Enron Updates on March 31, 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 

A number of significant developments have emerged in the continuing Andersen story this week. Among the top headlines:

Joseph Berardino Resigns as Andersen's CEO http://www.accountingweb.com/item/76331 

Andersen May Announce Up to 6,000 Job Cuts in the U.S. http://www.accountingweb.com/item/76484 

Andersen's Global Network Merger Plans Unravel http://www.accountingweb.com/item/76455 

Andersen's Client Losses Continue to Mount http://www.accountingweb.com/item/74745 

For a complete perspective of the entire Andersen story since the Enron saga broke, go to: http://www.accountingweb.com/item/76481 

The Securities and Exchange Commission has filed suit against the founder and five other former top officers of Waste Management Inc. for massive fraud. The complaint charges the defendants with inflating profits to meet earnings targets. http://www.accountingweb.com/item/76329 

Note that Waste Management just announced that it was changing auditors.  The auditor up to now was (guess?) Arthur Andersen.

A survey released this week shows CFOs turning more and more frequently to strategic risk management systems to help maintain earnings stability and secure a competitive advantage in the uncertain economic market. Find out specifically how a strategic perspective on risk management will help your organization. http://www.accountingweb.com/item/76373 

Self Regulation Really Works in New York --- It Kept a Few Drunks From Performing Bad Audits
Out of roughly 50,000 accountants licensed in New York, only 16 were disciplined by the state last year-most of them for drunk driving. In fact, only one was reprimanded on professional grounds.

NEW YORK, March 18, 2002 (Crain's New York Business) ó http://www.smartpros.com/x33351.xml 

They were an admixture of old-fashioned and uncouth, a duo almost as unlikely as Neil Simon's odd couple.  The seventy-year-old had been married to the same woman for forty years, in the same job for more than twenty, and in the same place--Orange County, California--forever.  The fifty-four-year-old had recently divorced and remarried, switched jobs often and moved even more frequently, most recently to a million-dollar home in swanky Moraga, east of Oakland, California.  Despite their obvious differences, they spoke on the phone virtually every day for many years.  They first met in 1975 and had traded billions of dollars of securities with each other.  The elder of the pair was the Orange County treasurer, Robert Citron; the younger was a Merrill Lynch bond salesman, Mike Stamenson.  Together they created what many officials described as the biggest financial fiasco in the United States: Orange County's $1.7 billion loss on derivative
Frank Partnoy, Page 157 of Chapter 8 entitled "The Odd Couple"
F.I.A.S.C.O. : The Inside Story of a Wall Street Trader by Frank Partnoy
- 283 pages (February 1999) Penguin USA (Paper); ISBN: 0140278796 
A longer passage from Chapter 8 appears at http://www.trinity.edu/rjensen/fraud.htm#DerivativesFraud 

A second passage beginning on Page 166 reads as follows:

Also on December 5, Orange County filed the largest municipal bankruptcy petition in history.  Orange County's funds covered nearly two hundred schools, cities, and special districts.  The losses amounted to almost $1,000 for every  man, woman, and child in the county.  The county's investments, including structured notes, had dropped 27 percent in value, and the county said it no longer could meet its obligations.

The bankruptcy filing made the ratings agencies look like fools.  Just a few months before, in August 1994, Moody's Investors Service had given Orange County's debt a rating of Aa1, the highest rating of any California county.  A cover memo to the rating letter stated, "Well done, Orange County."  Now, on December 7, an embarrassed Moody's declared Orange County's bonds to be "junk"--and Moody's was regarded as the most sophisticated ratings agency.  The other major agencies, including S&P, also had failed to anticipate the bankruptcy.  Soon these agencies would face lawsuits related to their practice of rating derivatives.

