Editor's note:
On December 2, 2001, local time in the United States, the financial scandal-ridden Enron filed for bankruptcy protection in the New York Bankruptcy Court, ranking No. 500 in the United States by market value Seven's Enron Corporation sadly ended its ignominious history. The Enron incident and the world communication fraud case exposed in 2002 became the fuse for the United States to eliminate financial fraud and reconstruct the capital market order, prompting the introduction of the " Sarbanes-Oxley Act" and the establishment of the PCAOB , rewritten the development process of accounting and auditing in the United States. The Enron incident was a milestone and worth remembering. To this end, we specially push the article "Reflections on the Enron Incident" published by Prof. Ge Jiashu and Prof. Huang Shizhong in " Accounting Research " in February 2002. Although the accounting and auditing problems discussed in this paper have been rectified to a certain extent, the profound reflections in this paper on standard setting, auditing supervision, corporate governance and other fields are still very enlightening so far. After the "two health" incidents, especially the judgment of Kangmei Pharmaceutical that the independent directors and CPA_ were jointly and severally liable for compensation, it is very important to revisit the Enron incident and draw historical lessons for the governance of financial fraud. realistic meaning. reflection
Enron
- analysis of Enron's accounting and auditing issues
Ge Shu Huang Shizhong
The history of modern accounting and auditing shows that,Major crisis events in the securities market will inevitably affect or even change the development process, development model and direction of accounting and auditing. The collapse of the U.S. stock market in 1929 and the resulting four-year global economic crisis not only ended the era of laissez-faire capitalism, but also completely changed the “rules of the game” in the securities market, the Securities Act of 1933 and the 1934 The establishment of the Securities and Exchange Commission ( SEC ) under the Securities and Exchange Act of 2009 eventually led to the birth of the US generally accepted accounting standards and auditing standards. We believe that the Enron incident needs to attract full attention from all walks of life, especially the accounting profession, because the Enron incident involves not only the issue of distortion of accounting information, but also exposes the institutional arrangements made by the United States to ensure the authenticity of accounting information (such as There are serious flaws in the independent director system of corporate governance and the industry self-discipline mechanism of certified public accountants. In recent years, my country has learned from the US practice to varying degrees, whether it is the supervision of the securities market or the norm of accounting and auditing. Rational analysis of the Enron incident in the mature securities market will not only help us draw lessons from it, but also avoid blindly imitating American practices in the future. Based on this consideration, this paper introduces the accounting and auditing issues that led to the collapse of Enron Corporation in a comprehensive manner, analyzes the potential impact of the Enron incident on the formulation of accounting standards in the United States and the supervision model of certified public accountants in the future, and from the perspective of accounting auditing and corporate governance, Summarize the Enron incident to us.
1. The accounting audit problems that led to the collapse of Enron
(1) Accounting problems
information disclosed by the news media,The main accounting problems of Enron can be divided into four categories:
(1) Using "special purpose entities" to overestimate profits and underestimate liabilities. Enron made inappropriate use of the accounting practice that "Special Purpose Entities" (SPEs) could not be included in the consolidated statements if they met certain conditions, and included three "Special Purpose Entities" (English abbreviations: JEDI, Chewco and LJM1) were excluded from consolidated reporting, resulting in an overstated profit of $499 million and an understated liability of hundreds of millions of dollars between 1997 and 2000. In addition, Arthur Andersen's audit adjustment recommendation was not adopted on the grounds that it did not meet the "materiality" principle, resulting in an overstated net profit of $92 million between 1997 and 2000. The details of each year are as follows:
The above-mentioned major accounting problems of Enron are due to an almost absurd accounting practice. According to the current accounting practice in the United States, if a non-related party (which can be a company or an individual) invests more than 3% in the equity capital of a "special purpose entity", even if the risk of the "special purpose entity" is mainly borne by the listed company, listing The company may also not need the "special purpose entity" to be included in the scope of the consolidated financial statements. Enron took advantage of this loophole in accounting practice, which only focused on legal form and ignored economic substance, and set up thousands of "special purpose entities" as a tool to conceal liabilities and cover up losses. What is even more incredible is that this 3% convention was originally designed by an entity engaged in leasing business 10 years ago, and then the entity tried to persuade the relevant authorities to approve its accounting treatment. Since then, this magical 3% rule has gradually evolved into a conventional practice, and is applicable to the accounting treatment of almost all "special purpose entities". Arthur Andersen justified himself after the Enron incident. But we think Arthur Andersen's defense is one-sided. As a world-renowned accounting firm, doesn't Arthur Andersen understand that this absurd practice goes against the basic accounting principle of "substance over form"? Mechanically copying norms and conventions without professional judgment? Was Arthur Andersen not aware of the possible consequences for investors of Enron's use of "special purpose entities" to conceal liabilities and cover up losses? Andrew, former executive vice president and chief financial officer of Enron S. Fastao (dismissed in October 2001) testified in a 1998 lawsuit called "Cactus 3" that Enron established a "special purpose entity" for the purpose of transferring liabilities to its balance sheet In addition, in the process of "business arrangement" and " organizational design", they are closely consulted with Arthur Andersen (kurt Eichenwald & Michael Brick, 2002).It can be seen that Arthur Andersen is not ignorant of Enron's intention to set up a "special purpose entity".
