ill-conceived regulations emerge from the rubble of Enron.

"I certainly think some damage has been done (by the Enron scandal)," said Jack Armitage, chairman of the department of accounting at the University of Nebraska at Omaha.

"On the other hand, I would hope that people and prospective students will see that the accounting profession will react in a positive way. If we react in a positive way I think it will certainly lessen the damage."

The accounting profession already was up to its ledger sheets in what one expert called a "people crisis."

In a speech in October to the National Association of State Boards of Accountancy, Robert J. Sack, professor emeritus at the University of Virginia, said that for years universities annually turned out 60,000 students with accounting degrees.

In 1999, he said, that number fell to about 48,000, a 20 percent decline. And data suggest the downward trend is continuing, Sack said.

"The scratching sound you hear is the sound that bright people are making as they scramble to avoid the 'accounting trap,'" he said. Instead, Sack said, students were becoming "finance professionals" or "information providers."

Annette Harmon, executive director of the Nebraska State Board of Public Accountancy, said the number of people taking the exam to become certified public accountants has declined over the last four years, although "we have seen our numbers increase just in the last couple of exams."

"I think people will see that it's a steady income, a good career," she said.

Armitage acknowledged that the number of accounting graduates is declining, "and it started before Enron." The primary reason for the decline is that, after Jan. 1, 1998, people had to have accumulated 150 credit hours at a university -- more than enough for a bachelor's degree at most schools -- in order to take the examination to become certified public accountants.

Before that, no college degree was required to take the exam.

Andersen's role in the Enron scandal hasn't escaped the attention of students like Ryan Burke, a 22-year-old Creighton University senior majoring in accounting.

"It brings to the forefront how important ethics are in the accounting profession," he said. "There are definitely more instructors lately who have been incorporating the Andersen and Enron case into some classroom discussions."

The discussions, he said, focus mainly on "what this is going to do to the accounting profession as a whole."

While the scandal hasn't soured Burke on the profession he has chosen ("I think accounting provides a great base of knowledge in business," he said.), he worries that reforms will be accompanied by too much government involvement.

One thing Burke said he is sure of: "They (the profession) can't allow something like this to happen again."

Tom Purcell, associate professor of accounting and professor of law at Creighton, urged people to keep the Enron scandal in perspective.

"There are over 240,000 members of the American Institute of CPAs," he said. "If someone did something wrong (at Enron), that's a small number of people compared to all the honest CPAs that continue to practice." [SmartPros Editor's Note: The AICPA reports 340,000 members]

Purcell said he was concerned "about the congressional rush to judgment in trying to make the whole problem just an accountant's problem. I'm hoping that the reform that comes out is done in a reasoned fashion, rather than a witch-hunting fashion."

Donald Kluthe, chairman of the 2,500-member Nebraska Society of Certified Public Accountants, said that the "misdeeds of a few" have stained the entire profession. "There has been some damage done, no question about that," he said.

"But the profession will survive. I just hope that when people look at this they don't paint everybody with that same brush."

-- By John Taylor

From The Wall Street Journal's Accounting Educators' Reviews on February February 22, 2002

TITLE: Everyone Wants Accounting Fix. But How? 
REPORTER: Michael Schroeder 
DATE: Feb 14, 2002 PAGE: C18 
LINK: http://online.wsj.com/article/0,,SB1013627671318028640.djm,00.html  
TOPICS: Auditing, Auditor Independence

SUMMARY: The article describes proposed legislation to establish a new board to regulate accounting and auditing practice. Among other things, the House Republicans' bill would require the SEC to establish an industry-funded group with two thirds of its members drawn from outside the accounting profession. At the urging of the Democrats, the bill also would increase the SEC's budget for reviewing financial reporting practices.

1.) Summarize the changes proposed in the legislation by Republicans on the House Financial Services Committee. Compare and contrast these proposed changes to current practice in the profession.

2.) What are the concerns of those who think the bill doesn't go far enough? How would those parties impose stricter legislation?

3.) The author states that the proposed legislation "also includes a provision that would limit audit firms from offering their clients assistance in preparing financial statements, or so-called internal audit work." Is this an accurate statement? What term do we use to describe services that outside accountants provide to assist clients in preparing financial statements?

4.) What are the services that we call "outsourcing internal audit work"? Are you concerned about an audit firm's independence from its client when the firm performs such services?

