Noble Accounting, or Accounting Nobles? - The Government Created Accounting Fiasco

Noble Accounting, or Accounting Nobles?
THE GOVERNMENT CREATED ACCOUNTING FIASCO
Last of Three Parts
by Ted Lang

July 4, 2002

Columnist Ted Lang It has already been discussed how the Big 5 accounting firms lobbied and campaigned to preserve their conflict of interest cash cow; namely, performing both auditing functions to satisfy IRS and SEC reporting requirements as well as management consulting functions motivated by enhancing corporate profits to earn larger client fees.

When the Enron outrage surfaced, it was none other than Representative W. J. "Billy" Tauzin (R-La.) who led the charge of outrage and feigned dissatisfaction as regards the complicity of Arthur Anderson and Company in destroying accounting documentation as the "profit partner" of Enron in their capacity as consultant. Why didn’t Tauzin and his committee heed the warning and advice of SEC Chairman Arthur Leavitt? Leavitt made perfect common sense. Obviously, that was precisely the problem. Common sense is not a motivator – campaign and political contributions are. Clearly, members of Congress and senators make more money from these than they do from their salaries.

As was previously pointed out, corporations must file financial reports with both the SEC and the IRS. Another reporting anomaly, only recently addressed, is when corporations were not required to list stock option expense on their income statement for SEC purposes, yet were allowed to deduct these expenses from their tax return for IRS purposes. Where is there consistency in this? Consistency is one of the very basics of professional accounting and financial reporting.

Gene Lyons of the Arkansas Democrat-Gazette, in his piece of February 20, 2002, entitled "Corporate Utopianism," points out examples of government complicity in these Wall Street reporting scams: "…in 1997, Brooksley Born, head of the Commodity Futures Trading Commission, proposed that corporations be required to disclose far more information to investors regarding energy derivative trading. (Risky speculation in oil and natural gas futures that helped bring Enron down.) Born’s predecessor Wendy Gramm, wife of Texas GOP Sen. Phil Gramm, had made a ruling exempting Enron from scrutiny in 1993, then joined the company’s board of directors a few days later." Whatever happened to the restriction on government employees that precludes joining a private sector company that soon after leaving their government position thereby providing the private company with inside privileged government information and advantage?

Lyons also offers: "In 1999, Clinton Treasury Secretary Larry Summers proposed a crack-down on off shore tax havens of the exact kind used by Enron to conceal its massive losses and hide its true financial condition from Wall Street analysts." Why hasn’t the shocked, distressed, and angry Congress acted on these proposals? Who but our trusted "honorables" are more to blame for these financial failures and misrepresentations?

We then have the testimony of Richard Blumenthal, Attorney General for the State of Connecticut, testifying before the SEC on September 20, 2000. Here are some of the things Mr. Blumenthal conveyed, as reported on his State of Connecticut website: "The tough-minded questions and vigorous standards that the public has traditionally associated with the term ‘independent auditor’ have been compromised by the interdependent business relationships between auditors and the audited. Truth in advertising would demand that for many large [accounting]-consulting firms the term ‘independent auditor’ be replaced with the term ‘company accountant.’ Regulations adopted by the American Institute of Certified Public Accountants [AICPA] and the Securities and Exchange Commission [SEC] have failed to preserve the independence of public accountants."

Blumenthal continues: "Indeed, during the past 25 years, management and financial consulting revenues at public accounting firms have grown from 12% to 70% of total revenues. This booming sideline business is extremely profitable. Yet, the regulations currently allow public accounting firms to audit companies for whom they gain significant profit through consulting contracts. In fact, engagement partners are encouraged to market consultant contracts to firms they are auditing."

And now Blumenthal’s beef with the SEC: "Connecticut residents have personally experienced the financial hardship occasioned by the loss of independence and objectivity in the accounting profession. In the Colonial Realty real estate investment scandal that rocked Connecticut in the early 1990’s, interdependent relationships between the Colonial Realty Company and its auditors, Arthur Andersen & Company, became a primary factor in the loss of hundreds of millions of investor dollars. My office’s investigation of the accounting work done by Arthur Andersen for Colonial Realty directly demonstrated the need for independence between auditors and the companies they audit."

Blumenthal points out that this Arthur Andersen caper resulted in the largest penalty assessment against a public accounting firm in Connecticut’s history: $3.5 million, "which included payment to Colonial Realty’s investors of the $2.5 million in fees Andersen had received from Colonial Realty for its accounting and consulting work."

This testimony from the Connecticut Attorney General came on the heels of Arthur Leavitt’s admonition to Congress to establish legislation to prohibit such consulting/auditing conflict of interest. And yet Leavitt’s SEC, today under the chairmanship of Bush appointee Harvey Pitt, audaciously supports via their website "pro forma accounting," advising investors to rely on actual financial statement numbers as opposed to propagandized press releases. How protective!

Pro forma isn’t accounting – it’s financial reporting without books and with out GAAP and in some cases excludes depreciation and other expense information critical to the proper and realistic interpretation of financial data. Why is this being allowed? Why doesn’t the SEC prohibit such practices? What is the point of SEC regulations governing financial reporting of publicly traded corporations if the SEC is going to allow this deviate substitution?

It should be clear, that the chief cause for accounting irregularities, is the federal government and its "oversight" agencies. Bribes in the form of campaign contributions and donations are used to nullify legislative protections and preclude congressional remedy. It is in this manner, that one of the "most beautiful inventions of the human spirit" has been corrupted and destroyed by the hideous ogre of government. ***

Photo of Columnist Ted Lang courtesy of the author