|This research paper discusses the causes for the increase of exposure of the accounting profession to liability from the early scandals of the| |decade to the expectations gap. It also discusses some of the professions responses, ideas, and actions in its attempts to deal with this | |effectively. |
There are many reasons why has the auditor’s exposure to liability has been increasing. Through a succession of major scandals, the accounting profession began to be judged severely. Arthur Anderson in 2002 disappeared after Enron collapsed in 2001 as the largest American bankruptcy case ever at the time. The company disclosed that a major portion of its debt was omitted from its balance sheet on in the company’s audited financial statements. Then came the alarming admission from Andersen that its accountants had participated in destroying audit documents after Andersen had expressed the contention of Enron withholding critical financial information from its auditors.
This scandal was followed by WorldCom with the disclosure of $3.8 billion in expenses being improperly booked instead as capital expenditures, allowing the company to post profits instead of reporting losses. Anderson was also its auditing firm, and attempted to defend its actions saying that critical information concerning line costs was withheld from its auditors.
As Dana Hermanson, research director at the Corporate Governance Center at Kennesaw State University stated, “Every disaster provides more motivation for cleaning up the structural problems in corporate governance that we’ve had for years.” He was referring to the amateur status of the members of the audit committees, failure of corporate boards to be independent, and the link between executive compensation and stock performance. He went on the state, “Many are arguing that, with the current stock-option plans in place, we’ve provided too much incentive and too much pressure to meet every earnings target and never disappoint investors. Anytime there’s an industry in trouble—like telecommunications-the pressure on top management is extraordinary. In such an environment, there is great potential for accounting abuses.”
Douglas Ziegenfull, a professor of accounting at Old Dominion University and former auditor states, “The types of transactions being done now are not as clear cut as they used to be. A lot of the terms are not spelled out, and the questions of ‘When do you book that revenue?’ is not as black and white” as in the past.
Art Bowman, current editor of Bowman’s Accounting Report, a newspaper which follows developments in accounting, believes that this is a problem resulting because the rulemaking body the FASB is an inefficient operation and only handles volatile current issues instead of anticipating rules of accounting for new situations in business in advance.
In 2003 the American Assembly, a national nonpartisan public affairs forum in their 103rd report...