(2) Overestimate assets and shareholders' equity by vacating bills receivable. Enron established four special purpose entities named Raptor I, Raptor II, Raptor III, and Raptor IV in 2000.” ( Hereinafter referred to as raptor companies), to hedge the market risk of Enron's investment. In order to solve the capital problem of raptor companies, Enron issued a value of 1.72 to raptor companies in the first quarter of 2000. $100 million in common stock. In the absence of receipt of subscription payments from Raptors, Enron recorded it as an increase in paid-in share capital and a corresponding increase in notes receivable, thereby inflating assets and stockholders' equity In addition, in the first quarter of 2001, Enron entered into several forward contracts with Raptors, Pursuant to the requirements of these contracts, Enron shall issue $828 million of future common stock to Raptor in exchange for notes payable by Raptor. These forward contracts are recorded by Enron in the manner described above. The increase in share capital and notes receivable also inflated assets and shareholders' equity by $828 million. The above two combined, Enron's assets and shareholders' equity were inflated by a total of $1 billion. In the third quarter of 2001, Enron had to As a material accounting error, assets and shareholders' equity of $1.2 billion were reduced at the same time, of which $200 million was the difference between the fair value of the that Enron should perform in the forward contract over the recorded notes receivable.
(3) Manipulating profits through limited partnerships. Enron Corporation adopted a series of financial innovations, including setting up limited partnerships controlled by it to raise funds or hedge.The now disclosed LJM Cayman Corporation (LJM1) and LJM2 Co-Investment Company (LJM2, LJM1 and LJM2 collectively LJM), incorporated in 1999, are legally registered as private investment limited partnerships. LJM's partners are divided into general partners and limited partners. Before the incident, Enron Corporation did not include LJM in the scope of consolidated statement preparation on the grounds that many of LJM's limited liability partners were financial institutions and other investors that were not affiliated with Enron Corporation. However, in terms of economic substance, LJM's operational control is completely in the hands of Enron, and Enron has now recognized that LJM is a subsidiary of Enron. From the establishment of LJM in 1999 until July 2001, the managing partner elected by its general partners was Andrew S. Fasstao, who was then the executive vice president and chief financial officer of Enron Corporation. At the beginning of the establishment of LJM, the relevant personnel clearly explained to the board of directors of Enron that the purpose of establishing LJM is to make LJM the source of funds for purchasing assets from Enron, the equity partner who invests in Enron, and the company that reduces the investment risk of Enron. Partner.
From June 1999 to September 2001, there were 24 transactions between Enron and LJM, most of which deviate from fair value. According to the information disclosed by Enron, these 24 transactions increased Enron's pre-tax profit by $578 million, of which the increase in pre-tax profit in 1999 and 2000 was $743 million, and the decrease in pre-tax from January to June 2001 Profit was $165 million. In these 24 transactions, Enron recognized a pre-tax profit of $87.3 million by selling assets to LJM2; LJM purchased the equity and bonds of the SPE sponsored by Enron, enabling Enron to recognize a pre-tax profit of $2.4 million ; LJM acquired the equity of Enron's affiliated companies, making Enron a profit of US$16.9 million; Enron and LJM jointly established 5 SPEs, and through the transfer of LJM2, the 5 SPEs (four of which are the aforementioned raptor companies) ), recognized a pre-tax profit of $471.2 million related to risk management activities.
Enron's $578 million pre-tax profit recognized through the above transaction, $103 million has been offset by the reconsolidation of LJM1's statements, and whether the remaining $475 million can be recognized is not yet known. However, the fact that Enron confirmed a loss of US$1 billion when it cancelled its investment in Raptor in the third quarter of 2001 (Gretchen Morgenson, 2002), cannot help but doubt the appropriateness of Enron's confirmation of the above-mentioned transaction profits in 1999 and 2000. .