On Tuesday, January 17, 1995, Robert Citron and Michael Stamenson delivered prepared statements in an all-day hearing before the California Senate Special Committee on Local Government Investments, which had subpoenaed them to testify.  It was a pitiful display.  Citron left his wild clothes at home, testifying in a dull gray suit and bifocals.  He apologized and pleaded ignorance.  He said, "In retrospect, I wish I had more education and training in complex government securities."  Stuttering and subdued, appearing to be the victim, Citron tried to excuse his whole life: He didn't serve in the military because he had asthma; he didn't graduate from USC because of financial troubles; he was an inexperienced investor who had never even owned a share of stock.  It was pathetic.

Stamenson also said he was sorry and cited the enormous personal pain the calamity had produced.  He pretended naivete.  He said Citron was a highly sophisticated investor and that he had "learned a lot" from him.  Stamenson's story was as absurd as Citron's was sad.  When Stamenson asserted that he had not acted as a financial adviser to the county, one Orange County Republican, Senator William A. Craven, couldn't take it anymore and called him a liar.  Stamenson finally admitted that he had spoken to Citron often--Citron had claimed every day--but he refused to concede that he had been an adviser.  At this point Craven exploded again, asking, "Well, what the hell were you talking about to this man every day?  The weather?"  Citron's lawyer, David W. Wiechert, was just as angry.  He said, "For Merrill Lynch to distance themselves from this crisis would be akin to Exxon distancing themselves from the Valdez."

For updates on derivative financial instruments frauds, go to http://www.trinity.edu/rjensen/fraud.htm#DerivativesFraud 

Nice going Lehman:  To Hell With the Widows and Orphans
Richard Gross, an analyst at Lehman Bros., maintains a "strong buy" rating on Enron as the stock declines from $81 to $0.75. A Lehman spokesperson helpfully explains to the New York Times that the firm was advising Dynegy on its purchase of Enron's pipeline, and it is Lehman's policy not to change the firm's rating on any company involved in a deal in which Lehman is an adviser.
Number 55 among the 101 Dumbest Moments in Business reads as follows at http://www.business2.com/dumbest/

Nice Going Paine Webber:  To Hell With the Widows and Orphans
Accounting Has Big Problems, But It is Not as Rotten to the Core as the Professions of Financial Analysis and Investment Banking --- http://www.trinity.edu/rjensen/fraud.htm#Cleland 

"The Man Who Paid the Price for Sizing Up Enron," by Richard A. Oppel, Jr., The New York Times, March 27, 2002, Page C1 ---  http://www.nytimes.com/2002/03/27/business/27ENRO.html 

Enron (news/quote) executives pressed UBS PaineWebber to take action against a broker who advised some Enron employees to sell their shares in August and was fired by the brokerage firm within hours of the complaint, according to e-mail messages released today by Congressional investigators.

The broker, Chung Wu, of PaineWebber's Houston office, sent a message to clients early on Aug. 21 warning that Enron's "financial situation is deteriorating" and that they should "take some money off the table."

. . .

The episode illustrates just how easily Enron appears to have thrown its weight around at a Wall Street firm, which may have satisfied a big corporate customer at the expense of some retail customers. PaineWebber managed Enron's stock option program for employees and handled brokerage accounts for many company executives. It also did substantial investment banking work for Enron, which generated fees for the firm. PaineWebber said that Mr. Wu was fired because he had violated policies by sending unauthorized e-mail messages to more than 10 clients and by failing to disclose that PaineWebber's research analyst had rated Enron a "strong buy."

But the day that Mr. Wu was fired was the day that Enron's chairman, Kenneth L. Lay, was both shedding some of his own shares and talking up the stock. On Aug. 21, Mr. Lay sold $4 million of stock to the company. He also sent an e-mail message to employees saying that one of his highest priorities was to restore investor confidence, adding that that "should result in a significantly higher stock price."

The message complaining to PaineWebber about Mr. Wu was sent by Aaron Brown, an Enron official who PaineWebber said helped oversee the stock option program. Mr. Brown could not be reached for comment. A switchboard operator at Enron said today that Mr. Brown no longer worked at the company, and a spokesman did not respond to questions.