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

From The Wall Street Journal's Accounting Educators' Reviews on February February 22, 2002

TITLE: FASB Is Seeking to Alter Approach to Off-Book Debts 
REPORTER: Steve Liesman 
DATE: Feb 14, 2002 
PAGE: C1 LINK: http://online.wsj.com/article/0,,SB101362728756344480.djm,00.html  
TOPICS: Advanced Financial Accounting, Financial Accounting, International Accounting, International Accounting Standards Board

SUMMARY: The article discusses the FASB's comments on establishing new standards in the area of consolidation policy. The related article also highlights comparisons to International Accounting Standards (IASs) and the IASB and relates the issues to the Enron debacle.

1.) What standards are currently in place for establishing when a subsidiary must be included in consolidated financial statements? If a subsidiary is not consolidated, how must the parent company account for its investment in the subsidiary?

2.) What are special purpose entities? How can the level of ownership of "start-up equity" that is obtained from independent investors determine whether such an entity should be consolidated within its parent's financial statements?

3.) How long does the FASB say it will take to establish a new standard in this area? Why does it take the Board so long to establish accounting standards-i.e., what is their due process? How do companies that are required to follow the FASB's standards have input to the Board's due process? Should companies have such input?

4.) The related article indicates that Enron considered contributing to funding for the recently revamped International Accounting Standards Board (IASB) in order to obtain some influence in their standard setting process. What is the IASB? Do U.S. companies use International Accounting Standards (IASs) in preparing reports?

5.) Again refer to the related article. How is the FASB funded? Are you concerned that companies obtain undue influence over either the FASB or the IASB by funding the Boards' operating budgets?

6.) The related article also indicates that IASs over consolidation policy are stricter than are the U.S. standards. Compare these two sets of standards in this area of accounting.

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


TITLE: Enron Hoped to Sway Accounting; Donations Were Considered to London-Based Board Setting Global Standards 
REPORTER: Greg Hitt and Michael Schroeder 
PAGE: A8 ISSUE: Feb 14, 2002 
LINK: http://online.wsj.com/article/0,,SB101364132635637280.djm,00.html 

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!)

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  

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.

February 23, 2002 message from Robert B Walker [walkerrb@ACTRIX.CO.NZ

In the aftermath of the Enron and other accounting scandals, the Europeans have begun to attack US GAAP and advocate the universal adoption of the IASB Standards as an alternative. This is based purely around the fact that the 'substance over form' (representational faithfulness) doctrine plays a more prominent role in the IASB Standard setting process.

See http://specials.ft.com/enron/index.html 

I find this disturbing. The US tradition is by far the more powerful intellectually; even if its capacity for converting principle into practice is lamentable. IFRS's (or IASs as they used to be called) are derivatives of US material and not only to satisfy the American ego.

Let me give an example of how the US tradition is better than its European (read British) equivalent. If you apply IAS 39 in respect to the acquisition of a mortgage portfolio, it tells you to apply an interest method in the event your portfolio qualifies (i.e. same as for FAS 115).

Knowing to apply the interest method is not good enough, however. Even within the interest method there are variations - e.g. for changes do you use the prospective or the retrospective method? (See the FASB present value study in Feb 1996 for a description of what this means.)

So far as I can see these questions are not answered in IAS 39. To solve the problem you need go to a source such as FAS 91 which not only tells you in detail what it is you do, it gives you arithmetic examples.

The most maddening thing about the current state of affairs is that the much vaunted IASB principles are simply those derived from the US conceptual framework. So far as I can see US GAAP does include 'representational faithfulness' in the GAAP heirarchy even it it is at a low level.

February 23 Reply from Todd Boyle [tboyle@ROSEHILL.NET

At 04:53 PM 2/23/02, Robert Walker wrote:

> IAS 39 in respect to the acquisition of a mortgage portfolio,[ it] tells 
> you to apply an interest method in the event your portfolio qualifies 
> (i.e. same as for FAS 115). 

> >Knowing to apply the interest method is not good enough, however. Even 
>within the interest method there are variations - e.g. for changes do you 
>use the prospective or the retrospective method? (See the FASB present 
>value study in Feb 1996 for a description of what this means.) 

> >So far as I can see these questions are not answered in IAS 39. To solve 
>the problem you need go to a source such as FAS 91...

Thanks for this point of course Robert! IAS' have been greatly aided by prior work in FASB.

