The fallout that accompanied the accounting scandals of the early 2000’s had an immediate impact on corporate business and accounting practices which is still being felt today. The collapse of Enron and its accounting firm Arthur Andersen, as well as the subsequent collapses of Worldcom and others have left a permanent mark on how corporate businesses and accounting firms are perceived and how they are regulated. It has also altered the experiences of students who are pursuing, or are considering the pursuit of, an accounting degree.
With the collapse and subsequent fallout from these accounting scandals comes the inevitable introspection. The events that followed had worldwide implications and were analyzed extensively in the media as well as in government circles. Experts pointed their fingers at a number of different reasons that led to the massive fraud in business and accounting practices in the Enron collapse. One theory put forth by Alex Berenson of the New York Times was that “the focus that analysts, investors and executives place on quarterly earnings as a company’s success indicator” began to take precedence over the ethics of executives and accountants (Roberts B08). In Paul Craig Roberts’ review of Berenson’s book, he disagrees with Berenson’s contention, or at least points out the holes that he sees with that logic. Robert’s points out that the scapegoats Berenson cites as the root causes of the scandals (quarterly earnings, stock options, and price competition between accounting firms) were in fact yesterday’s reforms intent upon increasing the protection of corporate investors (Id.). Berenson posits that a “cult” of the quarterly earnings developed, which in some cases caused executives and accountants to trade ethical accounting practice for the healthy appearance of the company. Roberts’ rebuttal points out that quarterly earnings were the result of a reform that sought to provide investors with more timely information about the financial condition of companies.
Roberts also mentioned how accounting had traditionally relied on “character and internal censure” to moderate fair practices. This culture was based upon a pay scale according to seniority. But in the 1970’s the FTC changed the accounting culture to one where partners were not paid by seniority, but by how much business they could bring to the firm. Conflicts of interest were also introduced into this culture when accounting firms began to consult with the businesses they were supposed to be auditing. (Id.) Roberts makes it clear that he believes federal regulations have a lot to do with the scandals that occurred. He seems to feel that a culture of honesty and integrity in the business and accounting professions is the most effective way to curb shady business dealing. Roberts even analogizes that “standard accounting practices are like door locks. They keep honest people honest. But they cannot prevent fraud any more than a door lock can prevent forceable entry.” (Id.).
Another interesting perspective suggests that “executives are likely to commit more fraud as the expected costs of committing fraud decline” (“How to Clean Up…” F-4). The article infers that in the 1990’s when much of the fraud was occurring, the cost of getting caught was so low that fraud likely increased. It also analyzes the U.S. securities market in the 1990’s, which “grew substantially…at a rate that far outpaced the growth in resources at the SEC” (Id.). There was also an increase in corporations with a large amount of intangible assets such as telecommunications. The aforementioned editorial thinks that a company’s intangible assets make it harder to detect fraud than in corporations with tangible assets like food and textiles. To bolster the point of the editorial, it is further noted that most of the high profile accounting scandals in the 1990’s occurred in companies with intangible assets. This editorial seems to imply that lax...
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“FEI Survey: Management Drives Sarbanes-Oxley Compliance Costs Down,
But Auditor Fees Virtually Unchanged.” Financial Executives International. 16 May 2007 .
Gerena-Morales, Rafael. “Auditing Experts Warn of more Accounting Scandals If Reform Isn’t Embraced.” South Florida Sun-Sentinel 5 November 2004.
“How to Clean Up After Corporate Scandals.” Editorial. Pittsburgh Post-Gazette 6 October 2002: pg. F-4.
Roberts, Paul Craig. “Unintended Consequences of Earlier Reforms Bite Market Hard.” The Washington Times 16 March 2003: pg. B08.
Taylor, John. “Accountant wear Enron Black Eye.” Omaha World Herald 17 February 2002: pg. 1D.
Titard, Pierre L., Braun, Robert L., Meyer, Michael J. “Accounting Education; Response to Corporate Scandals.” Journal of Accountancy No. 5, Vol. 198; 1 November 2004: pg. 59.
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