Mr. Wu, who declined to comment through his lawyer today, previously asserted that Enron was behind his dismissal, but today's disclosure was the first to show pressure was applied by Enron officials. Mr. Wu now works for A. G. Edwards.

A PaineWebber spokesman declined to elaborate on the matter involving Mr. Wu but pointed to a letter sent to Congress last week.

  Continued at http://www.nytimes.com/2002/03/27/business/27ENRO.html 

Bob Jensen's threads on how the professions of investment banking and security analysis are rotten to the core can be found at  http://www.trinity.edu/rjensen/fraud.htm#Cleland 

Leaders of the American Institute of CPAs have been traveling the country recently to inform constituents on current audit reform initiatives and to outline the position of the AICPA on behalf of the membership. Find out details of what the AICPA is fighting for in the area of audit reform. http://www.accountingweb.com/item/76386 

FASB Chairman (and former executive partner in Andersen) Comments on Proposed Legislation --- http://www.fasb.org/ 

Norwalk, CT, March 19, 2002óIn commenting on two bills recently introduced in Congress that include provisions concerning the Financial Accounting Standards Board ("FASB"), Edmund L. Jenkins, Chairman of the FASB stated, "The commitment to the FASBís independence and open due process that is expressed in the two bills is very important as we address issues related to the Enron matter."

"We appreciate the commitment to supporting and strengthening the FASBís independence embodied in the proposed legislation," Mr. Jenkins added, "but we caution Congress that any legislation mandating particular actions or procedures by the FASB can compromise the very independence that the legislation seeks to enhance."

"The Investor Confidence in Public Accounting Act of 2002," introduced on March 7, 2002, by Senators Christopher J. Dodd (D-Connecticut) and Jon Corzine (D-New Jersey) (the "Investor Act") would require that the Securities and Exchange Commission ("SEC") recognize generally accepted accounting principles established by the FASB if certain qualifications are met. Those qualifications include that the FASB be funded solely by "fees and charges assessed against each issuer" and "by revenues collected from the sale of materials and publications produced by that body." It also would require that the FASB submit an annual report to Congress and other parties.

"The Truth and Accountability in Accounting Act of 2002," introduced on March 14, 2002, by Representatives John D. Dingell (D-Michigan), Edolphus Towns (D-New York) and Edward J. Markey (D-Massachusetts) (the "Accounting Act") would require that the SEC annually conduct a review of "unresolved accounting standards issues" and issue a report to Congress and the FASB describing those issues. It also would require that the FASB submit to the SEC and Congress a response to the SEC report.

In further responding to the Investor Act and the Accounting Act, Mr. Jenkins stated, "We appreciate the sponsorsí support of, and commitment to, private-sector accounting standard setting. And, while we are confident that the FASBís current funding structure has not impaired our independence, we do support the Investor Actís provisions creating a fee-based source of funding for the FASB."

Despite general support of a fee-based source of funding, Mr. Jenkins cautioned that "to accept government-collected fees as a replacement of the current private-sector contributions to the not-for-profit Financial Accounting Foundation that has historically funded the FASB, such fee-based funding must be free of substantive conditions, adequate in amount, and not subject to the type of Congressional or executive branch review that invites interference with the technical decisions and independence of the FASB."

As to the other provisions of the bills, Mr. Jenkins cautioned, "Even limited and well-intentioned provisions like those contained in the Investor Act and the Accounting Act could compromise the independence of the FASB and the transparency of information that investors receive. The greater the involvement of Congress and the executive branch in the activities of the FASB, the greater the potential for harmful political pressures on the standard-setting process. As shown in the past, those pressures inhibit objective, neutral and timely resolution of important financial reporting issues. Resolution of accounting issues in an independent manner is essential to maintaining and enhancing the highest quality accounting standards in the world."

"The standards developed by the FASB over the past quarter century have provided the backbone for our nationís vibrant capital markets because of the transparent, credible and reliable nature of the information that results from their proper application," Mr. Jenkins stated. "Impairment of the FASBís independence by legislation could have a negative impact upon the quality of that information and, consequently, the longstanding competitive advantage of the U.S. capital markets."