(4) Using a partnership network to organize, self-deal, and allegedly conceal huge losses. The sums involved in the above three major accounting issues are already astronomical in our view. But Enron's accounting problems didn't end there. The above accounting issues involved in less than 10 partnerships and subsidiaries that have been disclosed so far may be just the tip of the iceberg. Enron had a vast and intricate network of partnerships, with about 3,000 partnerships and subsidiaries established for special purposes (primarily to purchase assets from or finance Enron), about 900 of which were located in overseas tax havens. Although Enron formed an independent investigation committee in October 2001, chaired by Professor William Bowers, Dean of the University of Texas Law School who was newly elected as an independent director, to investigate Enron's partnerships and subsidiaries. It may take years to understand the real situation of these network organizations with complex financial structures and ever-changing business risks. Nonetheless, according to a report in New York Times on January 17, 2002 and the full text of the newspaper on January 16, Ms. Sharon Watkins, Deputy General Manager of Enron's Corporate Development Division, in Chief Executive Officer Jeff Letter from Leigh K. Skilling to Chairman Kenneth Lay after his abrupt resignation that Enron will likely have to reduce after-tax profits of $586 million for the first five years by 13 billions of dollars in profit. The loss of $1.3 billion is mainly related to derivative financial instruments such as complex financing arrangements for partnerships that have not yet been confirmed by Enron. It is related to Condor (vulture) company, which Enron has not disclosed so far.As for the losses and off-balance sheet liabilities involved in numerous innovative financial instruments and other complex debt arrangements centered on Enron stocks, it is likely to be an incalculable "financial black hole".
(II) Audit issues , In the real world, the CPA and the listed company are both prosperous and both. The collapse of the Enron Building, in addition to evaporating the hard-earned money of Enron's employees and the wealth of many innocent investors, is likely to put Andersen in a desperate situation and trigger an unprecedented crisis of confidence in the "Big Five". The evidence disclosed so far shows that Enron deliberately committed fraud, but whether Arthur Andersen, which provides audit assurance and consulting services for it, is suspected of colluding with Enron to commit fraud is still inconclusive. The prima facie evidence in the unprecedented criminal investigation launched by the Bureau of Investigation and the SEC against Enron and Arthur Andersen is sufficient to show that Arthur Andersen was to blame for the Enron incident. According to the information disclosed so far, Arthur Andersen had at least the following serious problems in the Enron incident:
(1) Arthur Andersen issued a seriously inaccurate audit report and internal control evaluation report. Enron's financial statements have been audited by Arthur Andersen since its inception in 1985. In 2000, Arthur Andersen issued two reports for Enron, one was an audit report with unqualified opinions and explanatory paragraphs (explaining changes in accounting policy), and the other was an audit report on Enron's management claims. Its internal control can reasonably ensure the reliability of its financial statements to be recognized as an evaluation report.These two reports are in stark contrast to the aforementioned major accounting problems of Enron and have become the butt of laughs. After consultations with Arthur Andersen, Enron filed a Report 8-K with the SEC in November 2001, which made a significant restatement of profits, shareholders' equity, total assets, and total liabilities for the past five years of its financial statements, and explicitly reminded investors to invest "The audited financial statements from 1997 to 2000 cannot be trusted". In other words, Enron's financial statements audited by Arthur Andersen do not fairly reflect its operating performance, financial status and cash flow, and the internal controls approved by Arthur Andersen cannot ensure the reliability of Enron's financial statements. Both the financial picture and the effectiveness of internal controls described in the report deviate significantly from Enron's reality.
(2) Andersen's audit of Enron lacked independence. Independence is the soul of social auditing, without independence, auditing quality can only be an extravagant talk. Whether Arthur Andersen maintained its independence when auditing Enron was being widely questioned by all walks of life in the United States. Judging from the information disclosed in the preliminary investigation by the US Congress and other departments and the reports of the news media, Arthur Andersen's audit of Enron Corporation lacked at least formal independence, mainly as follows: Provide audit and assurance services, and provide a high-income consulting business. Enron is Arthur Andersen's second largest customer. In 2000, Arthur Andersen charged Enron with up to $5,200 in service fees, more than half of which was consulting service income (Reed Abelson & Johnathan D.Clater, 2002), and even more incredible is that , Arthur Andersen's consulting services even include bookkeeping. People from all walks of life have questioned whether Arthur Andersen can remain independent since it receives lucrative consulting income from Enron? Does Arthur Andersen have serious conflicts in Enron's audit? It can take a detached stand on Enron's financial statements Is it an impartial opinion? Even if Arthur Andersen finds a major accounting problem, is it likely to stand by and risk being fired and forfeiting its huge consulting income? Faced with doubts like these, even Arthur Andersen can From the perspective of defending himself, he did not violate professional ethics, but the public at least believed that Arthur Andersen lacked formal independence.There is a long-standing debate about whether accounting firms can perform both audit assurance and advisory services roles. Former SEC Chairman Arthur Levitt published an article in the New York Times on January 17, 2002 titled "Who will audit the auditor", reiterated the claim made three years ago and demanded that the accounting firm be At the same time, the provision of audit assurance and consulting services is limited. The SEC was defeated in this game with the "Big Five", from the departure of the pioneering figure Levitt who opposed the "Big Five" to Harvey Peter[1], who supported the "Big Five" to succeed the chairman of the SEC. The political influence of the Big Five. Statistics show that Arthur Andersen's Political Action Committee donated $990,000 in "political contributions" in the 2000 US congressional elections. The accounting firm actually set up a political action committee to try to influence the congressional elections. Where is the independence? Formal independence. Enron's chief financial officer, chief accounting officer and deputy general manager of the corporate development department and other senior management were recruited by Enron from Arthur Andersen. As for the resignation from Arthur Andersen, to Enron as a lower-level executive is too numerous to mention.
