Ensuring Financial Integrity: Rebuilding Trust in Accounting Practice

1. 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/

2. 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

3. 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.

4. 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

5. 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: ???

6. 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.)

7. Current Executive Fraud-Related Problems • Exorbitant Stock Options Who owns his own 14,000-foot mountain in Colorado?

8. Largest Bankruptcy Filings(1980 to Present)

9. Recent Financial Statement Frauds • Enron • WorldCom • Adelphia • Global Crossing • Xerox • Qwest • Many others

10. Let’s Get Back to the Basics

11. 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

12. Professional Skepticism • Should be displayed by all members of the team throughout the audit and review engagements

13. 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

14. 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

15. 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

18. Key Elements of Public Trust Spirit of Transparency Culture of Accountability People of Integrity