Accounting Scandal Updates on July 24, 2002
Bob Jensen at Trinity University

Bob Jensen's main document on the Enron scandal and other accounting frauds is at 

"Energy Deals Made $200 Million In Fees for Citigroup, J.P. Morgan," by Paul Beckett and Jathon Sapsford, The Wall Street Journal, July 24, 2002 ---,,SB1027459914213766120,00.html?mod=todays%5Fus%5Fpageone%5Fhs 

WASHINGTON -- Citigroup Inc. and J.P. Morgan Chase & Co. made more than $200 million in fees for transactions that helped Enron Corp. and other energy companies boost their cash flow and hide debt, according to congressional investigators and others.

In a congressional hearing Tuesday, investigators also laid out evidence from company documents that suggested the bankers knew of Enron's aim to avoid scrutiny through the deals. Along with the banks' acknowledgment that they marketed such schemes to other energy companies, some legal specialists said the evidence raised the specter of possible criminal or civil liability for the nation's two largest financial institutions.

Both banks defended the transactions as legitimate Tuesday, often in the face of hostile questioning from the Senate Permanent Subcommittee on Investigations. The banks contend that none of the transactions broke any laws, and that it was not their job to audit how the energy company booked the transactions.

The hearing aimed to determine how much Wall Street enabled the complex arrangements that helped fuel the spectacular rise and swoon of the energy industry. As it went on, shares in both banks plunged.

In 4 p.m. New York Stock Exchange composite trading, Citigroup shares sank 15.7%, or $5.04, to $27. Its high, in September 2000 was $59. J.P. Morgan stock was off 18.1%, or $4.44, at $20.08 a share -- down from a March 2000 high of $67.

"If it looks like the banks gave companies intricate instruction on how to do all this, the banks are going to face a significant chance of being indicted," said Christopher J. Bebel, a partner with Shepherd, Smith & Bebel. Mr. Bebel is a former consultant for the Department of Justice and a former Securities and Exchange Commission investigator.

The structures the banks were promoting to Enron and energy companies involve prepaid oil and gas contracts, in which money is paid up front for future delivery of the commodity. Those are common in the industry. But energy companies employed complex circular trades among an offshore entity, the banks and themselves, enabling them to book that cash as part of their trading operations -- instead of as debt -- and also keep investors in the dark.

To help sell these financing deals, according to new documents released Tuesday, Citigroup and J.P. Morgan developed pitch books about how companies could use their services. Critics allege the strategies deceived investors by masking a company's true financial health.

One Citigroup presentation from last year, for instance, touts how using such an arrangement "eliminates the need for Capital Markets disclosure, keeping structure mechanics private" and that "ratings agencies will not view the proceeds raised ... as company debt." For its part, J.P. Morgan, in a July 1998 presentation, noted that such structures were "balance sheet 'friendly.' "

In one February 1999 e-mail disclosed Tuesday, Adam Kulick, a Citigroup vice president, told colleagues that "the client does not wish to have to explain the details of many of the assets to investors or rating agencies." The e-mail went to Citigroup's working group for the biggest of the Enron transactions, a series of deals dubbed "Yosemite." Neither bank commented on the individual documents.

Officials at ratings agencies Moody's Investors Service and Standard & Poor's said at the hearing that if they had known how Enron was boosting cash flow and hiding debt they would have given the company a much lower credit rating than the investment grade it enjoyed until just before its collapse.

In addition to Citigroup's 10 transactions with Enron through June 2001, the bank disclosed for the first time that it engaged in earlier prepaid trades involving special-purpose vehicles with other firms -- Arkla Exploration Co. in 1992 and Amerada Hess Corp. in 1993. A spokesman for Amerada Hess said all of the trades were accounted for properly. A spokeswoman for Arkla couldn't immediately comment.

Citigroup also said it had made presentations on financing arrangements similar to Yosemite to many of the best-known players in the energy business -- including Williams Cos., El Paso Corp., Reliant, Dynegy Inc., and Duke Energy. Citigroup said none of those companies took the bank up on its offer. Duke, Williams, Dynegy, Reliant and El Paso declined to comment.

J.P. Morgan said that besides Enron seven other companies used the same offshore vehicle it established, called Mahonia Ltd., or a successor. The bank named Columbia Natural Resources Inc., now part of NiSource Inc., Occidental Petroleum Co.; Ocean Energy Inc.; Santa Fe Snyder Corp., which is now part of Devon Energy Corp.; and Tom Brown Inc. Spokesmen for those companies said the transactions with J.P. Morgan were all accounted for properly.

J.P. Morgan said the widespread use of prepaid contracts bolstered the bank's contention that they were both legal and in accordance with accounting principles. "Prepaid forwards are widely used deals by a large number of companies," the bank said in a statement. "The fact that they were widespread demonstrates that several outside firms found that they were legal and appropriate."

Continued at,,SB1027459914213766120,00.html?mod=todays%5Fus%5Fpageone%5Fhs  

Bob Jensen's evolving threads on accounting trickery can be found at 

Bob Jensen's accounting theory documents are linked at 

In case some of you did not notice, President Bush was not only on the Board of Directors of Harkin Energy, he was also on its Audit Committee at the same time.

Loan Star State? The 1989 sale of a Harken Energy Company subsidiary to a related-party raises questions about President Bush's role as a member of Harken's audit committee . . . Pres. Bush was a member of the Harken audit committee at the time. But when reporters asked Bush to discuss Harken's accounting practices, the President dithered. Eventually, he noted that, in accounting, "Things aren't always black and white." 
Ronald Fink and Marie Leone,, July 15, 2002 ---,5309,7453,00.html 

(The "black and white" quotation sounds like a feed to ---  This site is intended to be the most complete collection of George "Dubya" Bush quotes available anywhere on the Internet.)

Actually accountants do not wear black or white eyeshades --- they're green! And they're green because most of the auditors of large corporations have almost no experience.  Those young auditors are mere puppies yapping at the accounts receivable. See "The Strategy of Low Cost Auditing using Articling Labor" in "The Transformation of the Accounting Profession: The History Behind the Big 5 Accounting Firms Diversifying into Law," by Colin Boyd, Professor of Management, University of Saskatchewan --- 

The sad thing is that most members of audit committees (like George Bush)  are not even accountants.  They, along with the boards of director members and our U.S. legislators, are the CEOs’ pet rocks.

On July 7, 2002, the day before the Senate took up the accounting reform bill, the Subcommittee on Investigations released a report finding that Enron's directors failed to perform their duties in several important respects. 

The board of fallen energy giant Enron was aware of the managers' dubious financial practices and should share blame for its spectacular collapse, a US Senate subcommittee concluded in a report out Sunday --- 

"The board witnessed numerous indications of questionable practices by Enron management over several years, but chose to ignore them to the detriment of Enron shareholders, employees and business associates," said the report, the result of a six-month probe by the Permanent Subcommittee on Investigations.

The document is a resounding 61-page rejection of the efforts by Enron board members to disassociate themselves from the questionable accounting practices and financial manipulations that brought down what was once a top ten publicly-traded US corporation.

The Senate panel, led by Michigan Democrat Carl Levin, determined that "much that was wrong with Enron was known to the board, from high-risk accounting practices and inappropriate conflict of interest transactions, to extensive undisclosed off-the-books activity and excessive executive compensation."

"Overall the board received substantial information about Enron's plans and activities and explicitly authorized or allowed many of the questionable Enron strategies, policies and transactions now subject to criticism," the report concluded.

"Those red flags were not heeded," its authors, including Maine Senator Susan Collins, the subcommittee's ranking Republican, admonished.

There were six primary areas in what the report described as Enron management's duplicity in accounting that turned what was once "a well-respected and award-winning company into a disgraced and bankrupt enterprise in less than three months."

The 15-member board "failed to safeguard Enron shareholders and prevent" the company's collapse; ignored high-risk accounting practices; overlooked inappropriate conflicts of interest and "extensive undisclosed off-the-books activity".

It also did not respond to excessive compensation; and compromised its independence with financial ties between board members and executives, the report said.

For these failures, "the Enron board contributed to the company's collapse and bears a share of the responsibility for it."

The report also contradicts claims of ignorance by former Enron CEO Ken Lay -- once a close ally and contributor to President George W. Bush.