But I cant help myself --again I marvel at accountancy bodies' chutzpah in trying to apply a descriptive vocabulary to all the world's complexity, when the GAAP vocabularies are so much simpler semantic models than exists between the parties themselves. It reminds me of a kind of compression algorithm that makes documents smaller and simpler for investors to understand, by eliminating various paragraphs of their content. If those paragraphs of contract didn't matter economically then, why did trading partners put them in the contracts?

I'm arguing that financial statements should be aggregates of the native transaction attributes, with drilldown provided to investors, and that the role of accounting classification be much reduced. http://www.petitiononline.com/FinDereg/petition.html 

Accountants who are experts in a particular technical area (taxation, derivatives, etc.) or horizontal areas (especially the most common questions such as timing of recognition) should be articulating the detailed semantic framework for their domain that reflects the full richness of dealings that exist in contracts between parties.

No less will suffice to automate their dealings making business more efficient, and no less will ever suffice in financial reporting. The accountant who undertakes this work in any rigorous way will very quickly find hundreds of people from the software and modeling domains, and several technical frameworks to choose from: XML is most popular, followed by UML, metadata registry approaches like ISO 11179, and lesser ones like RDF or DAML. The narrative, textual approach of the FASBs, IASBs and XBRL, is frankly, not helpful at all. It is destructive.

Accountants have much to give the world by helping bodies such as the FPML arrive at accurate economic ontologies of their subjects, and indeed articulating a common ontological framework for business transactions themselves. Accountants' best roles going forward into future decades is to be metadata experts, harmonizing between those semantic frameworks of industry domains. This is a first-class challenge and one they cannot do alone. At this very time, the UN/CEFACT is launching a metadata harmonization team, whose approval will be required before any of the EDIFACT domain groups can add Core Components to the approved global registry. That is just one place where large scale harmonization efforts are underway,

As always, I could be wrong. Any comments welcome.

Todd Todd Boyle CPA 
9745-128th Ave NE Kirkland WA International Accounting Services, LLC 
425-827-3107 project www.arapxml.net 

February 23 reply from Robert B Walker [walkerrb@ACTRIX.CO.NZ

You are not wrong - merely incomplete.

The economic world accounting purports to describe does not entirely comprise contracts between parties which can be objectively verified by some kind of interchange system.

There are asymmetries, both practical and conceptual, that will not fit your system. In addition, your system does not deal with commodities, at least the way you describe it.

There is also an overlay of discount factors and probabilities that somehow needs to be injected to make sense of what would otherwise be a mass of useless data. Not to mention an aggregation process which must be carried out somewhere.

Why not give us a simple example? Here is one, a mortgage of $1,000 with a variable rate of interest set at 10% p.a at the outset, payable on a table basis over 10 years (i.e $162.75 p.a.).

Vary it by a change in interest rate to 11% after 1 year. Then vary it by an early repayment at year 1. How would your system treat this differently to FAS 91?

Ontology = the metaphysical contemplation of the nature of being. How do you apply this to accounting? (I think it does but it gets a little complicated.*)

At the risk of causing offense, your use of jargon places as many barriers in place as does Bob's use in the FAS 133 context. (So says someone not given to plain English, yes I know already.)

*'One would have to know what being is, in order to decide whether this or that is real ...; in the same way, what certainty is, what knowledge is, and the like ...' Friedrich Nietzsche The Will to Power section 486.

"Enron: Lessons for Accountants How to protect yourself from dishonest clients" SmartPros, February 2002 by: Jack Fox --- http://www.smartpros.com/x32992.xml 

February 2002 (SmartPros) ó How does one scale down the enormity of the Enron and Andersen debacle into terms that mere mortal accounting professionals can fathom? How have the goals, ethics and purposes of the accounting profession been subverted on such a massive scale? How have unknown entities prevailed to perpetrate a corporate and professional deception upon so many and at such a great cost?

