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Article Excerpt
Enron, WorldCom, Adelphia, Tyco ... these names bring to mind images of executives in handcuffs. They represent bankruptcies and billions of dollars lost by investors, retirees, and lenders. Speaking at the 13th Annual Fraud Conference and Trade Show of the Association of Certified Fraud Examiners, Sherron Watkins, stated that, "In less than two years, investors lost more than $60 billion in the value of their shares in Enron, and the company filed bankruptcy without ever disclosing a poor quarter relative to recurring earnings." (1) At WorldCom, financial officers and their subordinates reclassified more than $3.8 billion of lease expense for communications lines owned by third parties from the income statement to the fixed assets section of the balance sheet in order to maintain a higher stock price. (2) Adelphia founder John J. Rigas and his two sons have been accused of treating the company's funds as their personal piggy bank, using more than $250 million in Adelphia funds to pay personal margin calls, diverting additional funds to build a golf course on their private property, and using corporate apartments and jets for personal use without reimbursing the company--all while Adelphia carried more than $2.3 billion in "off balance sheet debt." (3) Tyco's CEO, CFO, and general counsel have been charged with fraud for receiving millions of dollars in low- or no-interest loans for personal purposes without disclosure to investors; further, they have failed to disclose related-party transactions and executive compensation arising from the forgiveness of loans in their financial statements. (4)
These cases have drawn widespread attention because of the billions of dollars involved, but they are not isolated incidents. In March 2002, a shareholder suit was revived against A.T. Cross, makers of Cross pens, for fraudulently overstating revenues. (5) Also, the former CFO of Media Vision Technology was found guilty in August 2002 of five counts of fraud for lying to investors and financial analysts about numerous schemes employed to overstate the company's financial position, including falsifying inventories, misdating transactions, and recording nonexistent products. A trial for the same charges against the CFO had resulted in a hung jury a year earlier. (6)
The nation's largest accounting firms have come under investigation by the Securities and Exchange Commission for their roles in these and other accounting scandals. Additionally, federal prosecutors brought charges against Arthur Andersen LLP and are investigating PricewaterhouseCoopers for conspiring with managements of public companies to defraud investors. (7) The conviction of Arthur Andersen LLP for obstruction of justice for shredding documents and doctoring Enron-related statements is unprecedented.
Impact on the U.S. Economy
The recent spate of billion dollar bankruptcies and accounting scandals is affecting the nation's economy. The July 18, 2002, press release of The Conference Board stated, in part, that:
Stock prices and consumer expectations are the primary components that are preventing the leading index from continuing its positive trend in June. The recent wave of questionable corporate practices and the lack of measures aimed at addressing them have contributed to the weakness in these two components.
Additionally, The National Economic Review for the second quarter 2002 reported that "concerns regarding financial reporting, a weak labor market, and waning business conditions have eroded consumer confidence ... While [June] confidence is still higher than it was at the start of the year, consumers' assessment of current conditions and their expectations for the next six months declined."
Changes in the Regulatory Environment
In response to huge investor losses, the Sarbanes-Oxley Act of 2002 was signed into law on July 30, 2002, by President Bush. This law requires that a public company's CEO and CFO prepare a statement to accompany the audit report that certifies the "appropriateness of the financial statements and disclosures contained in the periodic report, and that those financial statements and disclosures fairly present, in all material respects, the operations and financial condition of the issuer." Further, each annual report is now to contain an "internal control report" which shall 1) state management's responsibility for establishing and maintaining adequate internal control structure and procedures to ensure that the financial statements are materially correct; and 2) contain an assessment of the effectiveness of the internal control structure and procedures. Certifying officers are now subject to the risk of fines, prison, or both. (8)
The law also established the public watchdog Public Company Accounting Oversight Board, which is to include two CPAs and three "financially literate" individuals who are not and have never been accountants. The Securities and Exchange Commission, the chairman of the Federal Reserve Board, and the Secretary of the Treasury are jointly responsible for appointment of the Oversight Board's members. (9) Further, the law increased the number of offenses that qualify as corporate crime and stiffened the penalties for the same. It...
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