It could also compromise the influential soon-to-retire Republican Senator from Texas, Phil Gramm, who since 1989 has been a top beneficiary of Enron campaign contributions and whose wife served as a director for the energy trader.

The spectacular December 2001 collapse of the 100 billion-dollar company, which once had more than 20,000 employees, is one of the most colossal in US history.

But the blame for the debacle is misplaced, said a lawyer for the Enron directors who were not yet part of the firm's management team, in the pages of Sunday's New York Times.

"The Senate report unfairly criticizes the board for oversight failures, when what actually occurred here was that the board was misled by management and the outside auditors about these transactions," lawyer W. Neil Eggleston was quoted as saying.

So far, auditor Arthur Andersen is the only player in the scandal to be tried. It was found guilty of obstruction of justice by a Houston, Texas federal court last month.

I am impressed by Senator McCain's courage.  He's a gladiator amidst the CEO lions.

Summary of Senator John McCain's Major Proposals (that industry and large accounting firms are fighting against with every weapon in their defense arsenal):

"The Free Market Needs New Rules," by Sen. John McCain, The New York Times, July 8, 2002 --- 

In a string of corporate failures and scandals from Enron to WorldCom, we have seen the first principles of free markets - transparency and trust - fall victim to corporate opportunists exploiting a climate of lax regulation. I have long opposed unnecessary regulation of business activity, mindful that the heavy hand of government can discourage innovation. But in the current climate only a restoration of the system of checks and balances that once protected the American investor - and that has seriously deteriorated over the past 10 years - can restore the confidence that makes financial markets work.

Congress and the president must work quickly to frame new legislation and reform corporate governance and government oversight. And I would add one more suggestion. The president and Congress should ask for the resignation of Harvey Pitt, the chairman of the Securities and Exchange Commission. While Mr. Pitt may be a fine man, he has appeared slow and tepid in addressing accounting abuses, and concerns remain that he has not distanced himself enough from former clients.

The need for government action and oversight is clear. Corporations fabricated revenues, disguised expenses and established off-balance-sheet partnerships to mask liabilities and inflate profits. Executives maximized their compensation with stock option plans that burdened their companies with huge costs hidden from investors. Venerable accounting firms, having looked the other way as companies cooked the books, shredded documents to hide their misdeeds. Although American tax policy encouraged them to do so, corporations that move their legal headquarters offshore to avoid paying taxes appear conspicuously ungrateful to the country whose young men and women are risking their lives today to defend them.

Reforms must ensure a complete separation of the auditing and consulting services provided by an accounting firm; a firm that audits a company must be prohibited from providing any consulting service - ever - to that company. Legislation sponsored by Senator Paul Sarbanes would create an Accounting Oversight Board to establish and enforce the standards for audits of publicly traded companies. But this oversight board should be completely independent from the industry, financed either as part of the S.E.C. or a separate agency.

Stock options, while a legitimate and valuable form of employee compensation, must be identified as an operating expense in a public company's financial reports. Top executives should be precluded from selling their own holdings of company stock while serving in that company. Executives should be allowed to exercise their options, but their net gain after tax should be held in company stock until 90 days after they leave the company.

Executives should be required to return all compensation directly derived from proven misconduct. Also, a corporate compensation committee should be made up of members of the board who have no material relationship with the company or personal relationship with its management. Indeed, the entire board should be similarly independent, with the exception of the chief executive.

Top executives should be required to certify personally that the company's public financial reports are accurate and that all information material to the financial health of the company has been disclosed. If their certification is false, they should go to jail.

Government should remove egregious conflicts of interest in "full-service'' financial institutions. Investment services, including research, should be separated from lending, underwriting and securities trading.

Even as we take these and other necessary actions, asking for the resignation of Mr. Pitt would help show the public our seriousness. During his first 10 months as S.E.C. chairman, he did not participate in 29 of the commission's votes, most of which involved his former clients. To address corporate misconduct, he seems to prefer industry self-policing to necessary lawmaking. Government's demands for corporate accountability are only credible if government executives are held accountable as well.

What is at risk is the trust that investors, employees and all Americans have in our markets and, by extension, in the country's future. To love the free market is to loathe the scandalous behavior of those who have betrayed the values of openness that lie at the heart of a healthy and prosperous capitalist system.

Six ways to crack down on corporate crooks
"More Reform and Less Hot Air," by Daniel Eisenberg, Time, July 14, 2002 ---,9171,1101020722-320777,00.html 

1. More Orange Jumpsuits 
President Bush last week called for doubling the maximum prison term for mail and wire fraud to 10 years. But the problem isn't the length of the sentence handed down for corporate malfeasance; it's winning a criminal conviction in the first place. Financial misdeeds are often difficult to explain to juries, and proving intent is even harder. More money for investigators would help, but the new $100 million that Bush pledged for the Securities and Exchange Commission is not nearly enough for the underfunded agency.

There is similar posturing in Congress but also some substantive proposals. An amendment introduced by Senator Patrick Leahy of Vermont would make it a felony to defraud shareholders — making it easier to prosecute executives — and also provide more protection to whistle-blowers. Another proposed law would make CEOs liable for the accuracy of their firm's financial statements, a measure supported by nearly 90% of those surveyed in a new TIME/CNN poll.

2. Get Rid of Pet-Rock Boards 
Even with the improvements of recent years, too many corporate boards of directors still serve as little more than puppets of management. Bush only briefly touched on this in his speech, calling for a majority of each board — and for all members of its audit, nominating and compensation committees — to be "truly independent" and to "ask tough questions." But this should be spelled out further. Independent should mean more than someone who doesn't work for the company; it should exclude anyone who has a consulting gig or supplier deal or who has recently left the company — as the New York Stock Exchange recently proposed.

Board members also need to stop spreading themselves thin on five or 10 boards at a time. They should be subject to 10-year term limits and annual elections. The terms should not be staggered, so shareholders can throw out all board members at once if they wish. Companies should be required to give shareholders election materials about rival candidates; as it stands, small investors who want to wage upstart campaigns don't stand a chance.

To avoid getting too cozy with management, directors need to meet regularly by themselves and with auditors without any of the company's top executives present. They should appoint a lead independent director to balance the power of — or even serve as — the chairman, who these days too often happens to be the CEO. (That should not be allowed.) Finally, directors should be paid primarily with long-term grants of stock, rather than collect a check for showing up occasionally. At AutoZone, a $5 billion-a-year parts-supermarket chain, each board member must invest at least $100,000 in company stock within three years of joining.

3. Price the Options 
Executive pay is out of control. the proposal from President Bush and Congress to bar company loans to executives would help address the problem. Another good idea is letting shareholders approve every grant of stock options. But it's the kind of compensation — in the form of stock options — and the perverse incentives that come with it that pose the biggest concern. Because most corporations do not deduct the cost of options from their bottom line, CEOs have no reason not to stuff their pockets with options. So far, Bush has declined to address this crucial accounting issue, and Arizona Senator John McCain's attempts to push it were blocked last week. But in an encouraging development, West Coast real estate firm AMB Property just became one of the few U.S. companies (along with Boeing and Winn-Dixie Stores) to deduct the expense.

One reason options are troubling is that they encourage executives to expose the company to more risk than they would otherwise; executives have much to gain from reckless or shortsighted tactics and little to lose. Paying top executives mostly in restricted stock would force CEOs to "ride it up and down," says Charles Elson, director of the Center for Corporate Governance at the University of Delaware. And prohibiting CEOs from selling their company stock until after their tenure has ended would remove the incentive to manage earnings for the short term. McCain has called for such a restriction, which 70% of TIME/CNN poll respondents support.

4. Stop Bribing Auditors 
Much of the mischief by accounting firms stems from the dual role they often play: as auditors sworn to serve shareholders and as consultants paid much more to please management. Several bills in Congress take aim at the accounting industry, promising increased oversight. None yet propose the full separation that is needed between auditing and consulting firms, as McCain called for last week, but the bills at least stipulate that public companies should not be allowed to have the same firm do both its auditing and its accounting — a proposal endorsed by more than 70% of those polled by cnn and TIME. Auditing firms — or, at the very least, their employees — should be rotated from client to client every few years. Most important, auditors should give detailed statements explaining how aggressive or conservative their client's accounting is, rather than simply signing off on it.