While the politicians seek answers and are somewhat relieved that attention has been diverted from their own political campaign contributions imbroglio, the guilty, the greedy, the criminal, the incompetent, the ignorant, and Andersen, which may encompass all of the previous, are squirming in their collective collaborative juices and pleading the Fifth.
Enron may possibly be the greatest Ponzi scheme ever perpetrated since Social Security. Enron was allegedly aided and abetted by Andersen and possibly high level expertise from Nigerian government ministries which had developed the art of sending confidential letters to millions of people asking for their bank account numbers so the ministry in question could transfer the victims' funds into offshore receptacles.  The only requirements were the banking account numbers and purchases of stock in energy trading partnerships which have no traceable losses or shell companies or indictable felonies of any kind and a supportive auditor.
There are positive factors in almost any situation, if one looks deeply enough. Andersen has made a quantum leap and has given the term "paperless office" a new meaning.  Ethical, honest and capable accountants must have the courage to stand firm and never sacrifice their own ethics to serve the client's bottom line. The CPA or other accounting professional must be wary and resolute when the client ignores what is recommended or, upon confronted with an unwanted finding, asks to take it out of the audit. 
Remember, as a certified public accountant or other accounting professional, your own integrity is at stake. There comes a point where a client's unethical behavior shades into actions of questionable legality, which is vastly different than the gross felonies committed by the responsible guilty parties of Enron. While it is highly unlikely that you will find yourself dealing with people who are economic terrorists on a massive scale and employ a Big Five firm, it's not uncommon to find yourself as an independent accounting professional, dealing with small and medium-sized business clients who are looking for ways to skirt the law.  
The bottom line is that if you're ever called on to assist in some sort of illegal activity, you've got to get out. When a client asks you to perform acts that are clearly illegal or borderline according to your expertise and ethics, you have the right and obligation to resign for cause. The best way to avoid unhappy consequences is to be upfront and plan for difficult situations. Turn to the ethics committee at your state society of CPAs or the ethics function at the AICPA for guidance. Two articles worth reading on this topic are Andersen Introduces Yardsticks for Employee Ethics Programs and Professional Ethics for the CPA.
In addition, always utilize an Engagement Letter and employ some sort of problem resolution language and a notice procedure to specify how any potential conflict will be addressed. You can download selected sample engagement letters at the AICPA Web site.
When push comes to shove, you should listen and trust your savvy and feelings.  If you don't feel good about a potential client or a current client, it's probably a valid sign to pass on the prospective client or resigning the current client.  It costs you either way but when you haven't made the right choice, it costs you much more.

Jack Fox, an author, consultant and speaker, specializing in accounting practice development is the founder and CEO of The Accounting Guild, a marketing consortium in Las Vegas, Nevada.  He is the author of seven accounting and business books, including the third edition of his best selling book, Starting and Building Your Own Accounting Business, and Building a Profitable Online Accounting Practice, published by John Wiley & Sons.  Contact Jack at jackfox@accountingguild.com or 702-242-8725

Read more "Marketing Practices and Solutions" by Jack Fox

Expansion means complexity and complexity decay.
Cyril N. Parkinson

What do Andersen, Enron, and Napster have in common?
I think this editorial is important as an indicator of what the general public now thinks about accountancy in the wake of the Andersen/Enron scandal.

This is an editorial from Bob Evans is editor-in-chief of InformationWeek --- http://www.informationweek.com/ 
The editorial appeared in the the February 26, 2002 edition of 
InformationWeek BetweenTheLines [BetweenTheLines@update.informationweek.com

** Business Technology: Kids Want Straight Answers

As a parent, Bob Evans needs to explain such tough topics to his teenager as sex, drugs, and ... Enron.


** Business Technology: Kids Want Straight Answers

Fourteen-year-old to parent: "So what do you think about this Enron thing?"

"Well, it's complicated. What part of it are you asking about?"

Long, silent gaze, bordering on both incredulity at the question and suspicion at the dodge. "The part about a few top-level people lying through their teeth and selling their own shares while the price was high and making tens of millions while they were telling all the regular workers to keep buying the stock with all their pension money no matter how the price went."

"Well, like I said, it's complicated. A lot of people at all levels of the company made a lot of money, at one time, from Enron's innovative and market-making approaches. And that's not a bad thing. But equity markets are complicated, and it's hard to know when to sell."

"Why do you talk to me like I'm an idiot?"

"Hey, hey, hey: Why would you say something like that? I tried to answer your question in a reasonable way without making it overly complicated."

"I said it because you're speaking in some meaningless language and you're avoiding answering what I'm really asking when you say nonsense like 'Enron's innovative and market-making approaches.'"

"Geez, you gotta give me some slack here--I was just trying to put it in terms you could understand. See, Enron was doing things no company had ever done before--that was the innovation--and because of those new ideas, they were making a market for an entirely new type of company that behaved in ways no company ever had before." Pause; stage whisper: "It's a Wall Street term."

"So that makes it a good thing?"