"We look forward to working with Senators Dodd and Corzine, Representatives Dingell, Towns and Markey, and others to ensure that the FASB continues to efficiently and effectively fulfill its mission of establishing and improving accounting standards that, when followed, result in the transparent, credible and reliable information needed by todayís investors."

About the Financial Achttp://www.fasb.org/counting Standards Board (FASB)

Since 1973, the FASB 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 on credible, transparent and comparable financial information. For more information about the FASB, visit our website at www.fasb.org .

Bob Jensen's summary of proposed accountancy reforms is at http://www.trinity.edu/rjensen/FraudProposedReforms.htm 

Self Regulation Really Works --- Keep Those Drunks From Performing Bad Audits
Out of roughly 50,000 accountants licensed in New York, only 16 were disciplined by the state last year-most of them for drunk driving. In fact, only one was reprimanded on professional grounds.

NEW YORK, March 18, 2002 (Crain's New York Business) ó http://www.smartpros.com/x33351.xml 

For many people, those statistics are at best an embarrassment. "Something is broken, and we need to fix it," says Lou Grumet, executive director of the New York State Society of Certified Public Accountants. "I hope the low number of disciplinary actions shows that our members are perfect, but I believe the reality is that there are not enough resources to look at them."

Faced with mounting public outrage over the accounting scandals at Enron and a growing list of other companies, New York officials are scrambling to find better ways to police the profession, which is state-licensed and largely state-regulated. At the same time, accounting trade groups such as the NYSSCPA are working furiously to head off what they see as possibly harmful new restrictions by making their own proposals for change.

Topping CPAs' lists of desired reforms is the creation of a more muscular regulator, one capable of clamping down on rule breakers.

For accountants, having a tougher regulator in place would be vastly preferable to a number of options that have cropped up in recent weeks in bills pending in Albany. CPAs are particularly worried that laws designed to prevent conflicts of interest might forever bar them from performing consulting services for their clients.

"Legislatures are keying in on what is the hot button, and that is consulting services," says Allen Fetterman, a partner at Loeb & Troper.

Regardless of the good intentions behind some of the proposals, accountants warn that restrictions that might make sense for dealing with large corporations could actually harm small businesses that routinely turn to accountants for advice on a broad range of subjects. Even helping a small client to load-let alone select-a financial software program could be against the new rules.

"We need a definition of consulting and whether or not it truly is a violation of independence," says Marilyn Pendergast, a partner at Urbach Kahn & Werlin in Albany. "Some of it I see as a very important part of the service that we provide."

Given those concerns, accountants are looking to make changes elsewhere. In addition to establishing a stronger regulator, many CPAs would like to see improvements in the peer review process, in which accounting firms' quality control processes and professional work are examined by outside firms. In New York, such reviews are voluntary, and firms get to select whomever they want to conduct them.

Reform-minded CPAs want to make the peer review mandatory for all firms that provide audit services. What's more, they believe that reviews should be handled by a small group of firms closely monitored by an independent regulator.

Another issue that concerns accountants is that unlike those professionals who work for accounting firms, colleagues who work for corporations don't have to be registered with the state, even though they are licensed by it. As a result, the state's accounting regulator has no authority over them. The reformers are lobbying to have all accountants register with the New York regulator.

Accountants and outsiders alike agree that what needs changing most is the state's regulator itself: the Board of Public Accountancy.

For openers, they note that New York is the only state where the profession's regulator is not independent. Instead, it officially functions as a mere adviser to the Regents of the University of the State of New York, who also oversee everything from dentists and psychologists to acupuncturists and massage therapists. Critics charge that the Board of Regents has neither the staff nor the expertise to police accountants, much less assure the public that the Enron debacle could not happen here.

"What was a theoretical concern six months ago is a very real concern today," says Mr. Grumet of the NYSSCPA. "What's most important is to have a strong regulator in place that can implement all of these changes."