5. End Stock Pimping 
One had only to witness the grilling that Salomon Smith Barney analyst Jack Grubman endured at the congressional WorldCom hearing last week to get a sense of how low Wall Street analysts have sunk. Too many stopped providing objective stock research to investors long ago, instead spending the bulk of their time helping woo investment-banking business. New York State attorney general Eliot Spitzer has made some small progress toward cleaning up the industry: increasing disclosure of conflicts of interest and separating analysts' compensation from specific investment-banking deals. But those are half measures. The best solution would be to separate investment-banking businesses completely from research, as McCain has proposed. But the financial firms and their pet lawmakers will probably block such a reform. Still, analysts' pay should be based entirely on the performance of their stock picks, and investment banking divisions should have their own, separate army of analysts to work on deals.

6. Unlock Those 401(K)S 
One way to help potential victims of corporate crime is to give employees more power to diversify their 401(k) plan and not get stuck with a rotten nest egg. The Senate is considering legislation that would allow workers to sell company stock after being at a firm for three years. It would also require companies to disclose any planned insider stock sales.

Continued at,9171,1101020722-320777,00.html

Other proposed reforms are threaded at 

The AccountingWeb recommends a number of books on accounting fraud --- 

"The Truth Behind the Earnings Illusion:  The profit picture has never been so distorted. The surprise? Things aren't as ugly as they look" by Justin Fox, Fortune, July 22, 2002 --- 

Where are the major differences between book income and taxable income that favor booked income reported to the investing public?

Answer according to Justin Fox:

What the heck happened? The most obvious explanations for the disconnect are disparities in accounting for stock options and pension funds. When a company's employees exercise stock options, the gains are treated for tax purposes as an expense to the company but are completely ignored in reported earnings. And while investment gains made by a company's employee pension fund are counted in reported earnings, they don't show up in tax profits.

Analysts at Standard & Poor's are working to remove those two distortions by calculating a new "core earnings" measure for S&P 500 companies that includes options costs and excludes pension fund gains. When that exercise is completed in the coming weeks, most of the profit disconnect may disappear. Then again, maybe not. In struggling to deliver the outsized profits to which they and their investors had become accustomed in the mid-1990s, a lot more CEOs and CFOs may have bent the rules than we know about. "There was some cheating around the edges," says S&P chief economist David Wyss. "It's just not clear how big the edges are."

While conservative accounting is now back in vogue, it's impossible to say with certainty that reported earnings have returned to reality: Comparing the earnings per share of the S&P 500 with the tax profits of all American corporations, both public and private (which is what the Commerce Department reports), is too much of an apples and oranges exercise. But over the long run reported earnings and tax earnings do grow at about the same rate--just over 7% a year since 1960, according to Prudential Securities chief economist Richard Rippe, Wall Street's most devoted student of the Commerce Department profit numbers. So the fact that Commerce says after-tax profits came in at an annualized rate of $615 billion in the first quarter--a record-setting pace if it holds up for the full year--ought to be at least a little reassuring to investors. "I do believe the hints of recovery that we're seeing in tax profits will continue," Rippe says.

That does not mean we're due for another profit boom. Declining interest rates were the biggest reason profits rose so fast in the 1990s, says S&P's Wyss. Rates simply don't have that far to fall now. So even when investors start believing again what companies say about their earnings, they may still be shocked at how slowly those earnings are growing.

Continued at 

Reply by Bob Jensen:

For a technical explanation of the stock option accounting alluded to in the above quotation, go to one of my student examinations at 

The exam02.xls Excel workbook answers can be downloaded from 

The S&P revised GAAP core earnings model alluded to in the above quotation can be examined in greater detail at 

The pause that refreshes just got a bit more refreshing - Coca-Cola Co. announced Sunday it will lead the corporate pack by treating future stock option grants as employee compensation. 

Where are the major differences between book income and economic income that understate book income reported to the investing public?

This question is too complex to even scratch the surface in a short paragraph.  One of the main bones of contention between the FASB and technology companies is FAS 2 that requires the expensing of both research and development (R&D)  even though it is virtually certain that a great deal of the outlays for these items will have economic benefit in future years.  The FASB contends that the identification of which projects, what future periods, and the amount of the estimated benefits per period are too uncertain and subject to a high degree of accounting manipulation (book cooking) if such current expenditures are allowed to be capitalized rather than expensed.  Other bones of contention concern expenditures for building up the goodwill, reputation, and training "assets" of companies.  The FASB requires that these be expensed rather than capitalized except in the case of an acquisition of an entire company at a price that exceeds the value of tangible assets less current market value of debt.  In summary, many firms have argued for "pro forma" earnings reporting such that companies can make a case that huge expense reporting required by the FASB and GAAP can be adjusted for better matching of future revenues with past expenditures.

You can read more about these problems in the following two documents:

Accounting Theory --- 

State of the Profession of Accountancy --- 

More on Rotten to the Core

The enormous scandals and moral hazards of security analysts having to avoid sell recommendations of investments that they know their clients should sell or not buy are discussed in greater detail in my "Rotten to the Core" module at 

One of the enormous problems faced by analysts is that many companies will exclude them from information sources if they dare say bad things about those companies.  This continues to be reflected in the sad outcomes in the far right column of the table below.

I  added the following reference and table to  :

"Should Your Trust Wall Street's New Ratings?
Even in the Bear Market A "Sell" Remains a Rarity But Better Guidance id Coming"
by Jeff D. Opdyke, The Wall Street Journal, July 17, 2002, Page D1


Word Games
Many Wall Street firms have unveiled simpler ratings for stocks.  Here's a look at how they work?
Morgan Stanley (March 2002) New Ratings:  Overweight   Neutral   Underweight Percentage of Current "Sell" Ratings:  20.90%
Merrill Lynch (September) New Ratings:  Buy              Neutral                 Sell Percentage of Current "Sell" Ratings:  05.80%
Prudential (May 2001) New Ratings:  Buy              Neutral                 Sell Percentage of Current "Sell" Ratings:  03.50%
Goldman Sachs (Fourth Quarter) New Ratings:  Outperform  In-line     Underperform Percentage of Current "Sell" Ratings:  01.50%
Lehman Brothers (Aug. 1) New Ratings:  Overweight   =weight   Underweight Percentage of Current "Sell" Ratings:  01.00%
J.P. Morgan Chase (August) New Ratings:  Overweight   Neutral   Underweight Percentage of Current "Sell" Ratings:  00.90%
Credit Suisse First Boston (September) New Ratings:  Outperform  In-line     Underperform Percentage of Current "Sell" Ratings:  00.40%

"Channel stuffing" refers to the practice of building inventories in distribution channels. On July 11, 2002 Bristol-Myers Squibb, one of the world's largest pharmaceutical companies, confirmed that the Securities and Exchange Commission (SEC) has launched an "informal inquiry" into its sales practices. 

Channel stuffing was (is?) common in the tobacco industry where companies load up sales revenues on deliveries that they know they will have to take back after the freshness dates on packages expire.  More cartons were (are?) sent to customers than can ever be sold before expiration dates.

You can read about more revenue reporting tricks at

What are colleges doing in the wake of the accounting and corporate scandals?

"Is Education the Answer on Ethics? Our recent article on where business morality fits in B-school curriculums drew a wide variety of responses, sampled here," Business Week, July 8, 2002 --- 

A number of B-schools let us know how much they've been doing to turn out MBAs with strong ethics. At the same time, readers from the U.S. and abroad weighed in demanding more attention to business ethics as a discipline. Of course, that sentiment wasn't unanimous: Some readers felt that if B-schools emphasize ethics more in their curriculums they'll only create ghettoized courses fated to fall by the wayside, much as many e-commerce initiatives have. 

What do readers of BusinessWeek Online's B-Schools channel make of this year's lapses in corporate ethics -- and of our coverage of the subject? Responses to our June 13 story, "Where Can Execs Learn Ethics?" illustrate the rich variety of reactions.

A number of B-schools let us know how much they've been doing to turn out MBAs with strong ethics. At the same time, readers from the U.S. and abroad weighed in demanding more attention to business ethics as a discipline. Of course, that sentiment wasn't unanimous: Some readers felt that if B-schools emphasize ethics more in their curriculums they'll only create ghettoized courses fated to fall by the wayside, much as many e-commerce initiatives have. Here are edited versions of the some of the messages we received from readers:

Continued at 

From The Wall Street Journal Accounting Educators' Review on July 18, 2002

TITLE: Cooking Books Is a Hot Topic On Campuses 
REPORTER: Diya Gullapalli 
DATE: Jul 16, 2002 
TOPICS: Accounting, Accounting Education, Financial Statement Analysis, Fraudulent Financial Reporting

SUMMARY: In light of recent questionable financial reporting, many universities will offer new accounting courses aimed at identifying red flags. These new courses are just one of many changes occurring in accounting education to better prepare accounting graduates.

