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Margaret Warner Graduate School of Education and Human Development ​hello my name is Casey Ortiz and I'm going to talk to you today about the relationship between accounting scandals and accounting laws it is my theory that the accounting laws the accounting reform of 2002 was a direct correlation of the accounting scandals that have been popping up since the late 90s first real quickly I would like to go over who is affected by these count accounting scandals most people would probably think that it is just the people working for the company the people that go to jail the people that get fined for committing these scandals but it's so much more it's the investors the shareholders the employees you know and most these scandals you'll see investors lose millions employees with their jobs the public loses their trust in these companies and they're scared to invest their money anywhere because they hear about all these stories of CEOs stealing billions and that's just a really sad thing for people have to deal with so i just wanted to iterate why even though you may not personally invest in these companies you may want to invest in companies in the future and you need to know why this could affect you someday these are the three scandals that I feel were the most influential and the decision to create new laws and reform accounting practices and these weren't the only three scandals that happened in this time period there were several and throughout late 90s namely 1998 to around 2002 2003 and there has been scandals since I just feel that these three were the most important and really woke up the nation as to what was going on behind the closed doors of some of these fortune 500 companies and I would like to start with waste management waste management was a houston-based company that made headlines in 1998 when it was discovered that the founder and CEO and chairman dean buntrock had reported 1.7 billion dollars in fake earnings now the way he did this was he falsely increased the depreciation timely for his major long-term assets such as property and Quentin and equipment in turn this lowered the depreciation expense of the company which increased the earnings on the balance sheet which made the company look more profitable than it actually was when you make an company look more profitable than it actually is it will increase stock prices and people want to buy in thinking that they'll get a bigger return there were many parties involved in this fraud Dean buntrock for one who is the founder of the company also Philip Brunner Rooney who was the president of the company and the chief operating officer and Arthur Andersen which was a large auditing firm that provided auditing services as well as consulting services for its client the way this fraud was discovered was the new CEO and management team went through all the books and internal controls and found out what had been going on this whole time and essentially turned it over to the SEC and after litigation the shareholder class-action suit was settled for 457 million dollars and Arthur Andersen the auditing company was fine for 7 million dollars because they knew what was going on and did not report the company because there was a conflict of interest that was created when they decided to also become a consulting firm for the company because they were on the payroll now let's move on to and Ron n1 was a very big surprise to everyone it was in 2001 another houston-based company this is pretty fresh off the heels of waste management and Arthur Anderson's auditing firm was involved yet again it kind of came as a huge shock not only because the amount of money that was lost by innocent people and but also because the fact that it could be seen now that waste management was not going to be an isolated incident like people probably thought it would be so let's just start with the particular the Enron scandal lost its shareholders 74 million dollars a lot of money not to mention thousands of employees lost their jobs as well as investors and employees lost retirement accounts and the way that Kenneth Lay and Jeffrey Skilling committed this fraud was very tricky you could look right at the books and not really understand what you were looking at unless you were you knew about accounting you were an accounting expert and a lot of people that buy stock and buy shares in a company are not accounting experts they look at the stock prices they look at retained earnings expenses things like that and if the health of the company looks good overall then that's where you want to put your money but this fraud was being committed by keeping these massive debts off the balance sheets and the way they were doing this was by using an SPV an SPV is like a shell corporation if you are familiar with that a shell corporation have been used in the past for businesses to launder money basically to hide their money somewhere where no one would find it and this is essentially what an SPV is it is a another corporation that is created by the company and if the parent company which would be in Ron in this case does not have a controlling interest over the SPV they don't have to consolidate their financial statements which means they don't have to disclose the amount of debts and losses associated with this spp which really essentially isn't real in the first place it's just a place to hide what is actually going on and they would appoint their top executives as the principles of this of these SPVs which not only
creates a conflict of interest but also makes them a guilty party as well because they know what's going on and they aren't coming forward as a result of this fraud and the uncovering of this frog stock prices of Enron dropped from almost ninety dollars in only a couple of years and probably almost that much overnight from the time that the fraud was discovered till it was you know came out the next day as a result of the scandal and skilling and lay were both sentenced to 24 years in prison and Kenneth Lay died before he could serve his sentence skilling did serve his sentence and Arthur Andersen once again involved once again in consulting firm once again on the payroll was fined for falsifying accounts the last candle I want to go over today is worldcom also known as MCI this scandal inflated assets by 11 million dollars and it was done in such a simple simple way that it's kind of hard to believe that nobody knew nobody turned these people in because it was just it wasn't sneaky like Enron it would have been right in your face if somebody had looked at the books and had any accounting knowledge they would have known immediately what was going on and reported Bernie Ebbers which was the CEO at the time for committing this fraud what he was doing was capitalizing cost rather than expensing costs when you capitalize a cost you can stretch that cost out over a period of time say you buy an asset that's gone going to wash her last you a long amount of time you can stretch that cost out by periods until the asset is no longer valuable when you expense a cost say I buy paper for the copier that would be an expense you take it out of the money um your books right then there is no stretching it out however Evers was taking everyday costs and capitalizing them which was deflating the expenses basically and inflating revenues making it look like the company was making more money than it actually was this scandal resulted in investors losing a total of a hundred and eighty billion dollars worldcom had to file for bankruptcy which