Corporations in the spotlight

Some lawmakers and experts think that it is not only the corporations that are to be blamed for recent scandalous accounting transactions, but also accounting rule making process or makers. \nTelecommunications giant WorldCom, last week announced that it would restate $4 billion worth of expenses that resulted from fraudulent accounting entries. There is increasing news coverage of lawsuits from misled investors against corporations that provided fraudulent accounting statements. \nIn May, there was an extensive session in the House Committee on Financial Services, called "Corporate Accounting Practice: Is there a Credibility GAAP (General Accepted Accounting Principle)?"\nDuring the session, accounting professionals and experts from different areas -- from education to auditing firms -- agreed the problem was not only the corporations, but also the accounting standard setters and regulators. \n"Throughout its history, the Securities and Exchange Commission (SEC) has relied on the private sector to establish accounting standards. We will explore today whether that policy should continue," Rep. Paul Kanorski (D-Penn.), the ranking member, told the committee. \nCommittee chairman Michael Oxley told the committee that fraudulent financial restatements have caused problems for many different areas of society.\n"There have been too many restatements of financial statements, too many SEC investigations and too many pension plan losses for us to not dig further into this area," Oxley said. \nThe problems Oxley touches on are all recognized as results of fraudulent corporate accounting practices.\nThe SEC has authority under U.S. securities law to set accounting standards for public companies. It also has power to enforce its accounting standards. The Financial Accounting Standard Board (FASB) works with the SEC to set accounting methods while reviewing current accounting issues, but it does not have the responsibility or power to enforce its standards. The FASB simply helps the SEC establish accounting and reporting standards. \nBut in the midst of the constant corporation accounting scandals, the SEC and other accounting related institutions such as the FASB are drawing considerable fire from critics. \nConcerns over inefficient FASB practices are being recognized throughout the last decade. But they are highlighted recently in the wake of the collapse of major U.S. corporations after accounting frauds were revealed. \n"I have two big critics for (the) FASB," said Dave Greene, chair of the IU system and accounting graduate program. "One is that they are too slow. Sometimes it takes more than 10 years to come up with a decision since the inception of the problem … accounting rules have to be responsive to changes of business world." \nAnother major concern Greene has over accounting rules is independence. Many of the funding resources available to the FASB come from voluntary contributions. This fund structure may create pressure that can hinder the FASB from establishing unbiased accounting standards. \n"(The) FASB is becoming increasingly politicized," Greene said. "Lobbying (the) FASB is common, hence biased accounting, auditing standards can be possible." \nAs a result, many of the professionals and experts expect government to come up with the idea of creating a separate entity that would control the ethical aspect of the accounting practices. Most of them think the SEC, the FASB and related accounting institutions are not enough to fix the expanding fraudulent accounting practices. \nWhen it comes to being cynical about the current accounting rule making institutions, many Democrats and Republicans agree that the new policy is eminent.\n"I also think changes are occurring in every board room, on every audit committee and with every accounting firm in America," Sen. Phil Gramm (R-Texas) said in a June 18 mark-up of accounting reform and investor protection legislation. "But I do not believe that is enough … I believe we should pass a bill setting up an independent ethics committee that will oversee and enforce the highest standards of ethics in accounting." \nA financial accounting statement is a company's resume. Based on the financial accounting statement, investors make decisions whether to participate or partially own the company by becoming a shareholder. Hence, the role of the financial accounting statement is extremely important in the rapidly developing business environment. \n"Financial statement audits are considered an essential feature of providing reliable financial information to our capital market," said William Holder, accounting director at the University of Southern California, during his testimony before the committee in May.