1.) Discuss the advantages and disadvantages of offering case studies in accounting education. Should case studies completely replace a more traditional approach of studying and applying accounting standards? Support your answer.

2.) What changes to the CPA exam are proposed for 2004? Discuss the merits of the changes. Will the new exam format better test a persons preparation for a career as an accountant? What changes in education are needed to prepare students for the new exam format?

3.) Why do you think that enrollment in accounting programs has declined? Do you think that current accounting issues will serve to increase or reduce future enrollment? Support your answer.

4.) Discuss the advantages and disadvantages of providing broad-based business skills to accounting majors.

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

My secretary, Debbie Bowling, pointed out that the article below mentions the forthcoming American Association Annual Meeting in San Antonio August 13-19 --- 

In fact, organizers of next month’s AAA annual meeting expect the biggest draws to be sessions on “earnings management,” “aggressive financial reporting,” “regulating the accounting profession” and “insider information and corporate disclosure.”

"For students, Accounting Fraud 101:  More colleges offer courses on corporate abuse," by Diya Gullapalli, The Wall Street Journal, July 16, 2002 --- 

There will be a hot new course at many colleges this fall: how to tell if a company is cooking its books.

AT THE University of California at Irvine, MBA students will be offered “The Enron Case,” a two-credit course in which they will comb through the energy company’s financial statements looking for red flags. They also will learn about some of the factors blamed for Enron’s fall, including special-purpose partnerships, derivatives contracts and pension fraud.

At Massachusetts Institute of Technology, Prof. S.P. Kothari plans to present case studies on Tyco International Ltd., Global Crossing Ltd. and Xerox Corp. in his accounting classes, then test his students’ knowledge of these companies’ accounting problems. Advertisement

Professors say these new courses at some 20 colleges go way beyond traditional accounting classes that stress rote learning of the trade’s rules and regulations. Instead, they hope to teach students how to sleuth through corporate books. “Enron has reinforced the difference between skills and memorization,” says Steve Albrecht, associate dean at Brigham Young University’s Marriott School of Business. “We don’t want to just teach kids how to copy information from books, and that’s what’s been happening.” The American Institute for Certified Public Accountants even plans to change the CPA exam for 2004 so it will better measure students’ ability to think independently as accountants. The new test will be open book and require students to build spreadsheets and do research online during the test. This past spring the group distributed free computer disks with new practice questions to the nearly 900 U.S. schools with accounting programs. Some say it’s about time that universities addressed the issue. “The problem in accounting education is that professors presume to be engaged in high-level scientific research,” says Abraham Briloff, a professor emeritus at Baruch College in New York City. “They develop exotic and esoteric mathematical models when they should be rolling up their sleeves and teaching students how to dig into the 10Ks and 10Qs,” he adds, speaking of the annual and quarterly financial reports that public companies must file with the government.

Still, getting accounting instructors to change their methods may be an uphill battle, says Bill Schwartz, chairman of the teaching and curriculum committee at the American Accounting Association, a group that promotes accounting education. “When you have an aging faculty that’s within 10 years of retirement, sometimes there’s no incentive to make drastic changes,” he says. “Hopefully these scandals will push us.” In fact, organizers of next month’s AAA annual meeting expect the biggest draws to be sessions on “earnings management,” “aggressive financial reporting,” “regulating the accounting profession” and “insider information and corporate disclosure.”

Students say they can already feel the new approach. As an undergraduate, “I did math problems and memorized dozens of GAAP [generally accepted accounting principles] rules and legal statutes,” says Michael Rockwood, an MBA student at the University of Texas at Austin. But his brother, now an undergraduate accounting major at his alma mater, Utah State University, is doing more case studies, he says. At the University of Virginia, accounting major Brendan Abrams says “we discussed problems at different firms regularly” in accounting classes last spring, and this, he says, has prepared him well for his current internship as an auditor at Ernst & Young. This isn’t the first time accounting scandals have prompted business colleges to revamp their courses. In the 1990s, bookkeeping problems at firms such as Waste Management Inc. and Cendant Corp. led professors to make some changes, such as adding accounting fraud minors at schools such as Bloomsburg University in Bloomsburg, Pa. While nationwide enrollment in the accounting major has declined an average of 27% a year for the past five years, academics say the current accounting scandals might actually attract more students to the profession

An accounting fraud class at the University of Texas at Austin this spring had three times the enrollment it did the summer before, with many of the students coming from majors other than accounting. At Hilbert College, a small liberal arts college in Hamburg, N.Y., professors say they have received dozens of inquiries from other colleges this year about starting majors in economic-crime investigation similar to theirs. And at the University of Delaware, Professor Charles Elson says he had 45 students in his corporate governance class this past spring, compared with 22 a year earlier. He plans to respond to the demand with more lectures on the role of the audit committee of corporate boards of directors. This new emphasis on audit committees has spurred other schools to boost the discussion of corporate governance in accounting classes this fall. The National Association of Corporate Directors reports that over 20 additional colleges have requested reports and lecture material in the past four months and repeat clients such as Harvard University, Yale University and Xavier College in New Orleans have requested up to three times as many articles as last year. Yet some professors have worried that initiatives intended to give future accountants broad-based business skills could further blur the line between auditing and management consulting-an issue in many of the current accounting scandals. Big accounting firms have given millions of dollars to business schools, sometimes with strings attached as to the type of classes they offer and research that is done. Now “schools want to distance themselves from the accounting firms,” says the AAA’s Mr. Schwartz, who also is dean of the School of Business and Economics at Indiana University in Bloomington.

I was somewhat disappointed in the following interview with the new FASB Chairman. He does not come across very forceful or definitive in light of the problems facing financial reporting at this moment. However, Robert Herz is new on the job and must be given some time to take over the controls and lead us on. I hope that down deep he does not really believe that the scandals surfacing are truly isolated instances. Surely management of earnings is a much more systemic and pervasive cancer than he leads us to believe in this interview. But we really should not pass judgment on our leader at the very start of taking command of the FASB ship. It is certain that he will have to navigate through turbulent seas.

FASB Chairman Speaks The new FASB Chairman, Robert H. Herz, speaks on accounting standards, financial reporting and his professional and personal goals in this Financial Executive Online Exclusive --- 

"I'm ready to step up to the plate," says Robert H. Herz on beginning his five-year term as the newly-appointed chairman of the Financial Accounting Standards Board. Formerly PricewaterhouseCoopers LLP's North America Theater Leader of Professional, Technical, Risk & Quality, his 20-plus years of broad experience includes technical, operational and board positions. A stint on the International Accounting Standards Board, and his education in both the U.S. and U.K. - he holds a CPA and CA - give him fluency in working with international standards.

Herz is beginning this high-visibility post at a turbulent time for accounting standard setting, and just prior to his July 1 start date, he spoke candidly with Financial Executive's Managing Editor Ellen M. Heffes about accounting standards, the state of financial reporting and his professional and personal goals.

Recent corporate reporting coverage has centered on Enron, Andersen, investor lack of confidence, the dot-com debacle, reliance on short-term earnings and investment bankers' and analysts' conflicts of interests. From the "inside," how bad is it, really?

By and large, companies are trying, and do report properly. But the numbers of instances of accounting abuses and financial reporting scandals, and their effects on the system, have grown. This is causing some fundamental questions to be asked by all of us who are part of this system, [as well as] Congress and the public, and it is having an effect on the confidence in the capital markets. While the markets are fairly resilient, it is serious enough that everybody has to recognize that there are questions, and many of those questions are quite valid.

I'm a "glass-half-full" kind of guy. I think [questions are] healthy and that coming out of this process, we'll hopefully have a system with renewed dedication to everybody playing his or her role and taking responsibility in a highly ethical and sound way. And, I think some structural fixes will be put in place that could also help.

There were some excesses in the system, and people who were not exactly clear about their roles [or] where the boundaries were. That led to some bad behavior.

