Presentation on theme: "Dr. Norman Meonske Kent State University"— Presentation transcript:
1Dr. Norman Meonske Kent State University The Rise of Corporate Accountability?Dr. Norman Meonske Kent State UniversityOhio Council IMA January 30,2003Dr. Norman MeonskeKent State University
2Accounting Profession Are WeDead Yet?Accounting Profession
3Why so many financial statement frauds all of a sudden? "The Perfect Storm"Good economy was masking many problemsMoral decay in societyExecutive incentivesWall Street expectations—rewards for short-term behavior
4Why so many financial statement frauds all of a sudden? "The Perfect Storm"Nature of accounting rulesBehavior of CPA firmsGreed by investment banks, commercial banks, and investorsBad Lawyer Advice?
5Why so many financial statement frauds all of a sudden? "The Perfect Storm"Failure of Corporate Audit CommitteesBoard of Directors Failures and GreedFinancial Analyst Conflict of Interests and GreedEducation FailuresCorporate Accounting Ability Regulation
6Good economy was masking problems…. With increasing stock prices, profits and wealth for everyone, no one worried about potential problems.
13Nature of Accounting Rules Allows companies and auditors to be extremely creative when not specifically prohibited by standards.In the U.S., accounting standards are “rules-based” instead of “principles based.”It is impossible to makes rules for every situation
14Examples are:SPEs and other types of off- balance sheet financingRevenue recognition approaches,Merger reservesPension accountingOther accounting schemes.
15When the client pushes, without specific rules in every situation, there is no room for the auditors to say, “You can’t do this…because it isn’t GAAP…”
17GAAP CRITICISMFosters Earning GameDoes Not Show Value Creation
18Executive Incentives Meeting Wall Street’s Expectations Performance is based on earnings & stock priceFocus is on short-term (quarterly) performance onlyStock prices are tied to meeting Wall Street’s earnings forecastsExecutives have been endowed with hundreds of millions of dollars worth of stock options—far exceeds salary-based compensation (tied to stock price)Companies are heavily punished for not meeting forecasts
19Average compensation of America's top 100 CEOs has risen from 39 times that of the ordinary worker in 1970 to 1,000 times in 1999.Princeton University
20Stock Fell 13% With This Revelation Jack Welch,Former General Electric ChairmanGE had not disclosed those perks -- which included courtside sports tickets, a Manhattan apartment, and use of a corporate jet -- beyond a vague statement in an SEC filing that Welch would have "continued lifetime access to company facilities and services... "
22How To Play Numbers Game Aggressive AccountingEarnings ManagementIncome SmoothingFraudulent Financial ReportingCreative Accounting Practices
23Rewards of The Game Bonus Plan Effect Share Price Effect Borrowing Cost EffectBonus Plan EffectPolitical Cost Effect
24How to value a dot.com company: Take their loss for the yearMultiply the result by negative 1 to make it positiveMultiply that number by at least 100If stock price is less than the result…Buy, If Not?Buy it anyway
25Incentives for F.S. Fraud Incentives to commit financial statement fraud are verystrong. Investors want decreased risk and high returns.Risk is reduced when variability of earnings is decreased.Rewards are increased when income continuously improves.Firm A Firm BWhich firm will have the higher stock price?
26Auditors—the CPAsFailed to accept responsibility for fraud detection (SEC, Supreme Court, public expects them to detect fraud) If auditors aren’t the watchdogs, then who is?Became greedy--$500,000 per year per partner compensation wasn’t enough; saw everyone else getting richAudit became a loss leaderEasier to sell lucrative consulting services from the insideBecame largest consulting firms in the U.S. very quickly (Andersen Consulting grew to compete with AccentureA few auditors got too close to their clientsEntire industry, especially Arthur Andersen, waspunished for actions of a few
27In a separate case in late September, a judge's divorce ruling unsheathed guarded financial information about accounting firm Ernst & Young, which is a private partnership that does not file public financial reports.In divorce papers for Ernst & Young chief executive officer Richard S. Bobrow, a 45-page judge's opinion revealed how much the CEO was paid and put a dollar value on the company for the first time, giving competitors a rare peek into the firm's finances.
