PowerPoint - Accounting Laws & Regulations

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Objectives

• To describe the impact of historical events on accounting.

• To describe the role of accounting regulatory agencies.

• To explain the changes made to accounting rules and regulations.

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Accounting Laws

• Include:• disclosure laws

• demands companies conduct highly specific reporting of information accordingly set by the Securities Exchange Commission (SEC)

• privacy/confidentiality laws• prevent and secure information from being spread to sources

or places which should not have this information

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Sarbanes-Oxley Act of 2002

• Is a federal law created to set new requirements for all U.S. public company boards, public accounting firms and company management

• Protects shareholders from corporate financial statement misrepresentation

• Was developed due to frequent occurrence of accounting scandals such as Enron, WorldCom, Tyco and Arthur Andersen

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• States responsibilities of the board of directors

• Adds criminal penalties for misconduct

• Requires the Securities and Exchange Commission to create regulations

• Established an oversight board for accounting practices (Public Company Accounting Oversight Board)

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• Requires:• management to certify it has reviewed and signed off on

financial statements

• auditors to be experts not associated with the company

• a code of ethics to be established for financial officers

• internal controls to be documented by companies

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• Requires:• financial information to include disclosures about any

off-balance sheets

• management to state if internal control procedures are adequate

• management to update the public if significant financial matters happen

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Accounting Regulatory Agencies

• Include:• Securities and Exchange Commission (SEC)

• Financial Accounting Standards Board (FASB)

• American Institute of Certified Public Accountants (AICPA)

All states follow national accounting rules and regulations. CPAs also follow

regulations based on the state in which they practice. The governor of each state

appoints an accountancy board to oversee accounting practices.

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Securities & Exchange Commission (SEC)• Was created by Congress in 1934 with the purpose

of:• protecting investors

• maintaining fair, orderly and efficient markets

• standardizing company information provided to the public

• Monitors corporate takeovers in the U.S.• any person(s) who purchases more than five percent of

a company’s equity must contact the SEC within 10 days

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Securities & Exchange Commission (SEC)• Duties include:

• developing and providing rules for companies listed on stock exchanges• New York Stock Exchange

• NASDAQ

• Requires companies listed on the stock exchanges to provide forms to the SEC to be used for audits and recordkeeping

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Securities & Exchange Commission (SEC)• Divisions include:

• corporation finance• helps interpret SEC rules

• reviews documents which companies are required to complete

• trading and markets• interprets proposed changes to regulations

• regulates stock exchanges

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• investment management• oversees registered investment companies

• mutual funds

• collection of bonds and stocks

• investment advisors

• enforcement• investigates violations of laws and regulations

• works with law enforcement agencies on SEC-related criminal cases

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• economic and risk analysis• created in 2009 to analyze possible impact of proposed rules

• performs long-term research

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Financial Accounting Standards Board (FASB)• Is a private sector organization which is not under

direct government control

• Helps develop and improve accounting standards• the SEC can accept or reject FASB

rules

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American Institute of Certified Public Accountants (AICPA)• Is a national professional organization for Certified

Public Accountants (CPAs)

• Helps develop and administer CPA exams

• Provides guidance on issues not addressed by FASB

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Accounting Regulations

• Are established principles and rules for the accounting industry

• Help companies set employee and performance standards

• Are developed on state and federal levels

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Accounting Regulations

• Include:• boundary rules

• explain what the firm cares about

• measurement rules• explain how data would be recorded within a company

• ethical rules• are morals and principles set by a company

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International Financial Reporting Standards (IFRS)• State how particular types of transactions and

other events should be reported in financial statements

• Maintain stability and transparency throughout the financial world• international financial reporting standards are in many

parts of the world:• European Union

• Asia

• South America

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International Financial Reporting Standards (IFRS)• Maintain stability and transparency throughout the

financial world• the U.S. does not follow these standards

• U.S. follows Generally Accepted Accounting Principles (GAAP)

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Generally Accepted Accounting Principles (GAAP)• Are a common set of accounting rules and

procedures

• Are needed in maintaining accuracy and consistency of financial reports• completed external financial reports must also follow

GAAP

• Are issued by the Financial Accounting Standards Board (FASB)

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International Financial Reporting Standards (IFRS)• Differ from GAAPs by:

• IFRS is not as strict on defining revenue

• IFRS has different requirements on expenses• companies spending money on investments do not necessarily

have to report it as an expense

• IFRS prohibit last in, first out (LIFO) inventory valuation

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Ethics in Accounting

• Involves:• following the correct procedures set forth within a

company

• distinguishing right from wrong in situations

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Reasons for Unethical Accounting Behavior• Can include:

• increasing profits

• maintain shareholder confidence in the company

• addressing competition

• saving money

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Ethical Dilemma

• Is a situation which often involves conflict between moral principles

• Example:• CFO asks you to match ad costs as an asset on the

income statement to not show a quarterly loss because they need to show the bank every quarter that they are making profits to keep the loan in “good standing”

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Historical Unethical Accounting Events• Include:

