Snake oil salesmen everywhere

Accounting - every second person seems to be telling us - has many problems and, just like the Wild West of old, every blessed soul with a horse and wagon is spruiking something as the healing oil that will resuscitate market integrity.

This has intensified as the global press continues to make a meal of the Enron saga and the misfortunes that face some in the accounting profession arising out of the examples of corporate failure that will linger for some time, given that legal proceedings in most of these cases are under way now or due sometime soon.

Cures for the problem, now given the unfortunate tag "Enronitis", are being provided by all and sundry - including, of course, the President of the largest capital market in the world, the United States. Enronitis encapsulates the impact of the one corporate collapse on market confidence in accounting. President Bush spoke of accounting standards as needing to be stricter in his State of the Union address back in January. The President was surprisingly critical about the quality of accounting standards in what most people perceive to be a well-regulated capital market.

It is more surprising when you consider the US has criticised international standards promulgated by the International Accounting Standards Board as being of questionable quality. "Employees who have worked hard and saved all their lives should not have to risk losing everything if their company fails," President Bush said. "Through stricter accounting standards and tougher disclosure requirements, corporate America must be made more accountable to employees and shareholders and held to the highest standards of conduct."

That initial statement targeting US accounting and the need for much stricter literature and tougher disclosure requirements was recently followed by a 10-point plan to improve corporate governance in America. Among those measures, of course, was one to keep a better eye on auditors through greater oversight and make standard setters respond to the needs of the investing community. The ten-points covered by the President are:

1. Each investor should have quarterly access to the information needed to judge a firm's financial performance, condition, and risks.

2. Each investor should have prompt access to critical information.

3. CEOs should personally vouch for the veracity, timeliness, and fairness of their companies' public disclosures, including their financial statements.

4. CEOs or other officers should not be allowed to profit from erroneous financial statements.

5. CEOs or other officers who clearly abuse their power should lose their right to serve in any corporate leadership positions.

6. Corporate leaders should be required to tell the public promptly whenever they buy or sell company stock for personal gain.

7. Investors should have complete confidence in the independence and integrity of companies' auditors.

8. An independent regulatory board should ensure that the accounting profession is held to the highest ethical standards.

9. The authors of accounting standards must be responsive to the needs of investors.

10. Firms' accounting systems should be compared with best practices, not simply against minimum standards.

These 10 points are not the only suggestions kicking about in the US environment. The chairman of the Securities and Exchange Commission, Harvey Pitt, is busy preaching the need to make financial statements accessible to people by making them less dense and wrapped up in plain English. There are also speeches quoting the SEC chairman as wanting more contemporaneous information to be released to shareholders, which would be in a structure that's in a similar vein.

Other prominent individuals such as former SEC chief accountant Walter Scheutze offer other ways to deal with the problems of market information. Scheutze would turn the present reporting model on its head by recording as assets only those things a business is capable of selling - as he neatly puts it - "tomorrow morning at 10am for cash". Current accounting thought deals with the notion of accounting for future economic benefits that an entity expects to derive from an asset of some description going forward. Scheutze argues - as he did before a recent US Senate hearing into Enron and accounting standards - that accounting for future economic benefits is misleading and definitions of assets in conceptual frameworks should be based on whether things can be sold at a market value or exit price.

Other reporting methods are also being suggested with PricewaterhouseCoopers recently reiterating that companies need to focus in more detail on narrative disclosures to explain corporate risks and key performance indicators that are not caught within the scope of financial statements.

This, PwC argues, needs to be done in an environment where corporate transparency is market driven. Its treatise on ValueReporting states the market should be given the chance to shape the standard of disclosure before the regulators get their hands on it.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.