28$ 24 million to Janet Bobrow Annual Salary $ 3 Million$25 million in salary $US29 million in partnership earnings over the next decade.Pension worth $1 million a year for life and had access to a corporate jet owned by Ernst & Young and a New York apartment.$ 24 million to Janet BobrowJan Bobrow makes $ 10 an hour part-time at Central Church of the Nazarene in Lenexa, Kan.
29Moral Decay Honesty studies Attendees at the April, 1998 Business Week Forum of Chief Financial Officers revealed:67% of CFOs said they had been asked by senior company executives to misrepresent corporate financial results12% of CFOs admitted they had actually misrepresented financial results…55% said they had fought off requests to “cook the books”Honesty studies1961: 12%1986: 31%2002: ???
30How Much Stanford MBA Worth? $500,000 dollars$ 10 Million dollars$ 100 Million dollars$ 1 billion dollars
31The market lopped a cool $1 billion off Veritas' (VRTS) market cap yesterday when its CFO resigned after revealing he lied about his academic credentials. The fundamental picture hasn't changed—unless the CFO's duplicity extended to the books.
32Executives at Vetrias, storage management software maker, found that CEO’s claim to have earned an MBA from Stanford Business School was false.
33Financial Statement Fraud Will Destroy Your Shareholder Value
34Financial Statement Fraud Financial statement fraud causes a decrease in market value of stock of approximately 500 to 1,000 times the amount of the fraud.$2 billion drop instock value$7 million fraud
35These Are Interesting Times Number and size of financial statement frauds are increasingNumber and size of frauds against organizations are increasingSome recent frauds involve several people—as many as 20 or 30 (seems to indicate moral decay)Many investors have lost confidence in credibility of financial statements and corporate reportsMore interest in fraud than ever before—now a course on many college campuses—from 3 or 4 to over 50 college campuses
36Current Executive Fraud-Related Problems Misstating Financial Statements: Quest, Enron, Global Crossing, WorldCom, etc.Executive Loans and Corporate Looting: John Rigas (Adelphia), Dennis Kozlowski (Tyco--$170 million—the $15,000 umbrella stand)IPO Favoritism: Bernie Ebbers ($11 million)CEO Retirement Perks: Delta, PepsiCo, AOL Time Warner, Ford, GE, IBM (Consulting Contracts, Use of Corporate Planes, Executive Apartments with meals, maids, etc.)
37Current Executive Fraud-Related Problems Exorbitant Stock Options for Executives
38Complaint in Fraud Case Several hundred million in earnings overstatementComplaint:“The goal of this scheme was to ensure that (the company) always met Wall Street’s growing earnings expectations for the company. (The company’s) management knew that meeting or exceeding these estimates was a key factor for the stock price of all publicly traded companies and therefore set out to ensure that the company met Wall Street’s targets every quarter regardless of the company’s actual earnings. During the period ___ to ___alone, management improperly inflated the company’s operating income by more than $500 million before taxes, which represents more than one-third of the total operating income reported by (the company.)”
39Complaint in Fraud Case “The participants in the illegal scheme included virtually the entire senior management of (the company), including but not limited to its former chairman and chief executive officer, its former president, two former chief financial officers and various other senior accounting personnel. In total, there were over 20 individuals involved in the earnings overstatement schemes.”
49Deregulation of electrical power markets, a change due in part to lobbying from senior Enron officials:Chairman Kenneth L. Lay,expanded Enron into an energy broker, trading electricity and other commodities
50RISING POWER Enron became a giant middleman that worked like a hybrid of traditional exchanges. But instead of simply bringing buyers and sellers together, Enron entered the contract with the seller and signed a contract with the buyer, making money on the difference between the selling price and the buying price.Enron kept its books closed, making it the only party that knew both prices.