(3) Arthur Andersen did not take necessary corrective measures when it was aware of Enron's accounting problems. At present, the evidence disclosed by the US congressional investigation team shows that Arthur Andersen had discovered the accounting problems of Enron before the shady exposure of Enron, but failed to report to the relevant departments or take other measures in time. An Arthur Andersen email obtained by a congressional investigation group indicated that Arthur Andersen's senior partners had been discussing whether to terminate the business relationship with Enron as early as February 2001, citing Enron's aggressive accounting policies. The audit report issued by Arthur Andersen for the 2000 financial statements of Enron was dated February 23, 2001. Therefore, it is reasonable to believe that Arthur Andersen may have been aware of the accounting problems of Enron when it issued the audit report. It is impossible to discuss whether to resign in February.On August 20, 2001, Ms. Watkins called a former Arthur Andersen colleague to express her concern about Enron's accounting issues. At the same time, she wrote to the chairman of Enron's board of directors, warning that Enron's "elaborate accounting hoax" might be exposed (Richard A.Oppel Jr., 2001). On August 21, four Arthur Andersen partners, including chief auditor David Duncan, met to discuss Ms Watkins' warning. At this time, Andersen had realized the seriousness of the situation. Nevertheless, Arthur Andersen did not proactively report to securities regulators, nor did it take other necessary steps to correct the erroneous audit report that had been issued. Whether Arthur Andersen's practice violates the regulations is still difficult to determine, but at least Arthur Andersen's professional ethics have been greatly reduced.
(4) Destroy the audit working papers and obstruct judicial investigation. In the uproar of the Enron incident, the most unexpected thing for the accounting profession was that Arthur Andersen actually destroyed thousands of audit files. As we all know, the audit is the most important evidence. Auditing based on objective and real evidence is called by Paton and Littleton (1940/1970) the UK's most important contribution to the auditing profession. Objective and real evidence is also the basic assumption of accounting put forward by these two accounting masters_ One of span8span. Arthur Andersen's destruction of audit files is a blatant provocation to 's accounting professional ethics, and it also exposes its lack of law-abiding consciousness [2]. At present, the U.S. Department of Justice, FBI and SEC and other departments are conducting criminal investigations against Andersen over this scandal. After the scandal came to light, Arthur Andersen quickly fired David Duncan, who was in charge of Enron's audit, and fired three other senior partners at Houston . But this trick of abandoning the car to protect the handsome does not seem to be very clever. When questioned by the Justice Department, the FBI and the SEC, Duncan refused to admit that the decision to destroy the audit papers was made without authorization, but insisted that it was sent by e-mail from lawyers at Arthur Andersen headquarters on October 12, 2001. Those who ordered the destruction of audit manuscripts only after receiving the order from the lawyer did not stop the destruction activities on November 8.So far, Arthur Andersen headquarters has not responded to Duncan's statement. If Duncan's claims are true, then Arthur Andersen's troubles are big. From Arthur Andersen's point of view, the fact of destroying the audit files is very likely to escalate the Enron incident from a simple audit failure case to a criminal case. Many members of Congress and SEC officials have vowed to thoroughly investigate the matter. Destruction of audit files not only ruined Arthur Andersen's reputation, but also increased the suspicion of Arthur Andersen's collusion and fraud. If it was just an audit failure caused by a misjudgment, is Arthur Andersen worth the risk of destroying the audit files? There is only one answer: the destroyed audit files have hidden activities that cannot be seen in the sun.
2. The potential impact of the Enron incident on US accounting and auditing
The Enron incident is not only a mockery of the US accounting standards known as the best in the world, but also a myth of the "Big Five" Such a halo suddenly browned, more likely to make US CPA's industry self-discipline model a thing of the past.