was the long largest bankruptcy to ever be filed to date the CFO scott sullivan worldcom CFO was also found guilty and of cooking the books basically and he also was fired as the CFO and stripped of his CPA license this is this gamble that really put an emphasis on corporate government and internal controls corporate governance is socially the law of the company the rules the procedures the practices all the things that the members of the company must abide by and follow to protect the interests of the stakeholders now stakeholders are not just shareholders stakeholders are shareholders employees management anybody who has a stake in that company and can get hurt you know financially or otherwise from something something happening to that company but worldcom was the straw that broke the camel's back this was it this was the thing that was needed to pass the sarbanes-oxley Act of 2002 which was the largest accounting reform since the 1930s following the Great Depression so I just want to touch upon a few of the sections in sarbanes-oxley and explain how they correlate directly with the things that happened in these different scandals and how they correct the mistakes of laws in the past that did not cover everything that could have been covered to leave interpretation to the law first we'll start with section 302 section 302 deals with corporate responsibility and financial reporting simple enough this section ensures that everything is double-checked internal controls are used corporate governance is in place this accountability can ensure that people won't be hurt by things that happened at worldcom like that again because corporate government governance or the lack thereof is one of the biggest problems there was with worldcom somebody had to know what was going on even though nobody else step forward nobody else was punished somebody else had to know and if they didn't know it shows a big hole in the internal control process and the corporate governance process because internal controls say that everything gets double checked everything has two sets of eyes so if somebody is trying to be sneaky somebody else can come behind them to catch them now we'll look at section 401 section 401 deals with off-balance sheet liabilities obligations and transactions if you'll remember in Enron all of those transactions were off balance sheet so Enron did not have to report them in their financial statements this section says that all financial statements will include off-balance sheet sly abilities obligations or transactions of the company next section we're going to look at is 40 44 or for deals of the company's internal controls just like we said before with worldcom one of its biggest problem is internal controls and really all of these companies and that we mentioned so far and most of them people were working together on this to commit these scandals and if all the proper internal controls were used through every step of the accounting process somebody would have caught it along the way now we're going to talk about section 409 with which deals with significant changes in financial position if you notice i did add some graphs of enron and worldcom stock prices over the years will an Enron what happened was the people that were in the know the people that were committing this scandal before the scandal broke they sold all their stock which is basically insider trading and let the other people who had no clue was going on to lose all this money but the section is also to make sure the company's let people know what is going on and not just letting them you know their shareholders and not just letting them be blindsided by the news the next day and not know what they're going to do having lost all this money not having time to put a plan in place so it's making sure that these companies let the public know as soon as they know as soon as possible so that people can have time to make adjustments make a plan and get everything together before everything falls apart the
last section is section 802 and it just outlines the penalties and fines for committing any type of fraud or presenting false information financial statements to try to steal people's money this section imposes penalties that are fines for up to 20 years imprisonment for altering destroying mutilated concealing falsifying records documents or tan objects with the intent to obstruct impede or influence a legal investigation this section also imposes penalties of fines or imprisonment up to 10 years for any accountant who knowingly and willingly violates the requirements of maintenance of all audit or review papers for a period of five year with the sarbanes-oxley also came the public company accounting oversight board and protection for whistleblowers in Enron scandal the whistleblower was Sherron Watkins she did not lose her job and but there was protection offered to anybody who found scandals found any fraud and wanted to come forward but was scared of repercussions of their job being harassed daily at work etc the SEC felt it was important for people to feel like they could come forward because like I said in all these scandals nobody came forward and that's probably why they felt like they had nobody they felt like they had no protection and their job would be gone and everything would be gone if they tried to come forward to report any of this fraud now the public Public Company Accounting Oversight Board was created by the sarbanes-oxley to implement the rules of the Act they perform tasks such as registering accounting firms inspecting register firms setting auditing standards and determining what non auditing services are prohibited like I said before Arthur Andersen was a consulting service for many of the companies they also audited for putting them on the payroll creating conflict of interest so that would be a non auditing service that would be prohibited if you were also acting as the company's auditor it's read forms like this that show that the government with the sarbanes-oxley Act was taking into account all the things that had happened so far and trying to make them right and trying to put laws in place that showed that they were on top of it and they were going to put a stop to all of this corporate scandal that was happening all at once because just a year prior to world com the sarbanes-oxley was sitting in legislation but it wasn't being passed because the house in the Senate could not agree that's why i say worldcom was the straw that broke the camel's back because after worldcom happened just a few months the sarbanes-oxley was signed into law and being implemented mm into every accounting and auditing firm across the nation i personally find this topic very fascinating and it really makes you wonder if crimes didn't happen would there be laws to protect you against these crimes I don't believe that anticipatory laws can work as well as laws that are created after the crime is committed because people are mental they come up with new ways to do things all the time and with technology the way it is I really wouldn't be surprised if in another 10 years we see another accounting reform or corporate reform because with the growing technology they're just going to come up with new ways to commit fraud and I just find it all very fascinating and interesting and really am excited to see how the profession and the field grows and how the laws adapt to everything that is changing around us thank you very much for listening and have a good day you College of Physicians and Surgeons.
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