51Over time, Enron began to design increasingly varied and complex contracts. Contract to insure against:a rise or fall in interest rates,a change in the weather, ora customer's inability to pay.By the end, the volume of such financial contracts far outstripped the volume of contracts to actually deliver commodities
52THE UNRAVELING As its services became more complex and its stock soared, Enron created a constellation of partnerships that allowed managers to shift debt off the books.• Chewco • Whitewing
53Special Purpose Entities (SPEs) (Enron’s principal method of financial statement fraud involved the use of SPEs (Special Purpose Entities))Originally had a good business purposeHelp finance large international projects (e.g. gas pipeline in Central Asia)Investors wanted risk and reward exposure limited to the pipeline, not overall risks and rewards of the associated companyPipeline to be self-supported, independent entity with no fear company would take overSPE limited by its charter to those permitted activities onlyReally a joint venture between sponsoring company and a group of outside investorsCash flows from the SPE operations are used to pay investors
54Enron’s Use of Special Purpose Entities (SPEs) To hide bad investments and poor-performing assets (Rhythms Net Connections). Declines in value of assets would not be recognized by Enron (Market to Market.)Earnings management—Blockbuster Video deal--$111 million gain (Bravehart, LJM1 and Chewco)Quick execution of related-party transactions at desired prices. (LJM1 and LJM2)To report over $1 billion of false incomeTo hide debt (Borrowed money and not put on financial statements of Enron)To manipulate cash flows, especially in 4th quartersMany SPE transactions were timed (or illegally back-dated) just near end of quarters so that income could be booked just in time and in amounts needed, to meet investor expectations
55Special Purpose Entities & Off-Balance Sheet Financing What is the business purpose?To transfer risks and losses to someone elseOne Enron Example (the “Rhythms” transaction):Enron holds Internet stock in company called Rhythms NetConnectionsStock is restricted (can’t be sold for a certain period of timeEnron doesn’t want exposure to risk of a price dropThe solution is simple! Find someone else who believes the Rhythms stock price will rise and is willing to sell a contract (a put option) to buy the stock in the future at a set price (a hedge!)The problem is that Enron can’t find anyone willing to “do the deal”Another simple solution! Start a company (a Special Purpose Entity or SPE) to take the other side of the transaction (Enron called it LJM1)Where does the financing come from?97% from bank loan Guaranteed with Enron stock3% from entity other than Enron Andrew Fastow and others!Now “Do the Deal”Enron gives $168 million in Enron shares to LJM1 (LJM1’s primary asset)LJM1 gives Enron a note for $64 million and a put option valued at $104 millionWhen everything “settles out,” Fastow receives $15 million for his $1 million investmentEnron gets to “hedge” (i.e., not report) a $103 million market loss on its stock investment
56LJM1 SPE Responsible for 20% of SPE restatement or $100 million Should have been consolidated—an error in judgment by Andersen (per Andersen)After Andersen’s initial review in 1999, Enron created a subsidiary within LJM1, referred to as Swap Sub. As a result, the 3% rule for residual equity was no longer met.Andersen was reviewing this transaction again at the time problems were made public—involved complex issues concerning the valuation of various assets and liabilities.
57The Chewco SPEAccounted for 80% of SPE restatement or $400 million—hid lossesIn 1993, Enron and the California Public Employees Retirement System (Calpers) formed a 50/50 partnership—Joint Energy Development Investments Limited (JEDI)In 1997, Enron bought out Calpers’ interest in JEDIChewco Financing$240 million loan from Barclays, guaranteed by Enron$132 million loan from JEDI$11.4 million loan from Barclays; called Equity$0.1 million from Enron employeeFinancial reward to Enron employee$2 million management fee over 3 years (remained full-time Enron employee)$10 million liquidation ($125K investment)
58LJM2 SPE Raptors I-IVEstablished by Enron CFO to provide a quick buyer for Enron assetsBy December 2000, $1.5 billion in “hedged” investments, $500 million Enron “gain”Financial reward to Enron CFO—at least $15 millionEnron Financial Statement Impact—Hedged $1 billion in losses over 5 quarters; reported earnings of $1.5 billion.
59Insufficient Disclosure……. 2000 Proxy Statement “During 2000, certain Enron subsidiaries…entered into a number of transactions with LJM2 Co-Investment…Andrew S. Fastow, Executive Vice President and Chief Financial Officer of Enron, is the managing member of LJM2’s general partner.”Paragraph outlining the transactions“These transactions occurred in the ordinary course of Enron’s business and were negotiated on an arm’s length basis with senior officers of Enron other than Mr. Fastow. Management believes that the terms of the transactions were reasonable and no less favorable than the terms of similar arrangements with unrelated third parties.”