In response to the recent action of the Department of Justice against Arthur Andersen LLP, the Securities and Exchange Commission has released guidance, consisting of a package of rules, hotlines, and e-mail addresses for use by investors, clients, and other audit firms. The SEC's guidance provides helpful reassurance to investors and clients who may have been confused or influenced by the publicity surrounding the DOJ's unprecedented action. http://www.accountingweb.com/item/75589 

Donald J. Kirk, former vice chairman of the Public Oversight Board and former chairman of the Financial Accounting Standards Board, has agreed to oversee the completion of the independence reviews of the Big Five accounting firms after the POB closes its doors on March 31, 2002. http://www.accountingweb.com/item/75738 

From FEI Express on March 21, 2002

In this special executive report, Gordon Yale, a forensic accounting expert, examines what not to do with SPEs. His analysis, which looks at elements of the Powers Report, analyzes Enron's use of SPEs, traces the short history of SPE misuse and focuses on controversial gain-on-sale accounting common to many securitizations. Available at the FEI Research Bookstore:

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

Enron:  Bankruptcy Court Link http://www.nysb.uscourts.gov/ 
The 208 Page February 2, 2002 Special Investigative Committee of the Board of Directors (Powers) 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 ó The report issued today by Enronís 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 companyís leadership and the Board of Directors from criticism by shifting blame to others. http://www.andersen.com/website.nsf/content/MediaCenterEnronResources!OpenDocument   

On March 1, 2002 in the wake of the Enron scandal and the FASB wrote a summary report of SPE accounting at http://www.fei.org/download/FASB_SPE.pdf 

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.)

Arthur Andersen LLP entered a plea of not guilty to criminal charges of obstruction of justice for shredding documents relating to the Enron audit. "I plead not guilty," said Eugene Frauenheim, managing partner of Andersen's Houston office, in federal court on Wednesday. The date for starting the trial has been set at May 6. If Andersen is convicted of the federal charges, the firm could face a maximum fine of $500,000 and up to five years of probation. http://www.accountingweb.com/item/75746 

Interesting Business History in the Context of the Enron Scandal

A very interesting story, much more so than 'The Untouchables'...

The key accountant if there was one, was actually one of his lawyers, Edward O'Hare, who advised Capone on business ventures. 'Fast Eddie' O'Hare became a prominent lawyer and was involved in many businesses with Capone. During Capone's imprisonment for the Valentine's Day massacre in 1929, the laws had been changed to enable taxation of illegally earned profits. Capone and his associates, including Eddie, became a focus of IRS operations in 1930.

Fast Eddie decided to turn on Capone to settle up with the IRS. This was a breakthrough for the IRS. In addition, a set of accounts seized years earlier was properly analyzed provided further evidence of Capone's illegal earnings.

A very interesting wrinkle was that Eddie planned ahead for his son Butch. Terms of the deal with the Feds included acceptance of Butch at Annapolis. Eddie cooperated, and Capone was convicted.

In November, 1939, Eddie was executed by mob associates for cheating another boss, Frank Nitti, on a deal, and perhaps as (somewhat overdue) payback for Capone. According to http://www.alleged-mafia-site.com/tuohy/ohare.html  several months later, Nitti married Eddie's fiance (Eddie had divorced Butch's mother much earlier).

In the meantime, Butch graduated from Annapolis, and in 1942 became a war hero, the first US Navy Ace, by single-handedly downing 5 Japanese bombers and buying time that saved the carrier USS Lexington from destruction. According to http://www.alleged-mafia-site.com/tuohy/ohare.html  President Roosevelt called his outstanding performance, "One of the most daring, if not the most daring, single action in the history of combat aviation." He was subsequently shot down at night in Nov, 1943 and lost at sea.

In 1949, Col. Robert H. McCormick, publisher of the Chicago Tribune, led the charge to rename the Chicago-area airport (formerly named Orchard Field) to O'Hare's International Airport. And so it is named today.

I wonder if anyone from Enron is making similar deals...

