Preventing Another Enron

The Intellectual Conservative ^ | November 22, 2002 | John MacMullin

[RhythmStep]

In recent years, we have heard much about the failures of the auditing firms, particularly, but not limited to, Arthur Andersen & Co., in the performance of their audit function. Numerous critics over the years have pointed to the conflict of interest that exists within an auditing firm with respect to the promotion of a firm's consulting practice and, in a lesser regard, tax practice, which appears to compromise the independence of the auditing firm.

[RhythmStep]

This is worth reading.

[Alberta's Child]

Good article, but there is a better way to prevent those Enron-like accounting problems.

Eliminate the double taxation on corporate dividends, so corporations will be more likely to pay out regular dividends instead of reporting these nebulous "earnings" that nobody can keep track of anyway.

If Company A reports "earnings" of $0.75 per share, then investors can either believe these reported earnings, ignore them, or wipe their @sses with them. If Company B pays a dividend of $0.25 per share, then investors can still do whatever they would like but they won't be able to argue over how much money the company actually "makes."

[gov_bean_ counter]

Nice article, however, IMHO, the creative accounting was an attempt to cover what was a fundamentally flawed business enterprise. It is now public knowledge that the Clinton Administration acted affirmatively to something like 18 out of 20 requests for loan guarantees and legislative assistance.

Government created a false market for a non product. The amimal Enron evolved into was never going to be viable going concern.

[duffer]

This would not work in any fashion. The SEC can not examine all the public companies Annual and quarterly reporting which is the process by which much of the problems can be identified. Reveiw of the papers for a small audit of $250,000 can take a week of extensive reveiw with a high degree of knowlege of the company and its policies. The reveiw of the $25,000,000 audit is mind bending.

Take a bunch of non-professionals and ask them to look at Enron's multi level partnerships and the related impact upon earnings in any reporting period together the potential solutions and we would have something that i beleive would be next to impossible.

The new audit committee rules together with continued corp oversight and the accounting profession responding as it has will give the investing public the best chance to know what is going on and what they need to do about it.

[Cicero]

I prefer to trust the market and the law. There are already adequate measures in place, it's just that in the excitement and hubris of the roaring 90s the boomer bosses forgot them. They tossed the old constraints aside and paid the price.

Arthur Andersen has paid for its negligence and no longer exists. Through its example, other accounting firms have seen what happens if you go too far to please your client. They are very unlikely to jump over the cliff after Anderson if they can possibly avoid it. They will say to themselves, "Sure, I'd like to make a little extra money, but is it worth the risk of destroying the firm?"

And CEOs will say the same thing. "Is it worth making a few more millions if I risk bankruptcy, prison, and disgrace?"

[HassanBenSobar]

The company that audits the books should not be the same as the company who does the tax preparation.

If the two companies are the same, it is much more likely that companies will engage in tax shelter scams. This conflict of interest is as bad or worse than the issue of consulting + accounting.