(1) The Enron incident once again sparked debate on the efficiency and model of accounting standards formulation
A joint statement was issued on May 4, pointing out the shortcomings of the current US accounting standards, and made three statements on how to improve the quality of financial reporting: (1) Propose to the SEC to improve related party transactions, special purpose entities, and related market risks (including energy contracts) Specific recommendations for disclosure guidelines; (2) In a broader context, work closely with the SEC to participate in the process of modernizing the financial reporting system.Existing financial statement disclosures are often lengthy and meaningless. Making informed decisions requires many different streams of information, not just earnings information, and retrospective financial statements provided on a regular basis are no longer sufficient to convey true value and risk; (3) In today's economic environment, accounting standards are The program is too clumsy and slow. The Big Five will work with others to find a more efficient and modern approach to norm-setting.
Although the joint statement issued by the "Big Five" at this delicate time will inevitably give the impression of diverting the public's attention, it is undeniable that the Financial Accounting Standards Board (FASB) does need to review whether the US accounting standards are adaptable to the ever-changing economic environment. In particular, the current norms in the United States lag significantly behind financial innovation. To this end, many people of insight called for the Enron incident as an opportunity to re-examine the efficiency and defects of US accounting standards. Levitt pointed out in the article "Who Will Audit the Auditors" that the current financial reporting system in the United States cannot provide investors with information about the health of listed companies, and has evolved into a numbers game in many aspects. Listed companies can't stand the pressure of profit expectations, and they have adopted aggressive accounting methods, and some even resorted to fraudulent means. He also accused the FASB of being slow to develop new guidelines. To this end, he suggested that the FASB should be reformed from the perspective of improving efficiency and independence. In order to improve the efficiency of the FASB, he suggested that the FASB should be given sufficient and independent funds, and it should levy information use fees not only from listed companies, but also from financial institutions (such as mutual funds, securities companies and commercial banks), because the decision-making of financial institutions depends on The transparency enabled by accounting standards, but financial institutions have so far only benefited, not paid.
In terms of independence, Leavitt argues that the FASB should not be subject to congressional pressure. He pointed out that whenever the FASB's proposed guidelines may reduce the company's profitability, the powerful US companies often pass Congress to put pressure on the FASB, and this phenomenon should be stopped. We agree with Levitt on this claim.The Enron incident is a classic example of market decline. When the market is functioning normally, no one wants government intervention. However, when a major market decline occurs, the public will inevitably accuse the government of ineffective supervision, and strongly demand the government to intervene. The Enron incident has reignited the debate on the US accounting standard setting model. The focus of the debate is whether it is appropriate for accounting standards to be set entirely by the FASB of private institutions? Should Congress or government departments (such as the SEC) play a greater role in the setting of accounting standards It should be said that this debate is not new, there was a similar debate around 1994. At the time, the FASB proposed a standard that would require the recognition and measurement of stock options as an expense. Because the introduction of this guideline will seriously damage the economic interests of the managers of large American companies, in order to safeguard their own interests, large American companies have been lobbying Congress continuously, so that many congressmen represented by Senator Lieberman proposed a " The Accounting Reform Act of 1994, which requires that "any new standard or principle, and amendment to existing standard or principle, to be prepared for use in the preparation of financial statements to be provided under this Act, shall only be obtained by a majority vote of the SEC statutory board. , in order to take effect” (Dennis R. Beresford, 1995). Later, with the intervention of then US President Clinton, the bill was not passed. In order to avoid a situation where the FASB developed the guidelines and approved them by the SEC, the FASB made a "sensible" compromise by requiring that only stock options be disclosed as an expense, without confirmation. Whether this situation will reappear after the Enron incident remains to be seen. We believe that maintaining the independence of the FASB is the premise to ensure that the FASB formulates high-quality accounting standards . It may not be a wise move to adopt the standard-setting model of “standards set by private institutions and standards approved by official institutions” because of the Enron incident. Because if interested parties like Enron and Arthur Andersen can influence Congress, they must also be able to influence the SEC. In this sense, Leavitt's recent arguments clearly help prevent the United States from overdoing it in its choice of accounting standard-setting model.
Another debate that is likely to arise from the Enron incident is whether accounting standards should be based on Detailed Rules Basis or Basic Principles Basis.Currently, the FASB chooses a standard-setting approach based on specific rules, while the International Accounting Standards Committee (IASC) and the reorganized International Accounting Standards Board (IASB) choose the basic principles as Basic norm-setting approach. Both methods have pros and cons. Criteria based on specific rules are more operational but easy to be circumvented. The Enron incident shows that the norms based on specific rules not only always lag behind financial innovation, but also enterprises can easily escape the constraints of norms through "business arrangement" and "organization design". Arthur Andersen CEO Joe Berardino said in an interview with reporters: "Andersen has no right to compel clients to disclose the risks and losses hidden in special purpose entities, and clients often say that the guidelines do not Asking for this disclosure, you cannot hold me to a higher standard” (Floyd Norris, 2001). On the other hand, standards based on basic principles are less likely to be evaded by carefully planned "business arrangements" and "organizational design", but require accountants and certified public accountants to have high professional judgment in the use of standards. How to choose between these two standard setting methods is indeed worth thinking about by the FASB and the accounting community. There are many and detailed standards in the United States, but the accounting problems of listed companies are still emerging one after another (according to a survey by Arthur Andersen in 2001, the financial statements disclosed by 230 listed companies in 2000 had to be re-compiled due to serious accounting problems, Jonathan For, 2001), illustrating that a specific rule-oriented approach to norm-setting is not perfect.
