Title: ENRON: Aftermath'Lessons Learned
1ENRON Aftermath.Lessons Learned
- AICPA
- Alan Anderson
- Senior Vice President
2In a Way its Simple In a Way its Not.
- Tone at the Top
- Corporate Greed
- Individual Greed
- Market Euphoria
- Corporate Arrogance
- High Risk Deals
3In the Beginning.
- 1985 Deregulation
- Houston Natural Gas and InterNorth merger
- Massive Debt coupled with loss of exclusive use
of pipelines - Gas Bank
4Corporate Culture
- Best and the Brightest
- RICE Respect, Integrity, Communication,
Excellence - PRC Performance Review Committee
- Profits, Profits, Profits..
- Enron Capital and Trade Recources
- Enron Online (EOL)
5Business Model
- Enron Finance Corp.
- Enron Capital and Trade Resources
- Enron Online (EOL)
- Became a model for the industry
- Competition Increased
6Financial Reporting Model
- Mark to Market Accounting
- Swaps
- Related Party Transactions
- SPEs (Special Purpose Entities)
- Obscure Disclosures
- Others????
7Potential Red Flags
- unduly aggressive earnings targets
- management bonus compensation based on those
targets - excessive interest by management in maintaining
stock price or earnings trend through the use of
unusually aggressive accounting practices - Unduly aggressive financial targets and
expectations for operating personnel - .
8Potential Red Flags (continued)
- inability to generate sufficient cash flow from
operations while reporting earnings and earnings
growth - assets, liabilities, revenues, or expenses based
on significant estimates that involve unusually
subjective judgments such asreliability of
financial instruments and - significant related-party transactions.
9Where were .
- Management
- Board of Directors and Audit Committee
- External Auditors
- Market Makers (Analysts)
- Regulators (SEC, AICPA, others)
-That is what everyone is asking
10SEC Initial Response Dec 11,2001
- A system of current disclosures, supplementing
and updating quarterly and annual information
with disclosure of material information on a
real-time basis - Public company disclosure of significant current
trend and evaluative data, in addition to
historical information - Identification of most critical accounting
principles by all public companies - More timely and responsive accounting standard
setting on the part of the private sector
11SEC Initial Response Dec 11,2001
- An environment of cooperation between the SEC and
registrants that encourages public companies and
their auditors to seek advice on disclosure
issues in advance - An effective and transparent system of
self-regulation for the accounting profession,
subject to SECs rigorous, but non-duplicative,
oversight and - More pro-active oversight by audit committees who
understand financial accounting principles as
well as how they are applied.
12Meaningful Reform will it
- 1. Help investors make informed investment
decisions? - 2. Enhance audit quality and the quality of
financial reporting? - 3.Help restore confidence in the capital markets,
our nations financial
reporting system, and the accounting profession? - 4. Be good for Americas financial markets and
economic growth?
13Wide Range of Proposed Reforms
- Federal State Legislative Proposals
- SEC Chairman President Bush Proposals
- AICPAs Main Views and Concerns
- Volckers Reform Proposals for Andersen
- Former POB Chair Bowshers Proposal
- Several States NY, Mn, Fla. Ca. and others
14Legislative Activity - U.S. Senate
- Highest level of activity in 25 years
- Senate Banking Committee in Lead
- Hearings on Enron debacle in March/April
- Many pending proposals being floated
- Legislation likely in April/May
- Many very important issues in play
15Legislative Activity - U.S. House
- Financial Services Committee in Lead
- Oxley/Baker Bill likely vehicle
- Prohibit IA/IT services consistent with original
SEC Chairman Levitts proposal - Dingell introduced his own bill
- New regulatory structure is almost assured
- Only question is how far it goes.
16Proposals of SEC Chairman Pitt
- New body dominated by public members
- New disciplinary mechanism
- SEC handles law violations itself
- Regulatory Body pursues ethical and/or competence
standards cases complaints - Quicker disciplinary proceedings
- Body publicizes results and imposes fines
17Reengineer Peer Review Approach
- Replace triennial firm-on-firm peer review
- More frequent monitoring of audit quality
- Use permanent Quality Control staff
- Body composed of knowledgeable people
unaffiliated with any accounting firms - Staff deployed and overseen by new publicly
dominated body and its staff - Limited to Auditors of Public Companies
18Other Components of Pitt Proposals
- Will ban IT and internal audit services
- But says if Congressional proposals to restrict
more services go thru, we will have far worse
quality audits than we have today - Aggressive enforcement- CEOs Auditors
- Improvements on financial disclosures
- Timely reporting of events, stock sales, etc.