"Well, it's not necessarily a bad thing. We have a lot of laws about who can know what and when they can know it and how they have to tell everyone what they know at the same time and how they can't act in their own self-interest on information that hasn't been shared with everybody. It's--"


"That's not the sort of attitude that helps you learn how the world works."

"Well, Dad/Mom, tell me this: Would you have done what those Enron people did?"

"Aw, c'mon, these hypothetical questions aren't fair! What I do know is that I can say I'm really, really sorry for all the employees who lost everything. But did those executives break the law? I don't know; it's compli--er, it's tricky."

"Mom/Dad, have you used Napster?"

"What do you mean?"

Silence. Stare. Sense of growing anger.

"Well, yeah, of course I've used it--I taught you how to use it."

"Have you used it since that judge said it was illegal?"

Cough. Run fingers through hair. Pucker lips. Flip hands. Reply with idiotic question: "Well, that depends on what you mean by 'used' it."

Look of defiance mixed with tinge of pity and more than a little disgust. "Dad/Mom, I'll give you one more chance: What did Enron pay Arthur Andersen to do? And if you tell me it's complicated, I'll set my alarm clock for 3 a.m. and blast my Marilyn Manson CD out the window so loud it'll wake up the whole neighborhood."

"Arthur Andersen was supposed to make sure Enron followed all the laws we have about how companies have to tell everyone fairly and accurately about where and why money was coming into the company and where and why it was going out."

"And did Andersen do what it was paid to do and promised, by law, to do?"

"Apparently not. But that's hard to say."

"Ahhh--hard to say. I guess it's hard to say why they shredded documents if they had nothing to hide, right? And hard to say why they kept so quiet while all those employees were getting screwed?"

"Gosh, I don't know. ... Maybe they didn't really 'know' it, even though they probably should have, like, expected it." Horrible, long, deafening, awkward silence. "But Andersen is offering to try to make up some of the money some of the people lost."

Penetrating, otherworldly look. "OK, Mom/Dad, thanks a lot for the insights. Now I'm gonna go up to my room and log on to Napster. But don't worry about what I'll be doing: It's complicated." 

Bob Evans is editor-in-chief of InformationWeek. Send E-mail to mailto:bevans@cmp.com  or, better yet, give your feedback in his discussion forum: http://update.informationweek.com/cgi-bin4/flo?y=eGDU0BcUEY0V10NvU0At 

February 27, 2002 message from Roselyn Morris [rm13@BUSINESS.SWT.EDU

Some interesting discussion items:

In a discussion with a big 5 auditor partner and manager (non-Andersen) and the audit committee on February 26, 2002, of a quasi-governmental unit for student lending ($100,000 audit fee):

1) The auditor said that they considered the management their client and could not understand why they were requested to meet with the audit committee. When pressed, and so noted, that the engagement letter for the current engagement was from the audit committee, the auditor still said that the client was the management and that since management cut the check, the auditors preferred to stay on the good side of management.

2) When questioned about their independence and the fact that their firm had been doing the audit five years, the partner claimed that the firm had yet to make money on the audit and that of course they were independent. Since, they had yet to make money on the audit, each year the firm had increased their billings. The audit committee asked how that could be, since the firm and agency had a fixed fee three year contract. The auditors explained that they billed the additional fees (3-6%) to an unconsolidated subs so the additional fees were hidden in "headquartering expense" amount, and so that the board would not question it. Granted the amount was not material, but the auditors were amazed when I kept asking why they had helped management circumvent a control of the board reviewing the financials. On the independence issue, the auditor again was amazed that it was even questioned. True, some the personnel had been on the audit for the entire five years, but the firm and personnel were just truly understanding the agency and management. Since the agency is highly regulated, the auditors said that there very little room for manipulations of the financials. The auditors were then questioned if there was so little room for manipulations, why did they think an audit was needed. Their response was that audits were always required even if not needed. It was suggested that they might want to reconsider why audits were even required and that they might not be giving internal control the right consideration if they didn't understand why audits were needed. (It should be noted that six years ago the agency did have embezzlement by a highly placed management.)

