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Accounting Updates Part 2 Southern Gas Association Accounting & Financial Executives Conference April 28, 2003 Robert E. (Bob) Jensen Trinity University San Antonio, TX 78212 http://www.trinity.edu/rjensen/. Auditors—the CPAs.

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Accounting Updates Part 2 Southern Gas Association Accounting & Financial Executives Conference April 28, 2003Robert E. (Bob) JensenTrinity UniversitySan Antonio, TX 78212http://www.trinity.edu/rjensen/

auditors the cpas
Auditors—the CPAs
  • Failed 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 rich
  • Audit became a loss leader
    • Easier to sell lucrative consulting services from the inside
    • Became largest consulting firms in the U.S. very quickly (Andersen Consulting grew to compete with Accenture
  • A few auditors got too close to their clients
  • Tradition of sending puppies out to yap at the receivables
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In 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.

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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 Bobrow

“Jan Bobrow, the ex-wife of Ernst & Young CEO Richard Bobrow, says she would have settled their divorce for a little more than $2 million. Richard Bobrow offered $1.2 million.” USA Today, October 15, 2002

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Moral Decay

  • 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 results
    • 12% of CFOs admitted they had actually misrepresented financial results…55% said they had fought off requests to “cook the books”
  • Honesty studies
    • 1961: 12%
    • 1986: 31%
    • 2002: ???
current executive fraud related problems
Current 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.)
current executive fraud related problems7
Current Executive Fraud-Related Problems
  • Exorbitant Stock Options Who owns his own 14,000-foot mountain in Colorado?
recent financial statement frauds
Recent Financial Statement Frauds
  • Enron
  • WorldCom
  • Adelphia
  • Global Crossing
  • Xerox
  • Qwest
  • Many others
back to the basics
Back to the Basics…
  • Know your audit client
    • Understand the key reports used by management
    • Understand the budget process
    • Understand the source of growth
  • Know your client’s industry
professional skepticism
Professional Skepticism
  • Should be displayed by all members of the team throughout the audit and review engagements
back to the basics13
Back to the Basics…
  • Vary the audit testing performed
  • Prepare a detailed audit program
  • Understand the client’s closing process
  • Don’t forget the general ledger
the closing process
The Closing Process
  • Follow-up on all questionable items during the final analytical review
  • Examine all consolidating financial statements
    • Including, all post closing and top-side entries
back to the basics15
Back to the Basics…
  • Issues encountered during the audit ---
    • Deal with the issue at hand
    • Don’t try to “paper over” the problem
    • Management letter comment is not enough
    • Don’t make the client’s problem your own
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Key Elements of Public Trust

Spirit of Transparency

Culture of Accountability

People of Integrity