19President Bushs Key Proposals
- Tougher oversight of auditors
- CEOs sign off on full honest disclosures
- Take away bonuses stock gains for executives
when reporting is inaccurate - Wants SEC to set scope limits vs.Congress
- Audit committees decide on non-audit work
- Rejects tort reform, expensing stock options
20FASB to be more responsive
- Board size being reduced, speed increased
- Fast track project to deal with SPEs
- Also dealing with guarantees of debt and
determining fair value on forward contracts - Move toward more focus on principles
- Accounting details for IASB, not IFAC
- But clear support for working with IASB
21AICPA Input and Views
- Testifying in Congressional hearings
- Providing constructive input
- Zero tolerance for violation of rules or laws
- Urging all to be wary of simplistic solutions
which can lead to unintended consequences - Working to limit cascade effect
22New Public Regulatory Organization
- Radical change from last 25 years
- Move from Public Oversight to Public
Participation - New robust private sector regulatory body
- Independent of the accounting profession
- Structured with SEC oversight to handle
- Professional discipline and quality review
- Eventually auditor independence issues
23Roles of the New Regulatory Body
- Perform quality reviews of audit firms
- Enforce compliance with professional stds
- Discipline for violations of prof stds
- Establish rules deemed necessary for such reviews
and enforcement - Later influence new independence standards and
other standards (eg. audit standards)
24Important Process Issues
- Regulatory Body serves as disciplinary and
quality review board, not standards setter - Ability to move quickly, keep information
confidential, and take remedial actions - Able to compel production of documents and
protect documents reviewed from discovery or
admissibility in civil litigation
25Non-Audit Services
- Some are necessary part of modern audit
- OMalley Panel - some improve quality
- Audit quality dependent on auditor quality
- AICPA urges caution, impacts
- Audit Quality
- Future Staff
- New restrictions should not impede audit quality
or the quality of financial reporting
26Restrictions - Non-audit services
- Agree to restrict IT and Internal Audit
- Oppose ban on all non-audit services
- Many unintended consequences
- Onerous to smaller companies - costly
- Ripple effect to non public companies
- Overrides informed and reasoned decision-making
by audit committees
27Risk of Creating Audit Only Firms
- Threat is the risk to audit quality
- Skills/expertise outpaced by changes in business
practices and financial transactions - Less knowledge of client businesses
- Will lead to loss of necessary expertise
- Eventually, scale and other factors will lead to
audit quality deterioration
28Corporate Governance
- Public reporting of audit committee charter
- Audit committees should hire/fire auditors
- And evaluate relationships and services of the
audit firm for conflicts - Harmful to cast a dark cloud over all services
outside the statutory audit - Rely on knowledgeable members to decide
29Mandated Auditor Rotation
- Audit firm rotation has been proposed
- Most believe the costs outweigh the benefits
- Does not pass public interest test
- Would create significant proposal frenzy
- Rotation of team members seems adequate
- Loss of knowledge of company hurts a lot
30Tort reform ideas
- Reasoned law critical to integrity of markets
- 1995 law enacted to deal with abuses
- Liabilities are still an enormous deterrent
- Securities class actions cases are on the rise
- Average settlements are also way up
- Profession opposes reform of current law
- Concerns about liability are global
31Employment Restrictions
- There are many safeguards required today
- Some legislators propose more restrictions
- Like one or two year cooling-off period
- Many sound easy, but are hard to effect
- They can severely limit eligible audit firms
- Putting limits on individual careers and client
recruiting efforts are hard to legislate
32Financial Reporting Reforms
- Improved disclosures plain English
- More timely reporting to investors
- Client reporting on their internal controls
- Auditor assurance on internal controls
- Increased resources for the SEC to oversee
financial reporting disclosures
33Modernizing Business Reporting
- Unreported intangibles and discussion of risk
- Off balance sheet activity
- Non-financial performance indicators
- Forward-looking information