That's part of the reason why I am excited about the FASB chairman job, because of the opportunity to contribute to the proper functioning of the capital markets. A key aspect of that is sound corporate information that's relevant, that's reliable and that people can trust.

Another aspect is financial reporting, and a very important facet of that is setting standards relating to accounting and financial reporting.

As for the numerous U.S. standards, often ambiguous and open to interpretation, one argument goes: "With over 15,000 registrants reporting, how many are 'bad apples?'" It seems only only a few, but they are so highly publicized.

True, although the argument has been that, "It was only Cendant, Sunbeam and Waste Management." Then came Enron, and now the list seems to be growing, [with more] problems coming to light. So, while it is still a small percentage, it's larger than people thought before and, in my view, indicative of some broader problems in the system.

Do you think it's more than the individuals involved, but rather the rules themselves?

I think it's less the rules themselves. About two years ago, I co-authored a book, "The Value Reporting Revolution: Moving Beyond the Earnings Game," and believe the reason a lot of people read it was because of our depiction of what we called "the earnings game" that was going on. It is the quarterly earnings forecast game - the constant pressure from Wall Street on companies to meet or beat the Street's estimates on quarterly earnings - and it's made some people behave in unfortunate ways.

I think it is still an issue, [and] one that can be fixed. But, it requires people to acknowledge that there has been an issue.

Which leads us into your role at the FASB, beginning July 1. What do you aim to do?

It all starts from my overall goal and passion: I want the FASB to play its role in doing what it can to promote good financial reporting. But, we can only do so much because the standards themselves are only one element. That's got to go with good implementation of the standards, [which involves]: faithful implementation by the companies, strong auditing, sound corporate governance, analysts doing real analysis and proper review and enforcement by the Securities and Exchange Commission.

So we have a role to play at the FASB in trying to improve the system that can start with improved financial reporting standards. But there are many other elements and other players that have to weigh-in and do their part as well.

What specifically are you planning to do to move in that direction?

Some of it comes with what we focus on, the agenda. Is the agenda right? Are we looking at the right things? Are we also trying to think ahead, to get good intelligence as to what is really going on, out in industry, out in the markets?

What might the problems be? [I don't mean] crystal-ball gazing 5 or 10 years into the future, but more [in terms of] what issues are coming up, both around our existing rules in terms of new business structures and arrangements, and what kinds of questions do they raise for accounting and accounting standard setting?

Second, we need to look carefully at existing processes to see whether there are ways to improve them - in terms of both effectiveness and speed, without compromising appropriate input and due process. The existing board has started a project to determine whether standard setting - from getting it on the agenda, to finishing a project - can be made a little quicker.

Also, from my perspective, the success of any organization is very much dependent on not only the quality of its people, but also on the pride and passion of its people. I certainly feel that the FASB is an extremely important organization within the whole context of financial reporting and the capital markets, and I am sure people there already feel that way. That sense of pride and passion in the mission is important to the success of our efforts.

Would that be a number three item or goal, then, the staff?

I am not listing my goals in any order, but certainly, the pride and passion of the people working at the FASB would be very high on my list.

I also believe strongly in the international movement [towards] convergence. I've long believed in it, and it's at the stage now where things could begin to happen. I have a high regard for the International Accounting Standards Board (IASB), as a member of it - a post I step down from on July 1 - and my intent is to have the two groups work very closely together.

I'd like to see that happen both on new projects on particular topics and also to see if - by identifying within the inventory of existing standards the major areas that cause differences - we can come to some agreement and narrow the range of differences.

Reply from Eric Press [epress@SURFER.SBM.TEMPLE.EDU


Take a look at Herz's et al. book, The ValueReporting Revolution: Moving Beyond the Earnings Game (John Wiley). It documents a lot of corporate sins, and calls for increased company disclosure, and auditor responsibility. Bob Herz (whom I know from a stint on the AICPA's SEC Regulations Committee) is appalled at some of what has passed for auditing, and may well be a forceful FASB leader. It's wisdom to defer judgment on anyone's performance until we have some observations. Personally, I'm optimistic.

Eric Press, Ph.D., C.P.A 
Associate Professor of Accounting Fox School of Business 
Temple University Philadelphia, PA 19122 s 

"Pricewaterhouse to Pay $5 Million To Settle SEC Enforcement Actions," The Wall Street Journal, July 17, 2002 ---,,SB1026872210131770960,00.html?mod=home_whats_news_us 

The Securities and Exchange Commission is expected to announce as early as Wednesday that PricewaterhouseCoopers LLP has agreed to pay $5 million to settle three separate enforcement actions alleging violation of independence standards and improper accounting.

The agreements will outline accounting violations involving two audit clients: Pinnacle Holdings Inc., and Avon Products Inc. A third case involves independence violations by the firm's broker-dealer, PwC Securities.

In a letter dated Wednesday, PricewaterhouseCoopers Chairman Dennis Nally disclosed to the firms' partners that the SEC settlement was imminent and that the firm, without admitting or denying the allegations, had agreed to pay a fine and make improvements to audit procedures.

"Despite the potential for unfavorable publicity, we believe that settling these issues now is in the best interest of our firm and our clients," Mr. Nally wrote.

PricewaterhouseCoopers spokesman David Nestor said the firm doesn't "comment on SEC matters." An SEC spokeswoman said the agency doesn't confirm or deny investigations.

The SEC believes the settlements are highly significant because they demonstrate how consulting-fee arrangements allegedly led directly to the audit clients' improper accounting, according to a person with knowledge of the settlement. In the late 1990s, when former SEC Chairman Arthur Levitt was pushing to limit accounting firms from cross-selling some consulting services to audit clients, the accounting profession argued such restrictions weren't necessary because there had never been an example of an audit tainted by consulting arrangements.

"This is one of those cases," this person said.

The SEC is expected to allege that Pinnacle Holdings, Sarasota, Fla., with the approval of PricewaterhouseCoopers, improperly wrote off the cost of the auditor's continuing consulting services as part of a merger-related reserve.

In August 2000, Pinnacle Holdings, an operator of communications towers, disclosed in SEC filings that the commission had begun a formal investigation into whether PricewaterhouseCoopers compromised its independence as Pinnacle's auditor by providing certain unspecified nonaudit services. In December 2001, Pinnacle announced a settlement with the SEC relating to Pinnacle's original accounting for an August 1999 acquisition of certain assets from Motorola Inc. Pinnacle restated its accounting for that transaction in filings made in April and May 2001 to reflect those changes in accounting. Since then, Pinnacle has changed its auditing firm to Ernst & Young LLP.

The SEC also is expected to allege that Avon Products should have written off the consulting cost of the accounting firm's work on a nonoperating management system project, but instead kept a portion of the cost on its books as an asset, said a person with knowledge of the situation.

Avon, a New York cosmetics company, has been responding to a two-year, formal SEC investigation that concerns a special charge reported by Avon in the first quarter of 1999 that included the write off of costs associated with a management-software system, the company has said in SEC filings. The balance of the project's development costs had been carried as an asset until the third quarter of 2001, when Avon recorded a pretax charge of $23.9 to write off the carrying value of costs related to that project.

In SEC filings, the company has said, "as part of a resolution of the investigation or at the conclusion of a contested proceeding, there may be a finding that Avon knew or should have known in the first quarter of 1999 that it was not probable that [the software project] would be implemented and therefore, the entire [software project] asset should have been written off as abandoned at that time."

In the matter of PwC Securities, Mr. Nally's letter said, "the SEC found that PricewaterhouseCoopers violated independence rules due to contingent fee arrangements entered into by PwC Securities with fourteen of the firm's" audit clients. The SEC order states "that the SEC is not alleging that the financial statements of any of the clients were misstated," according to the PricewaterhouseCoopers letter. As a result of the contingent fee arrangements, the firm disciplined three supervisors, the letter said. In 2001, the firm sold a significant portion of the broker-dealer business.

In an effort to stop abusive tax shelter transactions, the Justice Department Tuesday filed enforcement actions against accounting firms KPMG LLP and BDO Seidman to enforce 29 summonses that request tax shelter documentation --- 

Bob Jensen's threads on tax shelters and frauds are at 

From The Wall Street Journal Accounting Educators' Review on July 15, 2002

TITLE: IRS to File Actions Against 2 Firms Over Tax Shelters 
REPORTER: Cassell Bryan-Low 
DATE: Jul 09, 2002 
TOPICS: Accounting, Tax Laws, Tax Shelters, Taxation

SUMMARY: In an effort to reduce abusive tax shelters, the IRS is requiring accountants, investment banks, law firms and other advisors to disclose information about investments in tax shelters. Questions relate to the use of tax shelters and the role of the accountant in providing tax advise.

