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America's capital markets are not the paragons they were cracked up to be
Jan 17th 2002 Like 190 Tweet
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tumble of American capitalism, the most successful system the world has known.
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2/16/2018 The real scandal | The Economist
The collapse of Enron is now raising some big questions Jan 17th 2002
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(see article). Andersen, the company's auditor, has admitted Take our weekly news quiz to stay on top of the
to an “error of judgment” in its treatment of the debt of one of Enron's off-balance-sheet headlines
vehicles; these vehicles led to an overstatement of profits by almost $600m over the
years 1997-2000. This week Andersen fired the partner in charge of the Enron audit, Want more from The Economist?
when it found that he had ordered the disposal of documents even after the SEC had Visit The Economist e-store and you’ll find a range of
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subpoenaed the firm as part of its investigation into Enron. This is not the first time that
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Andersen has been in trouble: last year, it was fined over its audit of another Texan more
company, Waste Management, and it also had to settle a suit over the audit of Sunbeam,
a Florida-based company.
If this were simply a case of one accounting firm doing wrong, that would be regrettable
but containable. Andersen may go under thanks to Enron litigation anyway. But the truth
is that it is not unique. It may have been unusually culpable, but all the accounting firms
have made mistakes in the past. Only this week, KPMG became the latest to be
censured, this time for breaking rules barring investment in audit clients.
That points to the need for systemic reforms, in three areas. The first is the regulation of
auditors. For years the profession has insisted that self-regulation and peer review are
the right way to maintain standards. Yet Enron has shown that this is no longer enough.
The Public Oversight Board should be turned from a self-regulatory body appointed and
financed by accountants into a statutorily independent organisation reporting to the SEC.
And it should be given teeth, including the power to ban or fine auditors for misdeeds.
Second is the urgent need to eliminate conflicts of interest in accounting firms. Andersen
collected audit fees of $25m from Enron, its second-biggest client, last year, but it earned
even more for consulting and other work. The accounting firms have fought off attempts
to limit or stop them undertaking consulting work for audit clients; they insist that there is
no real conflict of interest. Yet if confidence in auditing is to be regained, perception is as
important as reality. The SEC should now pursue again the ban that its previous
chairman, Arthur Levitt, sought to impose in 1999. There is also a strong case for
compulsory rotation of auditors, say every seven years: Andersen had audited Enron
since its birth in 1983.
Lastly come America's accounting standards. GAAP standards used to be thought the
most rigorous in the world. Yet under British standards, Enron would not have been able
to overstate its profits by so much. And, once again, although Enron may have been
egregious, it is not a lone offender. Several dotcoms and technology companies have
used what is euphemistically called “aggressive accounting” to boost reported earnings.
Too many companies have got away with “pro forma” accounting that delivers nice
numbers by omitting such items as stock write-offs, special transactions, interest charges
or depreciation. And the accounting treatment of stock options has long been a disgrace.
The SEC and its standard-setting body, the Financial Accounting Standards Board,
should now revisit GAAP; they might even embrace international accounting standards
instead. There is a lesson from British experience in the 1980s, when several audit
scandals led to both tougher regulation and more rigorous accounting standards. The
Enron scandal shows that America can no longer take the pre-eminence of its accounting
for granted. That is a far bigger concern than any number of congressional investigations.
Diversifying television: Aid and abuse: The saints Making the personal
“This Close” is an insightful and sinners of Oxfam political: The art born of
opioid addiction
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2/16/2018 The real scandal | The Economist
• Making the airline pay: How to ensure • Jacob Zuma resigns: The disastrous
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