- Enterprise opportunity and risk
- More Timely reporting (movement toward continuous
disclosure)
34Broader Perspective Needs
- Broader bandwidth of info for investors, a
recommendation long advocated by AICPA - New distribution channels that recognize the
ubiquity of the Internet communication - Increased financial reporting frequency, and
ultimately online, real-time reporting
35Volcker Proposals for Andersen
- Volcker wants Andersen rehabilitated and serving
as the gold standard for auditing - Really wants to reform a resisting industry
- This creates concerns for AICPA Big 4
- Split of audit and consulting businesses
- Separate partnerships no profit-sharing
- Much broader restrictions of services
36Other Controversial Volcker Ideas
- Proposed new restrictions on services
- Aggressive tax planning services
- Presumably includes creating tax shelters
- Legal services and some advocacy roles
- Tax accounting services for executives
- Also favors cooling off period for partners
joining clients, and 5 year partner rotation
37POB Reverses Long-standing Views
- Public Oversight Board quits/terminates
- POB Chairman testified March 19
- Highly critical of profession
- Propose unrealistic measures
- Far in excess of Pitt and Bush Proposals
- Favors big legislative solutions
38A Very Political Process
- Congress is more involved than ever before
- Issues are red hot and elections coming up
- High risk of harsh legislative solutions
- Profession working with legislators
- Trade-offs in SEC vs. legislative solutions
- Very hard to forecast the end results
39Recap of Key Issues in Play
- Scope of service/independence restrictions
- Considering perception versus reality
- Audit committee judgment or bright lines
- Audit firm or partner rotation proposals
- Firm rotation mandates create concerns
- Appropriate limits on rotation of people
40Other Key Issues in Play
- Revolving door/ hiring audit firm people
- Peer review/ new quality assurance
- New regulatory structure for profession
- New disciplinary structure protections
- Auditor/audit committee relationship
- Corporate governance reforms
41Other Key Issues in Play
- Accounting standards
- Process timeliness improvements
- Depth and coverage of standards
- Auditing standards
- Responsibility for fraud detection
- Fraud reporting reqts and standards
42Other Reform Issues in Play
- Who pays for audits
- SEC/FASB/Regulatory Body funding
- Tort reform
- Deductibility of stock options
- Tax shelter changes
- Pension and 401-K reforms
43Remember There will always be Strains on the
System of Checks and Balances
- Management
- Boards of Directors and its Committees
- Independent Auditors
- Security Analysists
- Regulators (SEC, FASB and others)
44Foundation for the Future
- Must work to protect the public interest under
the current reporting models - Must work to develop approaches and programs to
respond to marketplace demands for assurance
under New Economic models
45Convergence
- Blurring of Boundaries between
- Auditing of Financial Statements
- Assurance
- Attestation on Financial and non-financial items
- Need for on-line real time assurance
46What it takes to get Real Time Assurance.
- Reliable systems
- a common method of disseminating information on
the internet - reporting on subsets of financial data as well
as non financial data, industry specific rather
than one size fits all, common global approach - corporate accountability including management
integrity, solid enterprise risk management - Understandable disclosures including the ability
to drill down into expanded discussion if the
user desires to do so
47AICPA Initiatives
- Reliable Systems
- Method of Disseminating Information
- Financial Data and Non Financial Data
-
- Trust Family (Systrust)
- XBRL
- VMRC
- Performance View
48AICPA Initiatives
- Corporate Accountability
- Understandable disclosures
-
- Trust Family (Webtrust)COSO ERM ProjectASB
Fraud StandardEnvironmental ReportingAudit
Committee Rules - FASB ProjectsVMRCSEC Plain English Plan
49Recap
- Uncertainty where Enron debacle will end
- Profession needs to play leadership role
- Avoid overreaction simplistic solutions
- Consider unintended consequences
- Focus on the public interest in all we do
-
50In Summary
- We must work to build a foundation for the future
to continue to protect the public - We must be responsive to marketplace changes as
our audit model will continue to decline in
relevance - We should work together Globally whenever
possible