3) The audit of the unconsolidated sub has been late for the entire five years that the firm has done the audit, the agency audit has been late all but the last two years. The unconsolidated sub audit is presently six weeks late and may be later as the audit firm said it had to take care of the SEC clients. Since the agency has publicly traded bonds, the auditors changed and said SEC stock clients. Part of why the audit is late, is the audit firm personnel had to take their ski vacations and now the audit had to be queued behind the SEC stock clients. In trying to get the audit of the agency current the last two years, the board imposed a penalty on the audit firm if the audit was late. At the time the audit firm wanted a bonus if it was finished on time. In the meeting, the auditors still felt that they were entitled to a bonus whenever they finished the audit on a timely basis. They did not see that as a contingent fee or any violations of ethics.

4) The auditors were also anxious to discuss Enron and the Andersen's fault with the audit committee in case we could send the firm work from Andersen client.

I came away from the meeting even more depressed about the audit profession. I am trying to see the silver lining so that I can teach my audit class without prejudice.

Rosie Morris 
Southwest Texas State University

My answer proposed at http://www.trinity.edu/rjensen/fraudConclusion.htm#MyAnswer 
My answer, albeit naive, is that auditing firms must begin to "warrant" or "insure" their services much like insurance companies insure against liability with limits as to what they will pay such as limits to liability in automobile accidents.  Clients should decide how much auditing liability insurance they are willing to purchase as a component of the total audit fee.  The insured liability limit  should be publicized on Page 1 of a corporate annual report and in stock price listings in newspapers and on the Internet.  Accordingly, the amount of insured audit liability would then become an important input into investor and creditor decisions.  Firms paying for lower audit liability would then pay the price by having a higher cost of capital.   This does not mean that all audits should not be held accountable to identical high auditing standards or that audit insurance claims can be filed for stock price declines.  Claims should only be filed when there is evidence of audit negligence and/or fraud.

This is not a proposal that I have worked out in any kind of detail. Two components that I would like to include are as follows:

  1. A whistle blowing incentive scheme that will help disclose breakdowns in the services.

  2. For claims to be adjudicated in an "accounting court" very similar to the "court" proposed by the most famous managing partner (Leonard Spacek) in the history of Arthur Andersen --- Spacek, L., "The Need for an Accounting Court", The Accounting Review, l958, pp. 368-379.

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

Hi Roger,

What is ironic is that the largest CPS firms argued civil damages to be awarded on a pro-rata basis (instead of being the deep pockets in a lawsuit where the primary defendant is bankrupt) was due to "cookie-cutter" lawsuits in which identically worded lawsuits were being filed for multiple firms whose prices had severely declined. (In some cases, the letters even had the names of the defendants wrong).

I guess we have cookie cutters on both sides.


Bob Jensen

Original Message----- 
From: Roger Collins [mailto:rcollins@cariboo.bc.ca]  
Sent: Friday, March 01, 2002 12:14 AM 
To: Jensen, Robert Subject: Politics and standard setting

Bob, regardless of the merits of the argument, I quite like this quote from the article.. The responses show evidence of a co-ordinated US campaign against the IASB proposals, which have been criticised by Senator Michael Oxley, the chairman of the US House of Representatives' committee on financial services.

The letters include 116 from the US business community that are identical in content and even contain the same typographical error. http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT31GJ4Q4YC&live=true&tagid=FTDCZE6JFEC&subheading=accountancy 


Roger Collins Associate Professor UCC School of Business

The U.S. General Accounting Office has released for comment an exposure draft of the 2002 revision of the Government Auditing Standards. This exposure draft excludes the standard for independence, which is being revised separately. http://www.accountingweb.com/item/73528 

Last month, as the post-Enron audit-reform talks escalated, Bernard Wolfman warned Harvey Pitt, chairman of the Securities and Exchange Commission, that a Pandora's box of potential conflicts of interest can arise when an accounting firm provides tax products or advice to an audit client. "There are broad and pervasive issues that the SEC needs to deal with," explains Professor Wolfman. http://www.accountingweb.com/item/72966 

Although the Securities and Exchange Commission has never in the past brought an enforcement action against an audit committee or a member of an audit committee, recent remarks by SEC commissioners and staff indicate this may change in the future. SEC Director of Enforcement Stephen Cutler said, "An audit committee or audit committee member can not insulate herself or himself from liability by burying his or her head in the sand. In every financial reporting matter we investigate, we will look at the audit committee." http://www.accountingweb.com/item/73263 

US GAAP is under attack on the world stage, and the case for acceptance of international accounting standards is gaining momentum. Will the U.S. lose its authority over how foreign firms file financial statements for the U.S. market? What's happening and why? http://www.accountingweb.com/item/73130 



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  


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.


And that's the way it was on March 4, 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