60Fastow’s Explanation of Partnerships (SPEs) The partnerships were used for “unbundling and reassembling” the various components of a contract. “We strip out price risk, we strip out interest rate risk,” he said. “What’s left may not be something that we want.”The obvious question is “Why would anyone want whatever was left?”
61Role of AndersenWas paid $52 million in 2000, the majority of which was for non-audit related consulting services.Failed to spot many of Enron’s lossesKept a whole floor of auditors assigned at Enron year aroundEnron was Andersen’s second largest client
62Did both external and internal audits CFOs and controllers were former Andersen executivesAccused of document destruction—was criminally indictedWent out of businessOne Partner “I had $4 million in my retirement account and lost it all.” Some partners who transferred to other firms now have two equity loans and no retirement savings.
63Where was Anderson? Enron’s Audit Committee Auditor Enron’s Executives (Arthur Andersen)Did they know?2/5/01: Andersen partners meet to discuss Enron’s accounting, related parties, fees, etc.Issue: For a significant amount of time, according to notes of the meeting, the Andersen accountants debated a critical point: What should they do about two SPEs, LJM1 and LJM2, that had been set up 18 months earlier by Fastow?Resolution: They drew up a "to do" list:Recommend a special committee of the Board to review LJM deals.Review the SPE accounting tests.2/12/01: The Big Meeting: Andersen partners meet with Enron board's audit and compliance committee.All Enron executives were excused from the room.And then………..no evidence of any discussionInteresting side note: From 1997 to 2001, Enron paid Andersen $5.7 million in connection with work performed specifically on the LJM and Chewco transactions.
64Anderson Shredding The Document Destruction Chronology October 12 – Nancy Temple sends “Document retention policy” to Michael Odom.October 17 – SEC asks Enron for information about its accounting.October 23 – David Duncan calls urgent meeting, organizes effort to shred and dispose.The topics of discussion, according to a typed agenda, included:"SEC probe/shareholder lawsuits" and"soft and hard copy file review."November 8 – Andersen receives subpoena from SEC.November 9 – Duncan’s assistant sends to secretaries: “no more shredding.”message about Document Policy:To: Michael C. OdomDate: 10/12/ :53 a.m.From: Nancy A. TempleSubject: Document retention policyMike-It might be useful to consider reminding the engagement team of our documentation and retention policy. It will be helpful to make sure that we have complied with the policy. Let me know if you have any questions.Nancy
66Some partnerships' losses would have to be paid for out of Enron stock or cash in 2003, bringing the debts back home. There are indications that Enron executives and its accounting firm, Arthur Andersen, had warnings of problems nearly a year ago. According to a Feb. Andersen considered dropping Enron as a client. In August, Enron Vice President Sherron Watkins wrote an anonymous memo to former Chairman Kenneth L. Lay, detailing reasons she thought Enron "might implode in a wave of accounting scandals."
67On Oct. 16, Enron announced a $638 million loss for the third quarter, and Wall Street reduced the value of stockholders' equity by $1.2 billion. Enron announced Nov. 8 that it had overstated earnings over the past four years by $586 million and that it was responsible for up to $3 billion in obligations to various partnerships. A $23 billion merger offer from rival Dynegy was dropped Nov. 28 after lenders downgraded Enron's debt to junk-bond status.
68THE INVESTIGATION Dozens of lawsuits have been filed against the company by an array of pension funds. Dozens more are directed at former Chairman Kenneth L. Lay, former CEO Jeffrey Skilling and former Chief Financial Officer Andrew Fastow.
69Kenneth L. Lay, former Enron Chairman and CEO (resigned Jan. 23, 2002) Lay and Enron poured millions of dollars into both political parties, cultivating access and using the entree to lobby Congress, the White House and regulatory agencies for action that was critical to the energy company's spectacular growth. In addition to being one of the single largest financial backers of President George W. Bush's political career, Lay is also one of the president's friends.
71Andrew Fastow, former Enron Chief Financial Officer (ousted Oct Fastow was removed as Enron's CFO on Oct. 24, 2001 as the SEC began a probe into conflicts of interest in two partnerships he created and managed. Those partnerships earned him around $30 million in management fees from the deals in addition to his Enron salary.