(2) The Enron incident will rewrite the supervision model of CPA
The industry self-discipline that has been in use for more than 100 years is coming to an end.
American Institute of Certified Public Accountants ( AICPA ) has been playing a dual role since its establishment, not only the guardian of the legitimate rights and interests of CPAs, but also the supervisor of the practice of CPAs. In addition to formulating auditing standards, AICPA is also responsible for formulating professional ethics and follow-up education standards, and organizing national unified examinations. However, the qualifications of certified public accountants are granted by the states, and the sanction of non-compliant certified public accountants is also the responsibility of the states. AICPA lacks corresponding powers in this regard. In 1977, AICPA initiated the establishment of the "Public Oversight Board" (POB) to oversee the supervision of certified public accountants in response to congressional concerns about the decline in audit quality. However, POB is in vain and does nothing. Former SEC Chairman Richard C. Braden pointed out: "The POB is an institution that most Americans have never heard of, and its effectiveness is questionable. In the past, there have been many people who have been underfunded by POB and lack of oversight of auditing activities. In order to ensure audit quality, the civil self-discipline model implemented in the United States also introduced a peer review mechanism. Not long ago, Deloitte , one of the "Big Five", gave Arthur Andersen a "green light" for its audit quality after conducting a peer review on Arthur Andersen. After the Enron incident was exposed, Deloitte's assessment report on Arthur Andersen's audit quality has become a laughing stock.
In the face of the public's lack of confidence in AICPA and POB, and concern about the audit quality of the "Big Five" (more than 90% of listed companies in the United States are audited by the "Big Five"), the SEC responded quickly after the Enron incident. react.On January 17, 2002, SEC Chairman Peter solemnly announced to the press that he intended to establish a regulatory agency independent of the certified public accountants industry[3] to prevent the recurrence of the Enron tragedy. Peter stressed that the newly established regulatory body will be composed of accountants and non-accountants, and its main functions are: sanctions and quality control. He also specifically stated that AICPA will not play any role in the newly established regulatory body. The new regulator will have the power to require parties to hand over documents, have them testify, conduct investigations, initiate sanctions proceedings, publish penalties, and restrict CPAs who do not meet ethical and competency standards from engaging in Listed company audit business.
The SEC's decision ended the history of self-discipline in the US CPA profession and marked the arrival of the "post-Enron regulatory model". Although the SEC has yet to provide further explanation for this distinctly official regulator, the decision has received widespread attention. Lean Turner (2002), former chief accountant of the SEC, commented: "There is no doubt that we need a new regulatory agency independent of the accounting profession. But if the agency is not wholly and the people who set auditing standards, it will be difficult to achieve its goals." Turner shared Leavitt's view. Leavitt noted: “We need a regulator, possibly appointed by the SEC, to oversee the accounting profession, especially the five national accounting firms that audit the vast majority of public companies. This is the best way to ensure that auditors are truly independent. Such a specialized agency should not depend on financial contributions from industry. It should have the power to set auditing standards, obtain testimony and information, sanction unprofessional conduct. Its conclusions should be made public.” (Arthur levitt, 2002)
It can be seen that if Levitt and Turner's vision is finally adopted, not only AICPA and POB will lose their right to supervise certified public accountants, but also AICPA's right to set auditing standards will be deprived. In response to the aggressive SEC's offensive, AICPA was surprisingly silent.It seems that the Enron incident not only related to the life and death of Arthur Andersen, but also endangered the status of AICPA. This is not only a great tragedy of social auditing, but also the high cost of rebuilding the credit of certified public accountants. I hope this move by the SEC can be a turning point for the "rebirth" of the American accounting profession.
3. Five inspirations from the Enron incident Reflection and review of the accounting profession. From the perspective of accounting, auditing and corporate governance, the Enron incident has taught us profound and painful lessons, as well as many useful enlightenments.
