Accounting Updates Part 2 Accounting Updates Part 2

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 Part 2 Accounting Updates Part 2

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/

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, 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

“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

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: ???

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?

Largest Bankruptcy FilingsLargest Bankruptcy Filings

(1980 to Present)(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. PG&E $21.5 April, 2001

8. MCorp $20.2 March, 1989

9. Kmart $17.0 Jan., 2002

10. NTL $16.8 May, 2002

Recent Financial Statement Recent Financial Statement FraudsFrauds

• Enron

• WorldCom

• Adelphia

• Global Crossing

• Xerox

• Qwest

• Many others

Let’s Get Back to the Let’s Get Back to the BasicsBasics

Back to the Basics…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 client’s industry

Professional SkepticismProfessional Skepticism

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

Back to the Basics…Back to the Basics…

• Vary the audit testing performed

• Prepare a detailed audit program

• Understand the client’s closing process

• Don’t forget the general ledger

The Closing ProcessThe 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

Back to the Basics…Back to the Basics…

•Issues encountered during the audit ---

– Deal with the issue at hand

– Don’t try to “paper over” the problem

– Management letter comment is not enough

– Don’t make the client’s problem your own

Key Elements of Public TrustKey Elements of Public Trust

Spirit of Transparency

Culture of Accountability

People of Integrity