72In early October, Fastow was charged with securities, wire and mail fraud, money laundering and conspiring to inflate Enron's profit
74Kopper and his domestic partner, William D. Dodson, reaped $10 Kopper and his domestic partner, William D. Dodson, reaped $10.5 million based on a $125,000 investment in a partnership called Chewco, according to an investigative report issued by Enron's board of directors.In August 2002, Kopper pleaded guilty to financial wrongdoing and agreed to surrender $12 million in the first criminal case against a company official.
75Jeffrey Skilling, former Enron Chief Executive Officer (resigned Aug Senior Enron executives criticized former CEO Skilling about possible conflicts of interest in two partnerships he created with former Chief Financial Officer Andrew Fastow. Jeffrey McMahon, then Enron's treasurer, was "highly vexed" about the conflicts, "complained mightily" and suggested a list of remedies.
76Clifford Baxter, former Enron Vice Chairman (resigned May 2, 2001) Baxter was one of 29 former and current Enron executives and board members named as defendants in a federal lawsuit, after he sold 577,436 shares of Enron for $35.2 million before Enron's collapse.He was found shot to death in a car Jan. 15, 2002, in an apparent suicide.
77Watkins is the internal whistleblower who in August of 2001, more than two months before Enron disclosed it had overstated its profits and understated its debts, warned Kenneth L. Lay that the company might "implode in a wave of accounting scandals." Shortly after Enron Chief Executive Officer Jeffrey Skilling suddenly resigned. Watkins described "a veil of secrecy" around partnerships involving the energy-trading company's former chief financial officer, Andrew Fastow
78Arthur Andersen The job of Arthur Andersen, one of the nation's largest accounting firms, was to make sure investors could rely on Enron's financial statements. But Andersen also was a major business partner-soliciting and selling millions in consulting services to Enron. Andersen was also responsible for some of Enron's internal bookkeeping, and some Andersen executives ended up taking jobs at Enron.
79Led by then-chief executive Joseph F Led by then-chief executive Joseph F. Berardino, Arthur Andersen took its case public, saying it would take "all appropriate steps" to defend its integrity. Berardino also suggested that the company might stop selling consulting services to firms it audits. Barardino has since resigned from the firm.
80THE IMPACTEmployees Thousands of Enron employees, many with similar skills, were left unemployed. Enron encouraged employees to invest in the company, matched their 401(k) contributions with company stock, and briefly froze the plan in late October, barring employee sales, before the stock's final plunge. Thousands of employees and retirees have next to nothing in their accounts.
81THE IMPACTBanks One of Enron's biggest lenders, J.P. Morgan Chase, announced losses of $456 million as of Jan related to Enron's demise. Citigroup recorded $228 million as of Jan in Enron-related losses. But banks and regulators said the overall impact would be minimal, because no one bank is overinvested in Enron.THE IMPACT
82THE IMPACTInvestors Enron's stock lost nearly all its value, dropping from almost $34 on Oct. 16, Billions of dollars in stock value were erased. The stock has been delisted from the New York Stock Exchange.THE IMPACT
83THE IMPACTPoliticians Several prominent politicians from both parties returned Enron contribution money to the company or contributing it to charity. Others have been asked about their relationships with Enron.THE IMPACT
84THE IMPACT And Now there are 4 THE IMPACT Arthur Andersen Its reputation was badly damaged. Divisions of the business have been sold to other companies. There is also the possibility of staggering liability claims.And Now there are 4THE IMPACT
85SEC files suit against KPMG and partners over Xerox Accounting
86They have been charged with allowing Xerox to report false financial results between 1997 and 2000, rather than risk losing a key audit client. Office equipment maker Xerox last June was forced to restate more than US 6 Billion in revenues over 5 years after regulators accused it of using accounting tricks to prop up its earnings.
87ResponseSpecifically, KPMG offered a detailed description of events as they unfolded in the Xerox case and argued that it did the "right thing" by refusing to sign off on the company's 2000 financial statements in the face of what it called "strong client resistance."