1.) What is the role of a tax advisor? What is a tax shelter? Should a tax advisor encourage clients to invest in tax shelters? Does the use of tax shelters to reduce taxes violate tax law?

2.) Describe the changes in IRS policy related to the disclosure of investments in tax shelters. Should tax advisors be required to provide this information to the IRS? Support your answer.

3.) Refer to the related article. Are accounting firms cooperating with the IRS? Discuss the responses of BDO Seidman, KPMG, and Pricewaterhouse Coopers.

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

TITLE: IRS Seeks Data of KPMG, BDO on Tax Shelters 
REPORTER: Cassell Bryan-Low 
ISSUE: Jul 10, 2002 

Telecom giant Qwest Communications, already being scrutinized by regulators for accounting practices, acknowledged Wednesday it was also the subject of a federal criminal probe --- 

The troubled US telecoms giant confirms that it is the subject of a criminal investigation, only days after it denied a probe --- 

In addition to Enron, Duke Energy Corporation, El Paso Corporation, Dynegy, CMS Energy Corporation, Reliant Resources Inc. and others have been accused by by the Justice Department of "Revenue Round Tripping" according to The Wall Street Journal, July 15, 2002, Page B8 ---,,SB1026489288613564240-search,00.html?collection=wsjie/30day&vql-string=%28Duke%29%3Cin%3E%28article%2Dbody%29 

Question:  How does a company Round-Trip revenue?

Answer:  See 

July 16, 2002 message from Neil Hannon

After my second year working in manufacturing accounting, I was transferred to a large division of the same company as a financial analyst. We routinely booked the journal entries for capital projects. In the first month, a rather large expense item came across my desk and I booked the entry. When the large expense caused the controller to miss his monthly profit target, I was called into his office and he proceeded to tell me in no uncertain terms the "harm" I had inflicted on the organization. I was shocked. The entry was correct and proper. His point was that his reputation and therefore the division's reputation for meeting profit forecasts was now tarnished. What he wanted me to do in the future was to inform him before I booked a large entry so that he had the opportunity to "adjust" other factors and still hit his targets. That's when it hit me that I had left the "real world" and entered the world of "fantasy" accounting.

Neal J. Hannon, CMA
Chair, XBRL International Education Work Group
Chair, Information Technology Committee, Institute of Management Accountants
Member, XBRL_US Steering Committee
University of Hartford Accounting Department
401-769-3802 (Home Office)

The Senate this week, overwhelmingly approved several elements of President Bush's plan, including harsh new penalties for corporate fraud, and a House subcommittee on consumer protection passed the Financial Accounting Standards Board (FASB) Act.  

On July 10, 2002, as capital market slides reflected a continuing erosion of investor confidence, lawmakers in both the House and Senate made progress on accounting reforms. The Senate overwhelmingly approved several elements of President Bush's plan, including harsh new penalties for corporate fraud, and a House subcommittee on consumer protection passed the Financial Accounting Standards Board (FASB) Act.

The Senate measures were passed as amendments to the Sarbanes bill. They allow the Securities and Exchange Commission (SEC) to bar corporate officers and directors from future service for violations of securities laws, if their conduct demonstrates "unfitness" to serve. They also allow the SEC to seek an order in federal court imposing a 45-day freeze on extraordinary payments to corporate executives. In addition, the Leahy amendment imposes stiffer penalties on securities fraud. Written by Senate Judiciary Committee Chairman Patrick Leahy, the Leahy amendment would:

A vote on the overall Senate bill is expected later in the week ending July 12, 2002 or early the following week. Then the entire package must be reconciled with the House bill.

The House Energy Subcommittee on Commerce, Trade, and Consumer Protection approved the FASB Act, which would provide FASB with an independent legal basis for existence, move the US standard-setting process toward a principles-based approach like IASB's, and allow Congress to set deadlines for FASB projects. The next step for the FASB Act is consideration by the full House Energy and Commerce Committee.

How might the Financial Accounting Standards Board Act impact the FASB?

The Financial Accounting Standards Board (FASB) would answer to the Treasury Department and Congress under a bill being drafted in the House, sources said on Wednesday according to Reuters.

The bill, which could still change, proposes that the Secretary of the Treasury annually impose and collect fees to fund FASB. The Connecticut-based board now raises money by selling publications and soliciting gifts from accounting firms and companies interested in influencing FASB decisions.

Under the bill, the Treasury would manage FASB's account and give it an annual allowance to pay its bills. FASB would have to report annually to the president, the House Energy and Commerce Committee and the Senate Banking Committee.

The Comptroller General, head of Congress' General Accounting Office, would annually have to inform the Treasury and the committees if FASB was meeting independence and performance requirements before its allowance could be disbursed. If the comptroller general found FASB was falling down on the job, it would advise on what it needs to do.

Titled the Financial Accounting Standards Board Act, the bill would order FASB to develop standards for off-balance sheet accounting and special-purpose entities -- both hot issues in the Enron scandal.

The bill would also require FASB or its agent to monitor compliance with standards and to refer potential violations to U.S. regulators, according to the draft.


Authorities Say WorldCom Accounting Ruse Should Have Been Obvious to Andersen --- 

July 3, 2002 — The Financial Accounting Standards Board revealed proposals for new rules that aim to replace "fragmented and incomplete" existing accounting literature related to special-purpose entities (SPEs).

The proposed interpretation, Consolidation of Certain Special-Purpose Entities, will apply to any business enterprise -- both public and private companies -- that has an ownership interest, contractual relationship or other business relationship with an SPE. The proposed guidance would not apply to not-for-profit organizations.
Under the proposed rules, a 10 percent outside investment is required in order for the partnership to remain off the books. A 3 percent independent investment is allowed under the existing rules.
FASB stated that it is expected that when this proposal is implemented, more SPEs will be consolidated than in the past. Most SPEs serve valid business purposes, for example, by isolating assets or activities to protect the interests of creditors or other investors, or to allocate risks among participants. Many SPEs that were unconsolidated prior to the issuance of the proposed rules were reported according to the guidance and accepted practice that existed prior to this proposed Interpretation.
The FASB expects to issue an Interpretation in the fourth quarter of this year. The accounting guidance would be effective immediately upon issuance of the Interpretation for new SPEs. Companies with SPEs that existed prior to issuance of the Interpretation would be required to apply the guidance to the existing SPEs at the beginning of the first fiscal period after March 15, 2003. Calendar year-end companies would need to apply the guidance on April 1, 2003.
The comment period concludes August 30, 2002. Click here for the Exposure Draft

Xerox Target of Accounting Malpractice --- 

NEW YORK, July 1, 2002 (United Press International) — Xerox Corp. improperly booked nearly $2 billion in revenue over the past five years, the company said Friday, as it was forced to restate earnings to reflect $1.4 billion less in pre-tax profits during the period.

The amounts are actually less than those cited by the Securities and Exchange Commission in April, when it filed civil fraud charges against the copier company.

At that time the SEC charged that Xerox's accounting accelerated the company's recognition of equipment revenue by more than $3 billion and increased its pre-tax earnings by about $1.5 billion between the years 1997 and 2000, rather through 2001.

Xerox agreed to pay a $10 million penalty under an agreement with the SEC at that time.

Noting the effects of this latest corporate malfeasance on the financial markets, Bryan Piskorowski, first vice president at Prudential Securities, said, "The crisis of confidence continues here at the corner of Broad and Wall as more accounting irregularities litter the tape."

"For better or for worse, the market is becoming more accustomed to dealing with these kind of situations, especially in light of WorldCom's demise earlier this week," he added.

"So we head into the final day of the second quarter fretting over the same issues through which we traded it. Marking to market, the growing distrust of corporate America has lead to the biggest first-half loss since the 1970s, evaporating some $1.5 trillion in market value as measured by the Wilshire 5000. The S&P 500 is down 13.7 percent this year, with almost one in 10 stocks in the index falling 50 percent or more," Piskorowski said.