Other links:




Kevin Kobelsky PhD CA*CISA
Assistant Professor Leventhal School of Accounting,
Marshall School of Business
University of Southern California Accounting Building
125 Los Angeles, CA 90089-0441 Voice: (213) 740-0657 Fax: (213) 747-2815

From The Wall Street Journal Accounting Educators' Review on March 21, 2001

TITLE: Berkshire Hathaway Changes Accounting of Its Berkadia Stake 
REPORTER: Reuters DATE: Mar 18, 2002 
LINK: Print Only (Not online) 
TOPICS: Accounting Changes and Error Corrections, Accounting For Investments, Consolidation, Equity, Financial Accounting, Accounting, Financial Analysis, Financial Statement Analysis, Investments

SUMMARY: An accounting change will increase assets and liabilities of Berkshire Hathaway by $5.5 billion. The change is related to investments in Berkadia.


1.) Describe Berkshire Hathaway's investment in Berkadia. Prior to the accounting change, how did Berkshire Hathaway account for the investment? How is Berkshire Hathaway currently accounting for the investment? Why are assets and liabilities higher under the new accounting method? Why are there no changes to net income or equity under the new accounting method?

2.) What are the differences between the cost method and the equity method of accounting for investments? What factor(s) determine the appropriate method? When should investments be accounted for by consolidation of financial statements?

3.) What happened to Berkshire Hathaway's share price? What was the percentage change? Why do you think the price changed? Could the change in accounting treatment have affected share price? Support your answer.

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 Accounting Educators' Review on March 21, 2001

TITLE: Audit Cleanup: New Oversight Is Proposed by Blue-Chip Firms 
REPORTER: Cassell Bryan-Low and Michael Schroeder 
DATE: Mar 20, 2002 
LINK: http://online.wsj.com/article/0,,SB10165764708550520.djm,00.html  
TOPICS: Auditing

SUMMARY: The FEI has proposed changes in regulation over the auditing profession to include a new oversight body staffed with finance and accounting professionals knowledgeable about, but independent from, the industry. As well, the group proposes a minimum two-year delay before auditors who are leaving the profession may begin working for their audit clients. They also support streamlining the Financial Accounting Standards Board's operations.

1.) Describe the changes proposed by the FEI that are highlighted in the article. As described in the article, how do these proposed changes differ from some other proposals currently being discussed?

2.) What is the "outgoing Public Oversight Board"? Two members of that Board, Charles Bowsher and Aulana Peters, testified before Congress this week. With whose proposed reforms do those two individuals express concern? Comment on what you think they are concerned about and why.

3.) Who pays for oversight of the accounting and auditing profession? How does the FEI propose that the new regulation efforts be funded? Why do you think they make this proposal?

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

March 23 Messages from Roger Collins and Steve Filling

Steven, here is an extract from a message I wrote to AECM on December 6th....

....given that US GAAP is the most comprehensive - and the regulation system probably the most effective - on the planet, I'm coming to the conclusion that regulation and structural changes won't, by themselves, change matters.

There's an old saying that the stock market runs on two fuels - greed and fear.  Call me cynical if you like, but it looks as if the balance in at least part of the public accounting profession is tilted too much in the direction of greed. I suspect that the only way in which these attitudes will change is if one of the Big 5 is either bankrupted - or possibly brought so close to bankruptcy that they have to lay off thousands of employees - by legal action resulting from an auditing scandal. I'm not personally a fan of the "lawyers as sharks" culture - but right now I can't think of anything short of a cataclysm which would change attitudes to the extent which seems to be required - and, frankly, I can't think of anything other than a massive legal action that is going to stop, not just the drive for "profit at any price" but also the insouciance with which some senior industry figures treat the regulators, in its tracks.

"A whiff of grapeshot" was (I think) the phrase used by Napoleon...

