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 Person 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 808). In Paul
Craig Roberts’ review of Forenoon’s book, he disagrees with Forenoon’s contention, or at least points out the holes that he sees with that logic. Roberts points out that the scapegoats Person cites as the root causes of the scandals (quarterly earnings, stock options. And price competition between accounting firms) were In fact yesterdays reforms intent upon increasing the protection of corporate investors (old. ). Person 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 sass’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 ultra when accounting firms began to consult with the businesses they were supposed to be auditing. (old. ) 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 analogies 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 favorable entry. ” (old. . 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 sass’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. Crestless market In ten , wanly “grew ostentatiously… T a rate Tanat Tar outpaced the growth in resources at the SEC” (old. ). 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 sass’s occurred in companies with intangible assets.
This editorial seems to imply that lax regulations are the reason for increased fraud, and ultimately that an increase in regulation will decrease fraud. This conclusion is in stark contrast to Roberts’ article mentioned previously. But they represent opinions on two ends of the spectrum when placing blame for the accounting scandals of the sass’s and sass’s. (old. ) While the reasons for the accounting scandals are infinite in number, the somewhat opposing viewpoints of these two articles shed light on a number of possibilities.
What seems to be agreed upon throughout both articles is that no matter the condition of the market or the regulations in place, lapses in ethical Judgment are the root cause of most of these situations. This strongly suggests that the power to avoid another round of scandals like the ones experienced in the sass’s lies in the individual accountant or business executive to know the ethical standards to which he is held, and to abide by them. There were a number of effects that the accounting scandals caused on corporate businesses in the United States and worldwide.
The main issue was that trust in public companies waned. Investors polled after the Enron scandal said that even after certain regulations were introduced, “they had lingering doubts about the industry integrity’ (Green-Morale). This issue of public trust was a serious, yet largely superficial view of the state of corporate business and accounting. Some feared that an overreaction to the accounting industry would create “bad public policy’ (“How to Clean Up… F-4). And to this day debate goes on about the pros and cons of the Serbians-Solely Act of 2002.
Aside from the public policy revisions, the market numbers following the Enron scandal seem to indicate that there was very little effect on the actual market itself. One year after the Enron scandal first came to light, the S&P 500 declined by 28. 3 percent. Although this initially appears like a direct result of the accounting scandal, analysis of world markets at the time tell a different story. At the same time as the S&P 500 downturn, Britain’s FETES declined 27. 5 percent, France’s CA declined 34. 9 percent, and Germany’s ADDAX declined 36. 8 percent (old. . These numbers indicate that there was a world-wide fluctuation in the market, even in countries not beset by an accounting scandal. Other possibilities for this downturn were considered likely, such as “a slowdown in economic activity, excess capacity in the worldwide telecommunications market, and uncertainty over terrorism and Iraq” (old. ). Further evidence that the market was not directly affected by the scandals is leaned from the movements of stock prices in the telecommunications industry, where a large number of the scandals occurred.
Before the scandals were brought to light, the Nasdaq Telecoms Index had declined by 80 percent from a high in March 2000. (old. ). This indicates that there was a prominent downturn in the telecommunications market before the scandals occurred. If the focus is narrowed in even Turner, tons tale upon ten actual companies Tanat suffered Trot scandals, ten numbers continue to support the idea that the market was declining before the scandals occurred. In August 2000, Enron’s stock price peaked at $90. By October 15, 2001 , the last trading day before the scandal broke, Enron stock had already fallen to $33 a share.
This indicates a 2/3 drop in value before any hint of scandal had reached the public. So, while it is certainly likely that the scandals had an initial effect on the market, in the long term there was already a downturn unrelated to the accounting scandals. Similar to the effects to corporate business, the effects to the accounting industry have been largely related to image. A large effort was made to restore the public trust in accounting. One accounting industry insider recognized that they Molted the trust and confidence of … Linens and [they] need to get that back” (Green- Morale). Many in the accounting field expressed concerned about a “congressional rush to Judgment in trying to make the whole problem Just an accountant’s problem” (Taylor old). Whether or not it was a rush to Judgment, the federal government made some drastic changes that affect the accounting industry to this day. Most notably is the Serbians-Solely Act of 2002, which was signed into law and created a body whose sole responsibility was the regulation of accounting firms that edited publicly traded companies.
When it was initially introduced, the Serbians- Solely Act was costing companies millions of dollars to initiate and maintain compliance. An annual survey is done by Financial Executives International to track how much money it is costing companies to comply with Serbians-Solely, specifically section 404. There most recent survey of 2007 noted that compliance fees among companies with market capitalizations of $75 million were $2. 9 million during fiscal year 2006. This is a 23 percent drop from year 2005, and a 35 percent drop from the initiation of Serbians-Solely in 2002 (“FEE Survey… ). While companies are increasing their efficiency in regards to compliance with Serbians-Solely, it has still put a large strain on the accounting industry. The FEE Survey seems to indicate that efficiency will likely increase and then level off, with companies having an annual expense that includes compliance fees related to Serbians-Solely. Whether this Act is too much government regulation is arguable on both sides. But it did accomplish a larger goal, which was to begin to restore confidence in the accounting profession to the public.
Another significant population that was affected by the accounting scandals was the academic side. The heads of accounting programs throughout the country initially feared lower enrollments due to the accounting scandals. But figures seem to indicate that there was actually an increase in enrollment from 2002 to 2003 (Dotard 59). Many programs offered new courses as a direct result of the scandals. These courses involved such topics as fraud detection, corporate governance and ethics (old. ). Many programs also offered presentations, seminars, and lectures with an increased emphasis on professional ethics.
A survey done by the American Institute of Spa’s sought to gauge student attitudes towards accounting after the scandals. The survey generally found that the more educated students were about the accounting scandals, the more positive their attitudes were. This “suggested that open communication and straight talk… Could improve student attitudes” (old. ). It would seem that numbers wise, the accounting scandal has not affected enrollments In accounting programs In a gallants way. IT anything, ten scandals nave served to opening dialogue with students about the importance of ethical standards and fraud revelation.
The firm that I work at, Crower Cheek, was not specifically effected by some of these changes implemented, but was affected in a general way by the change in business and accounting culture that occurred. The business and accounting industries as a whole came through the early sass’s relatively unscathed. Sure there was major damage done to the public image of both professions, but they have generally recovered and have continued to comply with the new regulations resulting from the Serbians-Solely Act and other SEC provisions. But there are a number of strives that have come about as a result of the scandals and subsequent government action.
More skepticism is being brought into the audit process. Companies are considering how fraud could occur “even if there’s no indication it is there. ” Also, “investors are becoming better-educated about corporate financial statements… And are not putting so much credence in the views of media pundits and analysts” (Allen 7). Students who are considering or have chosen accounting as a profession now have an increased dialogue concerning ethics, fraud, and the consequences thereof in a corporate scandal. Overall this increased dialogue seems o be the most straightforward method to prevent future scandals.