In settling the SEC charges in April, Xerox neither admitted nor denied wrongdoing but it paid a $10 million civil penalty, the largest in history for corporate financial-reporting violations.

The SEC's complaint accused Xerox of having "misled and betrayed investors" in a multi-pronged scheme to flatter earnings and enrich senior executives.

But the new audit, which Xerox ordered as a result of the April settlement with the SEC, also looked at 2001 results and discovered fresh accounting problems.

PricewaterhouseCoopers conducted the fresh audit after Xerox fired its longtime auditor KPMG last fall.

Xerox is expected to file restated financial results for the five years as early as Friday. The filing is due by Monday.

Xerox expects the total revenue restatement to be "less than $2 billion for the five-year period," spokeswoman Christa Carone told the Wall Street Journal. The new problems discovered in the most recent audit center on accounting issues at Xerox's Brazil unit, the Journal said.

The bogus accounting at Xerox comes just two days after WorldCom Inc., the telecom giant, said it intends to restate its financial statements for 2001 and the first quarter of 2002 as a result of an internal audit of the company's capital expenditure accounting.

WorldCom also fired its chief financial officer and accepted the resignation of its senior vice president and controller.

The company also announced plans to slash its work force by 17,000 in an attempt to save $900 million annually.

WorldCom's $3.8 billion accounting fraud is the largest in U.S. history.

A new report card is being developed to measure the performance of major auditing firms in identifying ongoing-concerns and potential accounting problems in financial statements issued prior to companies going bankrupt. While auditors might think the numbers are acceptable, American investors might not. 

July 8 message from David Albrecht

Who Audits America, published twice per year and available in many university libraries and large city public libraries. Another reference work is Who Audits the World. I have used both extensively in audit market research.


July 8 message from Bill Mister

I use a service called 10KWizard. It is free to academics and students. You can search 10Ks for Key words. Therefore, you should be able to search on each of the final four's name and get your list. I cannot test this for you since I have to renew my subscription to the service. 

From The Wall Street Journal Accounting Educators' Review on July 15, 2002

TITLE: Merck Booked $12.4 Billion It Never Collected 
REPORTER: Barbara Martinez 
DATE: Jul 08, 2002 
TOPICS: Accounting, Earnings Management, Gross Profit Margin, Net Income, Net Profit, Revenue Recognition

SUMMARY: Controversy surrounds Merck's revenue recognition policy related to co-payments made to pharmacies for prescription drugs. Questions focus on guidelines for revenue recognition and implications of the Merck policy.

1.) When should revenue be reported in the income statement? Should Merck have included the co-payments made to pharmacies in its net income? Why is the collection of these co-payments by Merck important in determining revenue recognition?

2.) The article states that the accounting treatment for the co-payments does not alter net income. Why is this the case?

3.) How much revenue reported by Merck was from the co-payments made to pharmacies? What important financial ratios are altered by including the co-payments as both a revenue and an expense?

4.) Discuss reasons that a company would want to increase revenues even if the increase in revenues does not increase net income? Why would financial statements users object to the inappropriate recognition of an item as both a revenue and an expense?

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

Cheney accused of corporate fraud
Bush talks tough on business
Bush delivers too little too late
ABB sacks managers over hidden losses
Bosses resign at battered Elan
Illusory profits cloud USA Inc
Wall Street scandals at a glance

The Transformation of the Accounting Profession: The History Behind the Big 5 Accounting Firms Diversifying into Law 
by Colin Boyd, Professor of Management, University of Saskatchewan

Executive Summary

A number of bar associations across the world are simultaneously investigating the implications of allowing lawyers to practice in a multi-disciplinary context. The stimulus for each of these investigations is identical -- they are a response to the "Big 5" accounting firms diversifying into providing legal services. The legal profession seems uncertain how to respond to this strategic initiative.

This paper provides an overview of the recent history of the evolution of the accounting profession so as to enable decision makers within the legal profession to have a clearer understanding of some of the many complex issues that are provoked by the entry of the Big 5 into legal services.

The following conclusions are drawn in this paper:

• the accounting profession appears to be losing much of its original classical identity, for a variety of reasons.

• the business activities of the Big 5 firms now go so far beyond their original core of accounting activities that it more appropriate to call them business advisory firms than accounting firms.

• given the scope of their activities beyond accounting, it is perhaps better to conceive of these firms as being subject to market expectations for ethical integrity, rather than to imagine them beholden to an external professional code of ethical conduct.

• accordingly, the legal profession should regard the Big 5’s acquisition of law firms as a simple issue of business diversification into law by business service conglomerates, and not as an amalgamation of two professions, each with distinct codes of professional conduct with possibly contradictory elements.

It is recommended that the legal profession react to the Big 5’s entry into law in just that same way that the profession would react to any other industrial group (e.g. department store chains) attempting to diversify into the provision of legal services. The fact that the Big 5 have their origins in the accounting profession is not of particular importance compared to other matters such as the public issue of the business synergies of multi-disciplinary practices, and the internal issue of the acceptability of any consequent redistribution of power within the legal profession caused by allowing MDPs to operate.

What was once viewed as a boring back office function now is caught in the cross-hairs of the Commander-in-Chief as President Bush laid out his new ethic of corporate responsibility this week. How will a presidential initiative to regulate accounting change the debate on audit reform? 


The revised syllabus for the Professional Level I and Professional Level II examinations is available to download from the secure document library at 

The publication of the Government White Paper: Modernising Company Law is aimed at modernising company law in a clear and intelligible way and has been regarded as the most significant review of the subject in 150 years --- 

The International Federation of Accountants (IFAC) Board meeting took place in Madrid on 8-10 July 2002; the central theme for the meeting was "Rebuilding Public Confidence."

From Paul Pacter's IAS Plus at 

15 July 2002:  How the ED on IAS 32/39 will change securitisations
We have posted the 1 July 2002 issue of the Deloitte & Touche newsletter, Speaking of Securitization (PDF 134k). The newsletter summarises the securitisation aspects of IASB's exposure draft of Amendments to IAS 32 and IAS 39

9 July 2002: Earnings management: an international comparison
Despite the accounting scandals that have surfaced recently in the United States, a study by three accounting academicians has found that the opportunities for accounting abuses are far greater in Continental Europe and Southeast Asia than in the U.S. and the U.K. Using data for nearly 9,000 companies in 31 countries from 1990 to 1999, the researchers identified measures of the extent to which insiders can manage the 'accounting' component of reported earnings to smooth or mask the firm’s economic performance -- for the insiders' own benefit. The study, titled "Investor Protection and Earnings Management: An International Comparison", highlights an important link between legal institutions and the quality of accounting earnings reported to market participants. To download the latest version of the paper, Click Here.

3 July 2002: Current SEC initiatives in accounting and disclosure
In a Speech before the Economic Club of New York, SEC Chairman Harvey L. Pitt summarised the Commission's key initiatives in the area of accounting and disclosure as follows:

1 July 2002: SEC orders management certification of financial statement accuracy
The US Securities and Exchange Commission has posted a list of 947 companies whose chief executive and chief financial officers are now required to personally certify in writing, under oath, that their most recent reports filed with Commission are both complete and accurate. Officers who make false certifications will face personal liability. The companies are domestic SEC registrants with annual revenues above $1.2 billion. Click for Details from SEC Web Site including a link to the list and the form of the certification

"Calling the accountants to account:  Britain should not be complacent in the face of spectacular auditing failures in the US. Our system, too, remains open to corporate abuse," by Andrew Simms, Guardian, July 3, 2002 ---,4273,4453349,00.html 

CEOs of publicly traded companies have been told that the must now personally certify that their most recent filings with the SEC are both accurate and complete or risk penalties, fines or even jail terms. 

From The Wall Street Journal Accounting Educators' Review on July 15, 2002

TITLE: New SEC Order Forces Executives to Swear by Their Numbers 
REPORTER: Paul Beckett 
DATE: Jul 05, 2002 
TOPICS: Accounting, Audit Report, Auditing, Corporate Governance

SUMMARY: The SEC "is asking chief executive and chief financial officers of 947 of the largest companies to swear [to an oath] as a step toward increasing corporate accountability."

1.) What two items are currently included in every company's annual report to provide descriptions of who is responsible for the information presented therein? How does the SEC's requirement for a sworn statement from filing companies' CEOs differ from current practice?