Revelation 1: Neither the role of independent audits in securities regulation should be overstated, nor should the full responsibility for fraudulent failures of listed companies be placed on CPAs
Independent audits are The cornerstone of the development of the securities market is also the institutional arrangement to ensure the quality of accounting information of listed companies. However, the role of independent audit in securities market supervision is limited. It is true that Arthur Andersen was inescapably responsible for the collapse of Enron, but in the system engineering of securities market supervision, other relevant departments were also inseparable. Senior officials in the Bush administration and many members of Congress have received huge donations from Enron and are closely related to it. After they became aware of or were informed of Enron's deep financial crisis, did they not have the responsibility to report to the regulatory authorities? The SEC is now saying We want to increase the supervision of listed companies and certified public accountants, but have they done their due diligence in the supervision of Enron? Who will supervise the SEC? Isn’t it also the press that has a pioneering and innovative spirit” (in the evaluation of the Financial Times)? News supervision is an integral part of securities supervision. If even the press cannot be objective and impartial, can they expect certified public accountants to be detached and independent? The letter favored Enron because of the loss of independence. Aren't the lawyers also accomplices of Enron? When Enron used "special purpose entities" to cover up losses and conceal liabilities, lawyers who received a lot of money from Enron were reviewing relevant laws. Why did you keep your mouth shut? In addition, in the chain of securities supervision, why are well-known investment banks such as Citi and Morgan and their securities analysts, and credit rating agencies such as Standard & Poor's and Moody's also "suffering from Parkinson's disease" ” And unresponsive? (Qie Yongzhong, 2002)
Visible,Unlimitedly elevating the role of independent audit in securities supervision will only put the certified public accountant in a dead end. Likewise, it is neither fair nor helpful for us to dissect the reasons calmly and draw lessons from it to put all the blame for the failure of listed companies on the CPA. On January 18, 2002, the famous American economist Paul Krugman published an article entitled "A Decaying System" in the New York Times [4]. When analyzing the Enron incident, he pointedly pointed out: "The collapse of Enron is not just a problem of the collapse of a company, it is the collapse of a system. And the failure of this system is not due to negligence or dysfunction, but because of corruption... Capitalism relies on a set of oversight mechanisms—many of which are provided by governments—to prevent abuse by insiders. These include modern accounting systems, independent auditors, securities and financial market systems, and regulations prohibiting insider trading...Enron Corporation Events have shown that these systems are rotten. None of the checks and restraints used to stop insider abuses are working, and staff who should be performing independent audits are compromising." Krugman's insightful analysis shows that Arthur Andersen was also a sacrificial object of this "decaying system". Because if the whole system is rotten, can the certified public accountant still be alone? German points out that the modern capitalist system itself is rotten, and the result is obvious: freedom becomes a weapon of deception. He also believes that a market economy cannot solve all problems by itself. Krugman is undoubtedly correct. A large number of research results in economics have proved that the market economy needs appropriate regulation to prevent market decline (including the decline of the securities market). Although accounting standards and auditing standards are a form of regulation, they themselves seem to need regulation. The Enron incident shows that when the "invisible hand" always fails, it is unrealistic to rely entirely on market forces and civil self-discipline for accounting and auditing standards.As far as accounting norms are concerned, accounting systems and standards are entirely formulated by non-governmental organizations, their authority will inevitably be weakened, and their supervision and implementation efficiency is also low. On the contrary, if it is completely formulated by the government, it may reduce the independence of the formulation institution while improving the authority and the efficiency of supervision and implementation, and it is also difficult to ensure the high quality of accounting systems and standards. Therefore, the private-led model of accounting standards is not necessarily the best choice, and the official-led model of accounting standards is not necessarily perfect. The crux of the question is not whether the two models are better or worse, but whether the makers of accounting standards can truly remain independent, whether they can take the public interest as their own responsibility, and be truly objective and fair; from the perspective of auditing standards, the American style The self-discipline model of the private industry, its drawbacks have been fully exposed in the Enron incident. CPA industry associations have to play the roles of "patron saint" and "regulator" at the same time, and there is a conflict of interest in itself. The only feasible way is the separation of roles, either to become the "spokesperson" of the legitimate rights and interests of the certified public accountants, or to become the "supervisor" of the certified public accountants' practice behavior.