• Enron

• WorldCom

• Tyco International

• Adelphia Communications

• Freddie Mac

• HealthSouth

• Bernie Madoff

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Enron

• Who?• Houston, Texas-based commodities, energy and service

corporation

• Fortune Magazine named them “America’s Most Innovative Company” for six years in a row prior to scandal

• What happened?• shareholders lost $74 billion, thousands of employees

and investors lost their retirement accounts and many employees lost their jobs

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Enron

• Who were the main players?• former CEO Ken Lay

• CEO Jeff Skilling

• auditing firm Arthur Andersen

• How was it done?• large debts were kept off of balance sheets

• How were they caught?• turned in by internal whistleblower and high stock prices

fueled suspicions

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Enron

• How were they penalized?• Ken Lay died before serving time

• Jeff Skilling was sentenced to 24 years in prison

• Arthur Andersen was convicted of obstruction of justice for shredding documents related to the Enron audit• conviction was later reversed by Supreme Court

• impact of the scandal combined with findings of criminal complicity ultimately destroyed the firm

• the firm surrendered its CPA licenses and its right to practice before the SEC in August of 2002

• Enron filed for bankruptcy

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WorldCom

• Who?• telecommunications company; now MCI, Inc.

• What happened?• inflated assets by as much as $11 billion, leading to

30,000 lost jobs and $180 billion in losses for investors

• Who were the main players?• CEO Bernie Ebbers

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WorldCom

• How was it done?• underreported line costs by capitalizing rather than

expensing and inflated revenues with fake accounting entries

• How were they caught?• WorldCom’s internal auditing department uncovered

$3.8 billion in fraud

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WorldCom

• How were they penalized?• Bernie Ebbers was sentenced to 25 years for fraud,

conspiracy and filing false documents with regulators

• CFO (chief financial officer) was fired

• Controller resigned

• WorldCom filed for bankruptcy

Following the WorldCom scandal, Congress passed the Sarbanes-Oxley Act,

introducing the most sweeping set of business regulations since the 1930s.

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Tyco

• Who?• New Jersey-based blue-chip Swiss security systems

company

• What happened?• CEO and CFO stole $150 million and inflated company

income by $500 million

• Who were the main players?• CEO Dennis Kozlowski

• former CFO Mark Swartz

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Tyco

• How was it done?• money was siphoned through unapproved loans and

fraudulent stock sales

• money was smuggled out of the company disguised as executive bonuses or benefits

• How were they caught?• SEC and Manhattan District Attorney investigations

uncovered questionable accounting practices including large loans made to Kozlowski which were forgiven

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Tyco

• How were they penalized?• Kozlowski and Swartz were sentenced to eight to 25

years in prison

• class-action lawsuit forced Tyco to pay $2.92 billion to investors

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Adelphia Communications

• Who?• a cable television company located in Pennsylvania

• What happened?• fraudulently excluded billions of dollars in liabilities from

its consolidated financial statements by hiding them on the books of off-balance sheet affiliates

• falsified operations statistics and inflated earnings to meet Wall Street’s expectations

• concealed self-dealing by the Rigas family

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• Who were the main players?• Rigas family

• father, John

• sons, Michael, Timothy and James

• How were they caught?• scandal was uncovered when one of the company’s

subsidiaries filed for bankruptcy protection

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• How were they penalized?• John, Timothy and Michael Rigas were indicted on

criminal charges• John and Timothy were found guilty of 15 charges of

conspiracy, bank fraud and securities fraud

• Michael was acquitted on most charges

• Adelphia employee Michael Mulcahey was charged of hiding debt and stealing company funds, but was found not guilty of conspiracy and securities fraud

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Freddie Mac

• Who?• federally backed mortgage-financing giant

• What happened?• $5 billion in earnings were misstated

• Who were the main players?• President/COO David Glenn

• Chairman/CEO Leland Brendsel

• ex-CFO Vaughn Clarke

• former Sr. VP Robert Dean

• former Sr. VP Nazir Dossani

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HealthSouth

• How was it done?• earnings were intentionally misstated and understated

• How were they caught?• SEC investigation

• How were they penalized?• $125 million in fines

• Glenn, Clarke and Brendsel were fired

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Bernie Madoff

• Who?• Bernard L. Madoff Investment Securities LLC, a Wall

Street investment firm founded by Madoff

• What happened?• Madoff tricked investors out of $64.8 billion through the

largest Ponzi scheme in history

• Who were the main players?• Bernie Madoff

• Madoff’s accountant, David Friehling

• Frank DiPascalli

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Bernie Madoff

• How was it done?• investors were paid returns out of their own money or

that of other investors rather than profits

• How were they caught?• Madoff told his sons about his scheme; they reported

him to the SEC

• How were they penalized?• 150 years in prison and $170 billion restitution for

Madoff

• Prison time for Friehling and DiPascalli

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Accounting Laws & Regulations

• Help to better protect the economy and shareholders

• May increase costs for businesses but help prevent later lawsuits and profit loss

• Helps companies make more ethical decisions

PowerPoint - Accounting Laws & Regulations

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