2.) For what report is a company's outside auditors responsible? For what report is the company management responsible?

3.) According to the article, how has one law firm challenged the SEC's authority to require CEO's sworn statements? Why might some companies not want to challenge this authority?

4.) When a company as large as Enron files for bankruptcy, what remedies are available to investors, and others who relied on the company's financial statements, to recoup their losses? How could the SEC's requirement for a sworn statement expand the possible ways in which financial statement users might recoup losses?

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

From the FEI Express on July 16, 2002

SEC Signals Increased Scrutiny of the Quality of Companies' Financial Reporting
With the devastating result of inaccuracies in financial reports demonstrated by corporate giants such as WorldCom and Enron, the SEC issued an order that will require CEOs and CFOs of the 948 largest public companies to certify, individually and personally, under oath, to the accuracy and completeness of their companies' most recent SEC filings, by as early as August 14, 2002. This Alert from the law firm of Cooley Godward summarizes the details of the order, including what must be covered and how it should be filed, and recommends actions that the CEOs and CFOs should take in advance of filing

We encourage you to read the full text of the Alert. --- 

Executive Compensation Alerts from Fred Cook
Frederic W. Cook & Co.'s latest alert letters dated June 30, 2002 ("IRS Issues Additional Guidance on Valuation of Stock Options Under the New Proposed Regulations on Golden Parachute Payments") ; and July 1, 2002 ("Treasury Department and IRS Extend Moratorium Related to the Imposition of Employment Taxes and Withholding Obligations on Employee Stock Purchase Plans and Incentive Stock Options") are available through FEI's Web site. F.W. Cook's Web site also contains an index of all of past alert letters sorted by topic and date, and is searchable by keyword.

If there are others in your organization who would like to receive Fred Cook alert letters by e-mail, please send name, company name, address and e-mail address to to be added to an automatic e-mail distribution.

"Analyzing the Analysts," The Wall Street Journal, July 17, 2002 ---,,2_0807,00.html 

Senior investigators for New York State Attorney General Eliot Spitzer have gathered internal e-mails from executives at Salomon Smith Barney criticizing telecommunications-stock analyst Jack Grubman that could form the basis of a case against the star researcher or the securities firm itself, according to people close to the matter.

The e-mails come as Mr. Spitzer has given his staff an early August deadline to provide him with evidence it has collected so he can make a final decision on any case against Mr. Grubman and the firm, a unit of financial-services giant Citigroup Inc., these people say. Though no final decision has been made inside the attorney general's office on the matter, some senior officials in his office recently came to the conclusion that they now have enough evidence gathered against Mr. Grubman to bring a case against him, these people add.

Officials from Mr. Spitzer's office declined to comment. Salomon Smith Barney, in response to questions on the Spitzer inquiry, said: "It's inappropriate for us to comment on the course of Mr. Spitzer's inquiry, except to say that we're cooperating fully." Mr. Grubman didn't return a call for comment and the spokeswoman for the firm said he had no comment.

At issue for Mr. Grubman is his dual role helping Salomon Smith Barney win lucrative securities business from the nation's top telecom outfits while he was recommending investors snap up shares of these companies in his role as the firm's top-rated telecom analyst. Investigators from Mr. Spitzer's office are examining the possibility Mr. Grubman could have violated New York state law by failing to disclose his dual role to investors, many of whom lost big buying shares of technology companies thinking they were getting unbiased information from the telecom guru.

Continued at,,2_0807,00.html  

From The Wall Street Journal Accounting Educators' Review on July 19, 2002

TITLE: Debt Retirement Helps Nextel Post 1st Quarterly Net 
REPORTER: Jesse Drucker 
DATE: Jul 17, 2002 
TOPICS: Advanced Financial Accounting, Debt, Earning Announcements, Financial Statement Analysis

SUMMARY: Nextel reported second quarter results better than analysts expected, driving up the company's stock price. Questions are focused on accounting for debt extinguishments and quarterly reporting.

1.) In general, how are debt retirements accounted for? From the information given in the article, prepare the basic journal entry Nextel made to record its debt retirement. What recent change has the FASB announced in this area of accounting for and reporting of early debt extinguishments (or, retirements)? (Hint: you may investigate Statement of Financial Accounting Standards 145 on the FASB? web site  )

2.) Summarize the author's analysis of the impact of this debt retirement on Nextel's earnings results. Based on comments in the article, to what does the company attribute its second quarter results?

3.) Listen to discussion of the company's second quarter earnings announcement at 9.asx   One analyst mentioned concern about pending cash to retire company debt. What are the four reasons given by company chairman and CEO Tim Donahue for having retired that debt? Could the timing also have been influenced by the earnings effect of the accounting for this debt retirement?

4.) Again refer to the discussion of the company's earnings announcement. In explanation for Nextel's results, chairman and CEO Tim Donahue says, "The second quarter has always been a great seasonality quarter for us." He then says, "Minutes of [cell phone] use are up over 40% year-over-year." How should seasonal fluctuations in operations be addressed in quarterly reports? What accounting standard establishes this requirement? Does the year-to-year comparison support his assertion about seasonality in the second quarter?

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

Worldcom's Fall, The Wall Street Journal, July 17, 2002 ---,,2_0844,00.html 

WorldCom Sued Over Bond Offering
Three California pension funds sued WorldCom, some of its former executives and a group of major banks, alleging fraud in connection with a major bond offering last year by the telecommunications company.

WorldCom Outage Unlikely, Powell Says
Service to WorldCom's customers is unlikely to be disrupted as the company's financial crisis is sorted out, according to FCC Chairman Michael Powell.

WorldCom Unit to Gather Votes
WorldCom's reputation may be in tatters, but the telecom's Brazilian unit has been entrusted with electronically gathering votes cast in that country's coming presidential election.


 WorldCom Will Pay Severance in Installments
July 16
 Documents Suggest WorldCom Knew of Violations
July 16
 Andersen Ignored Warnings, Memos Show
July 15
 Sullivan Alleges Ebbers Knew of Irregularities
July 12
 Lenders Consider $3 Billion Secured Credit Line
July 10
 Internal Memos Reveal Sullivan's Plan for Charge
July 9
 WorldCom Seeks Refund of $10 Million Bonus
July 5

Manhattan U.S. Attorney Will Handle Probe

July 11
 Salomon Faces Questions on IPO Treatment
July 10
 Executives, Analyst Feel Congressional Heat
July 9
 WorldCom Players to Appear Before House Panel
July 8
 Justice Department Seeks to Curtail Internal Probe
July 5
 Investigators Shift Focus to Ousted CEO Ebbers
July 1
 House Launches Probe With Flurry of Subpoenas
June 28 


Three Big Lenders to Offer DIP Financing
July 15
 FCC, in Crisis, Could Let a Bell Buy WorldCom
July 15
 WorldCom's Banks Try to Freeze $2.65 Billion Deal
July 12
 Day Traders, Fund Managers Bet on WorldCom
July 11
 Federal Contracts May Prove Vital to Survival
July 10
 Bank of America Escapes Big Hit From WorldCom
July 9
 IDT Chairman Jonas Outlines Bid for MFS Assets
July 5


WorldCom Service Disruption Unlikely, Powell Says
July 15
 WorldCom's Clients May Soon Stampede the Exits
July 5
 MCI's Uniform Pricing Is a Hit Even as Parent WorldCom Falls
July 2
 How the WorldCom Imbroglio Could Land on Your Doorstep
June 27
 MCI Phone Rates May Change in Wake of WorldCom Fiasco
June 26


Bob Jensen's threads on the Enron/Andersen scandals are at 

Bob Jensen's SPE threads are at 

Bob Jensen's threads on accounting theory are at 


Bob Jensen's main document on the Enron scandal and other accounting frauds is at 


In March 2000, Forbes named as the Best Website on the Web ---
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For accounting news, I prefer AccountingWeb at 


Another leading accounting site is at 


Paul Pacter maintains the best international accounting standards and news Website at

How stuff works --- 


Bob Jensen's video helpers for MS Excel, MS Access, and other helper videos are at 
Accompanying documentation can be found at and 


Professor Robert E. Jensen (Bob)
Jesse H. Jones Distinguished Professor of Business Administration
Trinity University, San Antonio, TX 78212-7200
Voice: 210-999-7347 Fax: 210-999-8134  Email: