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Corporate Collapses and the Need to Restore Corporate Collapses and the Need to Restore Credibility and TrustCredibility and Trust

Sample Course 2Sample Course 2-- Ethical Issues in Accountancy Ethical Issues in Accountancy --

These sample course materials have been prepared These sample course materials have been prepared by Professor Barry J. Cooper by Professor Barry J. Cooper

[email protected]@rmit.edu.auSchool of Accounting and Law, RMIT University, School of Accounting and Law, RMIT University,

Melbourne, Australia and are adapted from the Melbourne, Australia and are adapted from the existing course conducted at RMIT University existing course conducted at RMIT University

during first semester 2006during first semester 2006

Major reference text is Major reference text is ethics,governance andethics,governance andaccountabilityaccountability, by , by DellaportasDellaportas et al, John Wiley and Sons, et al, John Wiley and Sons,

Australia 2005Australia 2005

mailto:[email protected]

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Learning objectivesLearning objectives

•• Describe and understandDescribe and understand–– The issues, principles and practices involved The issues, principles and practices involved

in the new expectations of governance, in the new expectations of governance, accounting and auditingaccounting and auditing

–– Why the corporate collapses in 2001 Why the corporate collapses in 2001 –– 2003 2003 had such an impact on corporate regulation had such an impact on corporate regulation and the loss of trust in the accounting and the loss of trust in the accounting profession profession

Introduction Introduction -- ObjectivesObjectives

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Learning ObjectivesLearning Objectives–– Why the collapses of organisations such as Why the collapses of organisations such as

Enron, WorldCom (United States); Enron, WorldCom (United States); ParmalatParmalat(Europe); HIH Insurance, (Europe); HIH Insurance, One.TelOne.Tel, Harris , Harris ScarfeScarfe (Australia); and Arthur Andersen, in (Australia); and Arthur Andersen, in particular, had such an impact on the professionparticular, had such an impact on the profession

–– The spate of reforms and regulation that The spate of reforms and regulation that followedfollowed

Introduction Introduction -- ObjectivesObjectives

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Case Study 1 Case Study 1 -- EnronEnron•• Enron is a classic case of corporate collapse Enron is a classic case of corporate collapse

caused by:caused by:–– The failure of the board;The failure of the board;–– A series of accounting frauds;A series of accounting frauds;–– Lack of independence and objectivity by the Lack of independence and objectivity by the

auditor;auditor;–– Poor corporate ethics;Poor corporate ethics;

•• Ultimately leading to the collapse of both Ultimately leading to the collapse of both Enron and global accounting firm, Arthur Enron and global accounting firm, Arthur AndersenAndersen

Case Study Case Study -- EnronEnron

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Enron Enron –– Structure of DiscussionStructure of Discussion

•• Our discussion will focus on key issues of Our discussion will focus on key issues of the case:the case:–– BackgroundBackground–– Key investigationsKey investigations–– Issues concerning directorsIssues concerning directors–– Issues concerning questionable accountingIssues concerning questionable accounting–– Issues concerning EnronIssues concerning Enron’’s culture, conflicts and s culture, conflicts and

whistleblowerswhistleblowers


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Enron Enron –– Structure of DiscussionStructure of Discussion

•• Also:Also:–– Issues regarding Arthur AndersenIssues regarding Arthur Andersen–– EnronEnron’’s governance and controls governance and control–– The involvement by the banksThe involvement by the banks–– Tax avoidanceTax avoidance–– The aftermathThe aftermath


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BackgroundBackground

•• Giant energy trading company listed on the Giant energy trading company listed on the New York Stock ExchangeNew York Stock Exchange

•• Stock (share) price rose from $20 in 1999 to Stock (share) price rose from $20 in 1999 to peak at $90.56 in August 2000; but it peak at $90.56 in August 2000; but it dropped to being worthless in December dropped to being worthless in December 2001, when Enron filed for bankruptcy 2001, when Enron filed for bankruptcy protection (Chapter 11 of the protection (Chapter 11 of the US Securities US Securities ActAct))

Enron Enron -- BackgroundBackground

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•• It had one of the largest audit firms as It had one of the largest audit firms as auditor, Arthur Andersen, a then well auditor, Arthur Andersen, a then well respected Big 5 global accounting firmrespected Big 5 global accounting firm

