Accounting Updates Accounting Updates Southern Gas Southern Gas Association Accounting & Association Accounting & Financial Executives Financial Executives Conference Conference April 28, 2003 April 28, 2003 Robert E. (Bob) Jensen Robert E. (Bob) Jensen Trinity University Trinity University San Antonio, TX 78212 San Antonio, TX 78212 http://www.trinity.ed http://www.trinity.ed u/rjensen/ u/rjensen/
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Accounting Updates Southern Gas Association Accounting & Financial Executives Conference April 28, 2003 Robert E. (Bob) Jensen Trinity University San Antonio,
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Accounting Updates Accounting Updates
Southern Gas Southern Gas Association Accounting & Financial Association Accounting & Financial
Executives Conference Executives Conference
April 28, 2003April 28, 2003
Robert E. (Bob) JensenRobert E. (Bob) JensenTrinity UniversityTrinity University
San Antonio, TX 78212San Antonio, TX 78212http://www.trinity.edu/rjensen/http://www.trinity.edu/rjensen/
Accounting Updates Accounting Updates
Southern Gas Southern Gas Association Accounting & Financial Association Accounting & Financial
Executives Conference Executives Conference
April 28, 2003April 28, 2003
Robert E. (Bob) JensenRobert E. (Bob) JensenTrinity UniversityTrinity University
San Antonio, TX 78212San Antonio, TX 78212http://www.trinity.edu/rjensen/http://www.trinity.edu/rjensen/
Why so many financial statementWhy so many financial statement frauds all of a sudden?frauds all of a sudden?
Systemic Problems of Accounting That Cannot or Will Not Be Solved: http://www.trinity.edu/rjensen/FraudConclusion.htm
•Behavior of CPA Firms: http://www.trinity.edu/rjensen/fraud.htm
Greed on Wall Street: Rotten to the Core http://www.trinity.edu/rjensen/fraud.htm#Cleland
Washington DC Prostitutes: Representative Fernand St Germain (D-Rhode Island) $32 Billion for 30 Years Senator Phil Gramm (R-Texas) & Wife Wendy $400 billion and counting
With Loop Holes Big Enough To Drive A Truck Through
RulesDetailed
Nature of Accounting RulesNature of Accounting RulesAllows companies and auditors to be
extremely creative when not specifically prohibited by standards.
“rules-based” vs. “principles based” rhetorical nonsense
Loop Hole Examples Include:SPEs and other types of off- balance sheet financing
Pension accounting
Merger reserves
Other accounting schemes.
Revenue recognition approaches,
When the client pushes, without specific rules in every situation, there is no room for the auditors to say, “You can’t do this…because it isn’t GAAP…”
Unaccountable Unaccountable ContractsContracts
Expect New Amendments in SFAS 149
GAAP CRITICISM
Fosters Short-Term Earnings Manipulations
Does Not Show Value Creation
Executive IncentivesExecutive Incentives•Meeting Wall Street’s ExpectationsMeeting Wall Street’s Expectations•Performance is based on earnings & stock price
–Focus is on short-term (quarterly) performance only
–Stock prices are tied to meeting Wall Street’s earnings forecasts
Companies are heavily punished for not meeting forecasts
–Moral Hazard: Employee Stock OptionsDid you ever hear the name Lou Pai?
Average compensation of America's top 100 CEOs has risen from 39 times that of the ordinary worker in 1970 to 1,000 times in 1999.
Princeton University
GE had not disclosed those perks -- which included courtside sports tickets, a Manhattan apartment, and use of a corporate jet -- beyond a vague statement in an SEC filing that Welch would have "continued lifetime access to company facilities and services... "
Jack Welch,Former General Electric Chairman
Stock Fell 13% With This Revelation
Stock Fell 13% With This Revelation
Enron’s CEO of Enron Broadband Services, Ken Rice, had a $33,000 customized Hellcat motorcycle in his office just for a distinctive decoration.
Lou Pai, CEO of Energy Services was such a big shot that he refused to commute to Houston’s Intercontenental Airport to board Enron’s corporate jets. A Falcon 900 jet had to be dispatched to his home in the Houston suburb of Sugar Land.
Lou Pai, CEO of Energy Services was such a big shot that he refused to commute to Houston’s Intercontenental Airport to board Enron’s corporate jets. A Falcon 900 jet had to be dispatched to his home in the Houston suburb of Sugar Land.
Multiply the result by negative 1 to make it positive
Multiply that number by at least 100
If stock price is less than the result…Buy, If Not?
Buy it anyway
Incentives for F.S. FraudIncentives for F.S. Fraud
Incentives to commit financial statement fraud are very strong. Investors want decreased risk and high returns.Risk is reduced when variability of earnings is decreased.Rewards are increased when income continuously improves.
Which firm will have the higher stock price?
Firm A Firm B
Auditors—the CPAsAuditors—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?
•Tradition of sending puppies out to yap at the receivables
•A few auditors got too close to their clients
•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
•Became greedy--$500,000 per year per partner compensation wasn’t enough; saw everyone else getting rich
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.
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$ 24 million to Janet Bobrow
Jan Bobrow makes $ 10 an hour part-time at Central Church of the Nazarene in Lenexa, Kan.
Jan Bobrow makes $ 10 an hour part-time at Central Church of the Nazarene in Lenexa, Kan.
Moral DecayMoral 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: ???
How Much Stanford MBA Worth?
a. $500,000 dollars
b. $ 10 Million dollars
c. $ 100 Million dollars
d. $ 1 billion dollars
The market lopped a cool $1 billion off Veritas' (VRTS)
market cap yesterday when its CFO resigned after
revealing he lied about his academic credentials. The fundamental picture
hasn't changed—unless the CFO's duplicity extended to the books.
• Financial statement fraud causes a decrease in market value of stock of approximately 500 to 1,000 times the amount of the fraud.
$7 million fraud $2 billion drop in stock value
These Are Interesting TimesThese Are Interesting Times• Number and size of financial statement frauds are increasing
• Number and size of frauds against organizations are increasing
• Some recent frauds involve several people—as many as 20 or 30 (seems to indicate moral decay)
• Many investors have lost confidence in credibility of financial statements and corporate reports
• More interest in fraud than ever before—now a course on many college campuses—from 3 or 4 to over 50 college campuses
Current Executive Fraud-Current Executive Fraud-Related ProblemsRelated 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 Current Executive Fraud-Related ProblemsProblems
•Exorbitant Stock Options
Who owns his own 14,000-foot mountain in Colorado?
Complaint in Fraud CaseComplaint in Fraud Case
• Several hundred million in earnings overstatement• Complaint:
“The goal of this scheme was to ensure that (the company) always met Wall Street’s growing earnings expectations for the company. (The company’s) management knew that meeting or exceeding these estimates was a key factor for the stock price of all publicly traded companies and therefore set out to ensure that the company met Wall Street’s targets every quarter regardless of the company’s actual earnings. During the period ___ to ___alone, management improperly inflated the company’s operating income by more than $500 million before taxes, which represents more than one-third of the total operating income reported by (the company.)”
Complaint in Fraud CaseComplaint in Fraud Case
• “The participants in the illegal scheme included virtually the entire senior management of (the company), including but not limited to its former chairman and chief executive officer, its former president, two former chief financial officers and various other senior accounting personnel. In total, there were over 20 individuals involved in the earnings overstatement schemes.”
Fraud InternationallyFraud Internationally
• 1. Denmark• 2. Finland• 3. Sweden• 4. New Zealand• 5. Canada• 6. Netherlands• 7. Norway• 8. Australia