GAAP? or craap?
Nice article on the complicity of auditors in modern-day corporate fraud...ERRR, income statement scams! BTW, nice to see Creemer give this guy some run on his show lately..."Pink" Floyd has been writing good, critical copy on the Bubble since at least the beginning of y2K.
nytimes.com
February 1, 2002
FLOYD NORRIS
Let the Auditors Tell Us What They Know
Not all GAAP is created equal.
In recent years, when a company's accounting has been criticized, the standard response had been that its auditors had certified the numbers to be in compliance with generally accepted accounting principles, or GAAP. That was supposed to be the end of the argument.
Every accountant knows that there is good GAAP and not-so- good GAAP. For many transactions, companies have a choice of accounting methods that can change the numbers that are reported. So, too, can decisions on estimates that affect profit numbers.
Auditors are supposed to discuss with a company's directors the decisions the company made and let them know whether the company was quite aggressive or very cautious in its accounting.
But that is where that information stops. Nobody tells the public. The only thing investors hear directly from the auditor is the boilerplate letter in every annual report. "One of the things that bothers me is that there is so little flexibility in what you can say about your work after you have done an audit," said James E. Copeland Jr., the chief executive of Deloitte & Touche.
He suggests auditors find a way to share at least some of the information they already provide to the audit committee. Are these profits highly dependent on the aggressive use of a particular accounting rule? Would changing assumptions about something produce radically different results?
As it is, with auditors giving the same grade to every company that barely meets accounting standards, we have a sort of Gresham's Law in operation, in which bad GAAP drives out good. If investors assume every company is pushing the accounting envelope, then those that use more conservative accounting derive no benefit from acting responsibly.
Robert K. Herdman, chief accountant of the Securities and Exchange Commission, has promised rules that will require companies to discuss their most important auditing decisions, and how they affect the results. He said Mr. Copeland's idea might fit in with that, requiring auditors to certify and comment on that disclosure.
Another easily carried out reform would deal with confidential letters — known as S.A.S.-50 letters after an auditing rule that sanctions them — that auditing firms now provide to justify innovative accounting. An investment banker trying to sell a new security will get such a letter from an accounting firm. "They are used in the structuring of edge-of-the-envelope transactions that do not provide transparency," said Jane Adams, an accounting analyst at Credit Suisse First Boston.
She suggests requiring that such letters be disclosed to the S.E.C., perhaps on a confidential basis. That would give regulators a chance to monitor new forms of aggressive accounting and to take quick action if need be.
The fact that some of Enron (news/quote)'s most ridiculous accounting had at least a veneer of complying with accounting rules shows how difficult auditors' decisions can be. Had the S.E.C. been monitoring those S.A.S.-50 letters, and had Arthur Andersen been able and willing to point out how aggressive the accounting was, perhaps the Enron story might have been very different.
A system that lets auditors effectively grade their clients' accounting would not guarantee success. There would be pressure to give every company a top grade. But it would be worth trying. |