88• FBI Agent Coleen Rowley, who called the bureau on the carpet for ignoring evidence hinting at the September 11 terrorist attacks.Former Enron vice president Sherron Watkins, whose memos warning company chairman Ken Lay about accounting irregularities failed to stop Enron's collapse.Cynthia Cooper, a WorldCom vice president who told the company's board of directors about nearly $4 billion in accounting irregularities.
93John Rigas (former CEO) The founder and former head of Adelphia, and two of his sons have been charged with looting the nation's No. 6 cable company to pay for luxury condos, a golf course and to cover personal investment losses.
94 Sam Waksal (former CEO) The former CEO of ImClone was arrested earlier this month on charges of insider trading for allegedly trying to sell his company's stock and tipping off family members after learning of the impending FDA decision on its new cancer drug Erbitux.
95Martha Stewart A close friend of Sam Waksal, has repeatedly denied any wrongdoing in selling nearly 4,000 ImClone shares on Dec. 27, a day before federal regulators said they would not consider the drugmaker's application for its new cancer drug. ImClone's shares plummeted after the news came out.
98Dennis Kozlowski (former CEO) Pleads innocent to charges of evidence tampering after earlier pleading the same to charges of evading taxes on purchases of valuable paintings.
99--Dennis Kozlowski, the CEO until he was indicted and resigned in June, borrowed more than $40 million from the company, and the loans were later forgiven, reports the Wall Street Journal. The SEC rules governing disclosure of CEO pay are quite clear on those matters, and there is simply no way to avoid disclosing the forgiveness of such loans. Yet Tyco never did. The company neither confirms nor denies any of this, declining to comment pending the completion of an internal investigation.
100Sample Frauds Large Fraud of $2.6 Billion over 9 years Year 1 $600KYear 3 $4 millionYear 5 $80 millionYear 7 $600 millionYear 9 $2.6 billionIn years 8 and 9, four of the world’s largest banks were involved and lost over $500 millionSome of the organizations involved: Merrill Lynch, Chase, J.P. Morgan,Union Bank of Switzerland, Credit Lynnaise, Sumitomo, and others.
101Why Fraud is a Costly Business Problem that must be addressed by corporate executives Fraud Losses Reduce Net Income $ for $If Profit Margin is 10%, Revenues Must Increase by 10 times Losses to Recover Affect on Net IncomeLosses……. $1 MillionRevenue….$1 BillionFraud Robs IncomeRevenues $ %Expenses %Net Income $ %FraudRemaining $ 9To restore income to $10, need $10 more dollars of revenue to generate $1 more dollar of income.
102Fraud Cost…Two Examples General Motors$436 Million FraudProfit Margin = 10%$4.36 Billion in Revenues NeededAt $20,000 per Car, 218,000 CarsBank$100 Million FraudProfit Margin = 10 %$1 Billion in Revenues NeededAt $100 per year per Checking Account, Million New Accounts
103Educators Need to teach students how to think Haven’t taught “ethics” enough (can’t make up own rules to meet own needs”Need to teach students about fraud—need a “fraud” course Need to teach students how to thinkNeed to teach students how to thinkWe have taught them how to copy, not thinkWe have asked them to memorize, not think
104EducatorsWe have done what is easiest for us and easiest for our students
105Accounting Education and Learning Theory Behaviorist ApproachLearners are seen as empty vessels that instructors pour knowledge intoProfessors use primarily lecture-based teachingStudents are provided with information needed to produce the desired behavior—high scores on content-based examinations.Professors assign homework problems similar to examples used in class, examples in textbooks, and problems on examinations.
106Accounting Education and Learning Theory Students use text or lecture notes as guides and solutions manuals.Students need not define the problem or understand why something is done the way it is or what other alternatives are available—only how something is done.
