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Hot Topic
The Aftermath
of Enron: Improving the Financial Reporting Process
by Dr. Scott A.Yetmar
Enron filed the biggest
bankruptcy petition in U. S. history on December 2, 2001. Enron reportedly managed
to avoid paying income tax in four of the last five years. Additionally, Enron may
have to reduce its past earnings by another $1.3 billion. Lastly, Andersen, LLP has
been indicted. Many pundits are asking what, how and why it happened.
Yes, Andersen, LLP did make, at the very least, grievous errors and mistakes. However,
one must not automatically assume that Andersen's firm-wide culture is this aggressive.
This may turn out to be a blessing in disguise. A strong accounting profession is
the key to our capitalist system. Auditors are supposed to be independent watchdogs
that allow investors to trust financial statements and disclosures. The true client
in an audit is society, yet the corporation is paying the auditor's fee.
The following are potential reforms or changes that have or will benefit the accounting
profession.
1. The current reporting model (traditional, manufacturing-based measures) is not
suitable for Information Age companies. Harvey Pitt, Securities Exchange Commission
chairman, has said, "Disclosures are made not to inform, but to avoid liability.
We need to move to a system of 'current, real-time' disclosure. Companies that spot
"unquestionably significant" changes to their health must disclose them
immediately. Financial disclosures are dense, impenetrable. We have called for plain
English financial statements. We need more prompt input by the FASB, the nation's
accounting standard-setter."
2. The SEC, which regulates financial markets, is also responsible for the oversight
of accounting firms. Pitt represented the Big Five as a private lawyer before he
was appointed SEC chairman. President Bush's two nominations for vacant seats on
the five-member SEC come from big accounting firms. The appearance of SEC independence
is tarnished.
3. More frequent monitoring of audit quality and competence should replace the current
triennial firm-on-firm peer review. There should be a permanent quality control staff,
overseen by a publicly dominated body (e.g. Public Accountability Board). The accounting
profession would not fund this Board. The Board would be empowered to perform investigations,
bring disciplinary proceedings, publicize results, and restrict individuals and firms
from auditing public companies.
4. Consulting fees are currently half of the Big Five firms' total revenue and have
been increasing at a much faster rate than tax and audit revenue. The growth of consulting
services has increased the economic incentives for the auditor to preserve a relationship
with the audit client, thereby decreasing objectivity and compromising the audit
process. The AICPA Board has placed new limitations on auditors of public companies.
The SEC now requires most public companies to disclose the non-audit services performed
and the amount spent on these services. This, and other regulations, should improve
the public's perception of independence.
5. National guidelines for audit committees have changed. The major alterations include:
1) audit committees must consist of at least three independent directors; and 2)
expanded jurisdiction over the items contained in communications between companies
and investors. When determining the degree of independence between an audit firm
and its client, does the relationship or the provision of a service:
- Create a mutual or
conflicting interest between the accountant and the audit client?
- Place the accountant
in the position of auditing his or her own work?
- Result in the accountant
acting as management or employee of the audit client?
- Place the accountant
in a position of being an advocate for the audit client?
The above suggestions
or enactments will better serve society. The audit firm will truly become more of
an advocate for society (e.g., investors and creditors). Information will become
more current, and therefore, more useful. Audit committees will better serve their
role as protecting the user of the financial information. Lastly, the separation
of consulting from the audit function will alleviate serving two conflicting masters:
the company and society.
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Dr.
Scott A.Yetmar is an assistant professor of accounting at the College of Business
and Public Administration.
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YOUR OPINION WANTED:
If you have an industry-related opinion you'd like to write and submit for consideration
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