•• Also had a Also had a ‘‘blueblue--ribbonribbon’’ board of board of directorsdirectors

Enron Enron -- BackgroundBackground


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Key InvestigationsKey Investigations

•• The Powers Committee was chaired by The Powers Committee was chaired by William Powers, who was an Enron William Powers, who was an Enron Director between Sept 2001 to Feb 2002 Director between Sept 2001 to Feb 2002

•• The committee was appointed by the US The committee was appointed by the US Senate to investigate related party Senate to investigate related party transactions that had transactions that had ‘‘surprisedsurprised’’ the board the board and resulted in several restatements of the and resulted in several restatements of the issued financial statements issued financial statements

Enron Enron –– Key InvestigationsKey Investigations

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Key Investigations Key Investigations –– Findings of Powers Findings of Powers CommitteeCommittee•• The summary findings of the Powers The summary findings of the Powers

Committee are:Committee are:–– Substantial unapproved employee bonuses paid Substantial unapproved employee bonuses paid

to managers and executivesto managers and executives–– Partnerships known as Special Purpose Entities Partnerships known as Special Purpose Entities

((SPEsSPEs) had been established to accomplish ) had been established to accomplish favourable financial results without bona fide favourable financial results without bona fide economic objectives, and did not conform with economic objectives, and did not conform with accounting rulesaccounting rules

Enron Enron –– Preliminary FindingsPreliminary Findings

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–– Other improper transactions entered into to Other improper transactions entered into to disguise $1 billion in losses, with wrong disguise $1 billion in losses, with wrong accounting treatments despite the auditorsaccounting treatments despite the auditors’’involvementinvolvement

•• Account restatements were necessary Account restatements were necessary because the because the SPEsSPEs failed to satisfy conditions failed to satisfy conditions required to be treated as independent entitiesrequired to be treated as independent entities

•• Resulted in the financial statements between Resulted in the financial statements between 1997 to 2001 being restated 1997 to 2001 being restated


Key Investigations Key Investigations ––Powers Committee Powers Committee ReportReport

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•• The magnitude of losses was so great that, The magnitude of losses was so great that, for example, Enron was found to have lost for example, Enron was found to have lost $618 million in the third quarter of 2001 and $618 million in the third quarter of 2001 and another $1.2 billion in losses in its special another $1.2 billion in losses in its special purpose entities (purpose entities (SPEsSPEs) that had not been ) that had not been accounted foraccounted for

•• Enron declared bankruptcy on 2 Dec. 2001 Enron declared bankruptcy on 2 Dec. 2001

Key Investigations Key Investigations –– Powers Committee Powers Committee ReportReport


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Key Investigations Key Investigations –– Senate Committee Senate Committee ReportReport

•• The Senate Committee report, released on The Senate Committee report, released on July 8 2002, also found:July 8 2002, also found:–– Failures of the Enron board of directors in their Failures of the Enron board of directors in their

fiduciary dutiesfiduciary duties–– High risk accounting practicesHigh risk accounting practices–– Inappropriate conflicts of interestInappropriate conflicts of interest–– Extensive undisclosed Extensive undisclosed ‘‘offoff--thethe--booksbooks’’ activitiesactivities–– Excessive compensationExcessive compensation–– Lack of independence by the board and auditorsLack of independence by the board and auditors


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Issues concerning directorsIssues concerning directors’’ failure failure to oversee and governto oversee and govern•• Due to the type of business Enron was Due to the type of business Enron was

engaged in, the directors and also engaged in, the directors and also management were able to be management were able to be ‘‘aggressiveaggressive’’and and ‘‘innovativeinnovative’’ in increasing cash flows, in increasing cash flows, lowering debts and smoothing incomelowering debts and smoothing income

•• Aim was to meet the criteria set by credit Aim was to meet the criteria set by credit rating agencies such as Moodyrating agencies such as Moody’’s and s and Standard and PoorStandard and Poor’’s and thus maintain the s and thus maintain the stock price stock price

Enron Enron –– DirectorsDirectors’’ liabilityliability

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•• For example, one method adopted was to For example, one method adopted was to sell or syndicate its own assets, not to sell or syndicate its own assets, not to independent third parties, but to independent third parties, but to ‘‘unconsolidated affiliatesunconsolidated affiliates’’ ((SPEsSPEs))

•• Asset Asset ““salesale”” to to SPEsSPEs taken up as revenue taken up as revenue and assets then not included in Enronand assets then not included in Enron’’s s financial statements, but were so closely financial statements, but were so closely associated with Enron that Enron treated the associated with Enron that Enron treated the SPE assets as part of its own SPE assets as part of its own


DirectorsDirectors’’ failure to oversee and governfailure to oversee and govern

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•• At its peak, Enron had between $15 to At its peak, Enron had between $15 to $20 billion involved in hundreds of $20 billion involved in hundreds of structured offstructured off--balance sheet finance balance sheet finance transactions transactions

•• Board members were compensated with Board members were compensated with generous cash and stock optionsgenerous cash and stock options

DirectorsDirectors’’ failure to oversee and governfailure to oversee and govern


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Questionable accountingQuestionable accounting practicespractices•• There were complicated accounting There were complicated accounting

transactions created by Enrontransactions created by Enron’’s management, s management, with support from their auditorswith support from their auditors

•• Under US laws, nonUnder US laws, non--consolidated consolidated SPEsSPEs have have to be controlled by an independent third to be controlled by an independent third party, who must hold at least 3% (only) of the party, who must hold at least 3% (only) of the capital at riskcapital at risk

•• Some transactions were formed to create an Some transactions were formed to create an SPE but no independent third party was foundSPE but no independent third party was found

Enron Enron –– Accounting PracticesAccounting Practices

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•• Hence subsequent restatement of the accounts Hence subsequent restatement of the accounts was later necessarywas later necessary

•• Other questionable transactions included Other questionable transactions included inappropriate management fees paid, a inappropriate management fees paid, a disguised payment of premiums and disguised payment of premiums and indemnification payments against tax indemnification payments against tax consequences for senior executives, preconsequences for senior executives, pre--booking revenue for services not yet providedbooking revenue for services not yet provided

Enron Enron –– Accounting PracticesAccounting Practices

Questionable accounting practicesQuestionable accounting practices

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EnronEnron’’s culture, conflicts of interest and s culture, conflicts of interest and whistleblowerswhistleblowers•• The unethical culture at Enron was The unethical culture at Enron was

evidenced by:evidenced by:–– Significant returns to officers, e.g. CFO making Significant returns to officers, e.g. CFO making

a gain of US$30 million on one SPE in which a gain of US$30 million on one SPE in which he had a personal interesthe had a personal interest

–– Lack of integrity, with many sham transactions Lack of integrity, with many sham transactions through the through the SPEsSPEs

–– Senior officialsSenior officials’’ willingness to be involved in willingness to be involved in frauds and wrongdoingsfrauds and wrongdoings

Enron Enron –– Cultural ClimateCultural Climate

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–– Self interested motivesSelf interested motives–– Fraudulent behaviour addressed only after Fraudulent behaviour addressed only after

whistlewhistle--blowing by the internal auditor, with an blowing by the internal auditor, with an anonymous letter to the chairman of the boardanonymous letter to the chairman of the board

–– Officers willing to please key personnel who Officers willing to please key personnel who could in turn influence their stock optionscould in turn influence their stock options

EnronEnron’’s culture, conflicts of interest and s culture, conflicts of interest and whistleblowerswhistleblowers

Enron Enron –– Cultural ClimateCultural Climate

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Role of Arthur Andersen at EnronRole of Arthur Andersen at Enron•• The accounting firm Arthur Andersen The accounting firm Arthur Andersen

(discussed in detail later) had multiple (discussed in detail later) had multiple roles at Enron:roles at Enron:–– AuditorAuditor–– Consultant on accounting and other mattersConsultant on accounting and other matters–– Internal AuditorInternal Auditor–– Tax advisorTax advisor–– Advisor and reviewer of financial Advisor and reviewer of financial

disclosuredisclosure

Enron Enron –– Arthur AndersenArthur Andersen

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•• Arthur Andersen received audit fees of Arthur Andersen received audit fees of US$25 million and other fees of US$27 US$25 million and other fees of US$27 million in its last last year at Enron, which million in its last last year at Enron, which was one of its largest clients was one of its largest clients