Well, now we have a storm of grapeshot. I agree that most of the Andersen personnel who will suffer will probably not get what most of us would recognise as "fair" treatment - but anyone who equates the operation of the legal system with fairness is likely to be over-optimistic.What moral responsibility do Andersen employees feel ? How willing are they to translate those feelings into action? As Paul Williams writes - what are the limits of collective responsibility ?

Approach this from a slightly different direction; how much would Andersen employees - ALL Andersen employees that is - be willing to give voluntarily to those thousands of former Enron employees who have lost their jobs, houses, health insurance, pensions etc. in a series of events in which Andersen appears to have been closely involved? How many senior Andersen partners would have voluntarily liquidated, say, 70% of their partnership investment to hand it over to some form of Enron employee trust fund, immediately they discovered that Enron was in trouble?* My guess is, not too many - and that's one of the reasons why the legal sharks have the initiative right now.

What is about to happen will be rough justice for many, because its not a process of fairness as much as a process of the Justice Department trying to demonstrate that if the scandal is sufficiently great, no-one is above the law.This "making an example" is hardly ever fair - but there are plenty of precedents for it - the Romans, for instance, had a policy of executing every tenth man of recalcitrant legions (hence 'decimation'). Whether the target - although legitimate - is in fact a distraction from the intimate involvement of senior Enron executives with the current Administration is another matter.

One issue raised by all this is whether the current organisational structures of the large accounting (and other) professional partnerships are appropriate vehicles for the responsibilities those organisations carry.How can a partner in Seattle share responsibility for the actions of another partner in Portland, Me.? But what is the alternative - to make every auditor a free agent? Hardly.Massive professional liability policies, as per gynaecologists? These too would have to be on a collective basis, given the number of individual professionals involved, not to mention the $ value of the risks. One way or another, it seems that the collective would still pay in the end.

It may seem to some that firing Duncan and the rest of the Houston team, and paying some form of compensation, would be appropriate - but that would simply send the message that nothing was really wrong and that after the fuss had died down, we (ie, the firm) could still go on conducting business in the same old way. If, as has been claimed, accounting is really "broke" then, given that practising accountants have effectively captured the "regulation production" system, the only chance of a genuine fix will come from a radical shake-up. Andersen's plight provides the excuse for that shakeup (although to be frank the AICPA haven't done themselves many favours either).So, justice becomes ritual- verging on a witch hunt, with Andersen the culprit/victim, being made an example for the rest of the profession to ponder.


Roger Collins 
Associate Professor UCC School of Busines

*Of course, with hindsight, they all would- but that's not the point.

Steven Filling wrote:

Jagdish - I'm a bit perplexed by your message. Would you agree that the vast majority of Enron employees [arguably as innocent as Andersen staff] similarly have had their lives brutally disrupted? Is there something about accounting as a practice that is different in character from other business organizations?

I agree that what is happening to Andersen staff is, from my perspective, "unfair" - in fact, considering that my sister is a consulting partner at Andersen, I'm probably more confirmed in that belief than most on this list.

However, my questions remain - Should accountants be exempt from the ravages of the market? Should the large CPA firms, who became large [and diversified beyond auditing] to facilitate the economic well-being of their owners/staff, somehow be beyond the tribulations imposed by the capitalist business environment [aka all the others seeking to become better off]?


March 23 Reply from Jagdish Gangolly

Paul and Steve,

I will read the May book very soon.

I agree that in some sense we all (specially the researchers and practitioners in financial accounting) bear some responsibility. We might have had a more resilient structure for financial accounting if we had been a bit less enamoured of regression equations in our research and searched for theoretical underpinning for financial accounting in disciplines besides economics. We have no canons of interpretation, no hermeneutics of accounting, and we all accept the standards stuff as divinely inspired as a matter of faith. Is it any wonder that common sense has dropped out of our equations? Should the legal system consider our adherence to our own concocted standards anything other than a farce?

Culpability is an entirely different matter. I am not convinced that the FIRM of AA was was culpable. At least some professional employees there, I am sure were. That being the case, indictment of the whole firm, at least in my humble opinion, was not warranted. DOJ must have known that such indictment is nothing less than a death warrant for the firm. Such warrants are issued only when the guilt is established beyond reasonable doubt, as I understand. As an information based profession, our only asset is trust. And that has been butchered by this indictment, wise or otherwise.