107Problems with Accounting Education CurriculumProblemsProblems with Accounting EducationTeach outdated stuff—replaced by technology—teach to the past, not the futureToo narrow and specialized150-hour programs—more of the samePh.D. programs reinforce specializationDon’t cover important topics in the right waysGlobalizationTechnologyVarious business models
108Problems with Accounting Education PedagogyRule-based, memorization, test-for-content, prepare for certification model, doesn’t add significant valueDoes not expose students to ambiguity enoughLacks creativityNot enough teaching of skillsNot enough out-of-classroom activitiesNot enough focus on technologyTechnology has changed everything
109What are we teaching our students? One of the main things we are teaching is “how to copy.”Not from a solutions manual or from other students (because that is prohibited), but from examples in the chapter or from other students.Students are not developing higher-level thinking skills or learning to identify issues or define unstructured problems.When they graduate and find themselves performing an audit or completing a tax return, they do what we taught them to do--they reference what was done last year (a similar example) and copy (with different numbers and slight changes in format)They don’t think analytically about what has changed or even what is going onThey don’t consider what the risks and substance of transactions are, or what changes in the numbers mean.They are copying because we taught them how to copy
110Educational FocusWhy do educators spend so much time focusing on content when content memorization has such a short useful life and when skills are transferable across positions and last so much longer?Is it because this type of teaching is easier to teach and much easier to assess?
111Using Constructivist Teaching Critical in the new environment—to help our students think analyticallyCan no longer use textbook (or CDs) to drive everything we doBest class is combination of reading (text), video, cases, experiential learning (field studies, service-learning, etc.), group work, etc.Let’s look at why this is important—the Enron example
112Some ThoughtsDoing what’s easiest—our “train monkey” or “operant conditioning” approach to teaching has led to:Inhibiting their ability to assess risks and think analyticallyRule-based standards that allow firms to basically do whatever they want—you can’t legislate everythingAn ethical and public relations nightmare for accountants and the accounting profession
113Types of Fraud Fraudulent Financial Statements Employee Fraud Vendor FraudCustomer FraudInvestment ScamsBankruptcy FraudsMiscellaneous FraudsThe common element is deceit!
114What’s Hot in Accounting--7 Sizzling Areas Assurance services--Elder careConsulting servicesEnvironmental accountingForensic accountingInformation technology servicesInternational accountingTax and financial planning
116Whistleblower Protection Prohibits Disciplining or Discriminating against employees who provide information regarding securities law violations
117Attorney Professional Conduct Requires Attorney’s to Report Material Violations of Securities or Breaches of Fiduciary Duty to the Company’s CEO or Chief Legal Officer or if necessary to the Board of Directors
118New and Increased Felonies + Civil Action Destruction of of DocumentsLonger Periods For Civil FraudIncreased Criminal PenaltiesLower Thresholds To Bar for UnfitnessNo Bankruptcy Discharge of Securities Law Liability
119Auditor Independence & Rotation Rotation of Audit/Review Partners every 5 yearsProhibits Some Non Audit Services
1208K Expanded 8 K Disclosures Accelerated 8 K Reporting – 2 Days
121Accounting Issues New Issuer Fees SEC Adopt Principles-based Accounting SystemUnlawful to Fraudulently Influence AuditorsNew Rules for Financial Experts on Audit CommitteeNew Management Assessment of Internal Control
122Non-US Companies Not Exempt Non-US IssusersNon-US Companies Not ExemptNew CEO/CFO Apply To Foreign Private Issuers
123Have Made Proposals For the SEC To Consider NYSE and NASDAQHave Made Proposals For the SEC To ConsiderNASDAQNYSE
124Enhanced Disclosures SEC Review – 3 Years Material Off-Balance Sheet TransactionsReconciliation of Pro Form F/SSEC Review – 3 Years“Real Time” Disclosures of Material Changes To Financial ConditionExpenses
125Detailed Quantitative & Qualitative Matters – No Boilerplate Accelerated Due Dates For Periodic ReportsMD&A Disclosures of Critical Accounting PoliciesDetailed Quantitative & Qualitative Matters – No Boilerplate
126Loans Management Transactions 8 K Security Transactions Including Preplanned Purchase/Sale
127The SEC Sets New Ground Rules on Selective Disclosure & Insider Trading
132Once The Camel Stick Its Head In the Tent, We Will Have Problems
133The Sarbanes-Oxley Act apparently did not go far enough to suit California lawmakers. Under a law that took effect this month, public companies based in California or doing business there have to give the state extra layers of detail on insider activity.
134Key Elements of Public Trust Spirit of TransparencyCulture of AccountabilityPeople of Integrity