Revelation 3: Do not be superstitious about the American corporate governance model, nor deify independent directors
Corporate governance is an internal institutional arrangement to ensure the quality of accounting information. Sound corporate governance can not only prevent fraud, but also help to improve the reliability of accounting information. The question is, what is sound corporate governance? American-style corporate governance has always been highly respected, and it is also the key reference object of our country. American-style corporate governance has gradually developed in an environment where ownership is fairly dispersed. In order to prevent the company's senior management from abusing their powers and infringing on the legitimate interests of small and medium shareholders, the United States attaches great importance to the introduction of the independent director system, and requires independent directors to lead the work of the nomination committee, audit committee and compensation committee. This corporate governance model that emphasizes the function of independent directors certainly has its rational elements, but the Enron incident shows that independent directors are not omnipotent. We checked Enron's 2000 annual report and analyzed the composition and background of Enron's board of directors. The results were astonishing to find that among the 17 members of Enron's board of directors, in addition to Chairman Kenneth Lay and CEO Jeff Except for Lee Skilling, the remaining 15 directors are all independent directors.The seven members of the audit committee are all composed of independent directors, and the chairman is Robert Jedick, the retired former dean of Stanford University's business school and professor of accounting. There are many well-known independent directors, including the secretary general of the US Olympic Committee, the former chairman of the US Commodity Futures Trading Regulatory Commission, the former chairman and CEO of General Electric Company, the president of the University of Texas, and the former British Minister of Energy and other celebrities. But even these high-weight independent directors failed to supervise the top management for Enron's shareholders, which eventually led to heavy losses for investors. Now, these independent directors are not only censured by all walks of life, but also sued by investors. The relevant departments of our country are vigorously promoting the independent director system, and scholars from many colleges and universities have "joined the army" one after another. This is a good thing, and it is also in line with the study style of combining theory with practice. However, we earnestly hope that all of you will bear in mind the importance of the word "independence", represent the interests of minority shareholders, exercise power with caution, and study the Enron incident carefully, so as to avoid repeating the same mistakes.
Revelation 4: We should not only focus on institutional arrangements, but ignore all-round integrity education Regulators exercise restraint and deterrence. However, if the participants and regulators of the securities market do not speak honesty and integrity, the institutional arrangement will be ineffective. When huge economic interests collide with serious moral norms, only subtle integrity education can make the balance tend to moral norms. The Enron incident shows that integrity education should be comprehensive. Certified public accountants need integrity education, lawyers, securities analysts, investment banks, credit rating agencies, small and medium investors and other securities market participants, as well as government officials, regulators and news media and other securities market supervisors, also need integrity education. Honesty education should start from the government first, otherwise, the rotten system that Krugman said is hopeless.
Inspiration 5: Don’t be superstitious about the “Big Five”, the audit quality of the “Big Five” is not always trustworthy Competency and business training are unmatched, but the Big Five are not all great.After Enron, many news reports showed that the audit quality of the "Big Five" was worrying. In the late 1980s, the notorious collapse of the International Commercial Credit Bank forced PwC to pay more than $100 million in damages two years ago to reach an out-of-court settlement with investors who had suffered huge losses; The county bankruptcy case and the Barings Bank Lisson fraud case have also involved KPMG, Deloitte, and Coopers in costly lawsuits; the recent major vicious cases such as Xerox, Lucent, and Sanden have also involved the "Big Five". For example, in August 2001, the court ruled that Ernst & Young should pay 335 million US dollars in compensation to the shareholders of Shandon (Wang Lingxu, 2002). Arthur Andersen, one of the focal points of the much-anticipated Enron incident, has been plagued with lawsuits and scandals in recent years. In 2002, the Associated Press published a report titled "Andersen's Past Audit Problems", which listed Arthur Andersen's serious audit problems over the past 20 years, including the recent cases of Sunshine and Waste Management (Alex Berenson). &Jonathan D. Glater, 2002). Sunshine Company was delisted and filed for bankruptcy protection due to fraud exposure, and Arthur Andersen paid $110 million in compensation to settle the legal action with the shareholders of Sunshine Company; The SEC imposed a fine of $7 million, a record for a single fine by the SEC against an accounting firm. In addition, on January 14, 2002, the SEC publicly condemned KPMG because KPMG did not implement the avoidance system and still provided audit and assurance for the AIM mutual fund when it had a large investment in it, which violated the rules of independence (Reed Abelson & Jonathan D. Glater, 2002). Similar cases are numerous, showing that the "Big Five" audits are not always trustworthy. (End)
Notes:
[1] Peter, the current chairman of the SEC, as a private lawyer at the time, represented AICPA and Arthur Andersen in the competition for incentives with the SEC. Even some members of Congress asked him to recuse himself from the SEC's investigation of Andersen, but Peter refused.
[2] Arthur Andersen was eventually disbanded, and the most direct reason was its organized and planned destruction of Enron's audit papers. Without this blatant flout of the law, Arthur Andersen might not have fallen apart.
[3] The Public Company Accounting Oversight Board (PCAOB) is largely the product of the Enron financial fraud and the Arthur Andersen audit scandal.
[4] Article by Paul Krugman, reprinted in Reference News First Edition, January 21, 2002.
Main references (slightly)
pre-edit: Wu Tang
late editor: Zheng Huimin
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