Accounting Updates Part 2 Southern Gas Association

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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/

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Auditorsthe CPAs

• Failed to accept responsibility for fraud
  detection (SEC, Supreme Court, public expects
  them to detect fraud) If auditors arent the
  watchdogs, then who is?

• Became greedy--500,000 per year per partner
  compensation wasnt 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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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 results55 said they
  had fought off requests to cook the books

• Honesty studies
• 1961 12
• 1986 31
• 2002 ???

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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
  millionthe 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.)

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Current Executive Fraud-Related Problems

• Exorbitant Stock Options Who owns his own
  14,000-foot mountain in Colorado?

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Largest Bankruptcy Filings (1980 to Present)
Company Assets (Billions) When Filed
1. WorldCom 101.9 July, 2002
2. Enron 63.4 Dec., 2001
3. Texaco 35.9 April, 1987
4. Financial Corp of America 33.9 Sept., 1988
5. Global Crossing 25.5 Jan., 2002
6. Adelphia 24.4 June, 2002
7. PGE 21.5 April, 2001
8. MCorp 20.2 March, 1989
9. Kmart 17.0 Jan., 2002
10. NTL 16.8 May, 2002
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Recent Financial Statement Frauds

• Enron
• WorldCom
• Adelphia
• Global Crossing
• Xerox
• Qwest
• Many others

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Lets Get Back to the Basics
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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 clients industry

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Professional Skepticism

• Should be displayed by all members of the team
  throughout the audit and review engagements

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Back to the Basics

• Vary the audit testing performed
• Prepare a detailed audit program
• Understand the clients closing process
• Dont forget the general ledger

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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

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Back to the Basics

• Issues encountered during the audit ---
• Deal with the issue at hand
• Dont try to paper over the problem
• Management letter comment is not enough
• Dont make the clients problem your own

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