I agree with Steve that the employees of Enron also have been dealt unfairly. However, they have not been indicted, and Enron now is just a shell. I am sure the culprits at Enron will ultimately be held accountable.

I am not suggesting that the accounting firms be exempt from the vagaries of the "market". However, if you look at the segmentation of the market for CPAs services, it appears that the SEC practice may be evolving into a sort of natural monopoly anyway. While this may be an unavoidable economic phenomenon, we should all probably accept (not necessarily invite) the judicial scrutiny that it entails, at least in the United States.

Respectfully submitted,

Days of Self-Regulation are Over
March 29 Message from George Lan

There are three professional accounting bodies in Canada: the CAs (Chartered Accountants), the CGAs ( Certified General Accountants) and the CMAs ( Certified Management Accountants).

The CAs are probably the most established ones in Canada (depending on who you ask). The CICA (Canadian Institue of Chartered Accountants) set accounting standards in Canada; its board consist of many chartered accountants.

Only the CAs have the right to sign off the audits or do public accounting in Ontario whereas in other provinces such as British Columbia, the CGAs have the right as well as the CAs to do the attest function. CMAs tend to focus on the management and accounting functions in industries; they were previously known as RIAs ( Registered Industrial Accountant). Both the CAs and CMAs require a university degree before one can enroll in their programs. The qualification exams are very rigorous often consisting of many integrative cases where students need to demonstrate analytical and indepth thinking.

The CGA program focuses on various aspects of accounting, finance and business management. At this moment, the CGA does not require a university degree although many do have one. If a student has taken the relevant courses at community colleges or universties, they can get credit for CGA courses if they have achieved a certain grade in these courses. CGA has had a well developed distance learning program for a long time where students can take courses by correspondence and on-line now. They were among the first ones to require that their students have a computer (over more than 10 years ago) and have sound computer skills. The CGA program is probably the most flexible of the three; however, the programne is also arduous, rigorous and long.

Many CAs work in industries after a few years with a CA firm. The three degrees are well-respected in Canada and the CAs and CGAs have significant inroads in some overseas countries such as Bermuda and China, respectively. To become a chartered accountant, a student must article with one of the public accounting firms. CGAs and CMAs also require significant work experience before a student is granted the certification but the work could be say in the accounting or auditing area of the government of private companies.

Although the three bodies have tried to differentiate themselves,they have a lot in common, I believe. CGAs are in the top five percent of income earners in Canada, according to their brochure; I think CAs and CMAs are also doing very well.

These three professional associations have strict rules of professional conduct and require continuing professional development of their members. You can find more about CGA Canada at www.cga- canada.org or CGA Ontario at www.cga-ontario.org , about the CICA or ICAO ( Institute of Charetered Accountants) and the CMA at their websites (unfortunately the exact URLs are not at the tip of my fingers right now, but if you search for ICAO...)

It is possible that those unfortunate accountants who are caught and disciplined by their associations represent only a fraction of those committing misdemeanours. Following the role of AA in the Enron collapse, a high official at the OSC ( Ontario Securities Commissions- which set rules for companies trading on Ontario Stock Exchanges - Toronto Stock Exchange) said a little while ago " the days of pure self- regulation of auditors are over." How the OSC is going to watch them more carefully is not clear.

I am not too sure whether I have given you the information that you wish; if not, please let me know.

Best wishes for a good holiday to you in Jamaica and to other AECMers as well.

George Lan 
University of Windsor

With all the talk of audit reform, globalization, and criticism of the U.S. financial reporting system, an increasing number of companies are assigning staff to closely monitor developments of the International Accounting Standards Board. Once considered "that governing body that has nothing to do with us," U.S. companies are now paying attention. http://www.accountingweb.com/item/76199 

And that's the way it was on March 31, 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