•• As will be discussed later, AndersenAs will be discussed later, Andersen’’s s internal culture was obsessed by the desire internal culture was obsessed by the desire to drive revenueto drive revenue


Role of Arthur Andersen at EnronRole of Arthur Andersen at Enron

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Arthur Andersen and Conflicts of Arthur Andersen and Conflicts of InterestsInterests

•• AndersenAndersen’’s conflicts of interest included:s conflicts of interest included:–– Self audit (e.g., consultants on the Self audit (e.g., consultants on the SPEsSPEs))–– Self interest versus public interest e.g. fSelf interest versus public interest e.g. fear of losing large ear of losing large

and prestigious audit such as Enron, leading to the and prestigious audit such as Enron, leading to the removal of partners who were disliked by Enron removal of partners who were disliked by Enron managementmanagement

–– Internal debates about Enron not airedInternal debates about Enron not aired–– Covering up of nonCovering up of non--compliance by Enron managementcompliance by Enron management–– Failure to inform investors on EnronFailure to inform investors on Enron’’s nons non--disclosures disclosures


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Arthur AndersenArthur Andersen’’s demise post Enrons demise post Enron

•• In summary, AndersenIn summary, Andersen’’s apparent s apparent shortcomings at Enron included:shortcomings at Enron included:–– Lack of competenceLack of competence–– Failure of internal quality control policiesFailure of internal quality control policies–– Failure to follow up where there was lack of Failure to follow up where there was lack of

informationinformation–– Misunderstanding of the fiduciary duties of Misunderstanding of the fiduciary duties of

auditorsauditors


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•• Andersen was charged and convicted in Andersen was charged and convicted in March 2002 for obstruction of justice March 2002 for obstruction of justice because personnel in several cities shredded because personnel in several cities shredded Enron audit papers Enron audit papers

•• Conviction resulted in the withdrawal of Conviction resulted in the withdrawal of AndersenAndersen’’s ability to audit companiess ability to audit companies

•• Reputation and ability of the firm to Reputation and ability of the firm to function was quickly eroded, with Andersen function was quickly eroded, with Andersen personnel personnel ‘‘jumping shipjumping ship’’

•• Rival firms began taking over its clients and Rival firms began taking over its clients and various parts of its businessvarious parts of its business


Arthur AndersenArthur Andersen’’s demise post Enrons demise post Enron

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The Implosion of Arthur AndersenThe Implosion of Arthur Andersen•• The Big Five became the Big Four in June The Big Five became the Big Four in June

2002 2002 •• AndersenAndersen’’s 85,000 worldwide employees s 85,000 worldwide employees

were dissipated to other firms or lost their were dissipated to other firms or lost their jobs jobs

•• Ironically, in 2005, the conviction of Ironically, in 2005, the conviction of AndersensAndersens was overturned in the US was overturned in the US Supreme Court on appeal, but by then it was Supreme Court on appeal, but by then it was far too latefar too late……


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EnronEnron’’s Governance and Controlss Governance and Controls

•• EnronEnron’’s management was out of controls management was out of control•• The directors could not rely on the The directors could not rely on the

information given to them and thus the information given to them and thus the entire governance system was shortentire governance system was short--circuitedcircuited

•• Andersen, as both auditors and consultants, Andersen, as both auditors and consultants, were directly dealing with management were directly dealing with management

Enron Enron –– Governance and ControlsGovernance and Controls

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EnronEnron’’s Governance and Controlss Governance and Controls•• Andersen was involved in the disguising of Andersen was involved in the disguising of

transactions that were not disclosed to the transactions that were not disclosed to the boardboard

•• Financial reports were misleadingFinancial reports were misleading•• Directors were unaware of whether policies Directors were unaware of whether policies

were followed, or if procedures were were followed, or if procedures were complied withcomplied with

Enron Enron –– Governance and ControlsGovernance and Controls

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Issues concerning the banksIssues concerning the banks•• Some banks were found to have been aware Some banks were found to have been aware

of the sham transactions such as the of the sham transactions such as the ‘‘prepaysprepays’’, that is, prepayments for future , that is, prepayments for future energy delivery were recorded as current energy delivery were recorded as current operating revenues and cash flows operating revenues and cash flows

•• One bank that had reinsured its loans to One bank that had reinsured its loans to Enron, found that reinsurers refused to pay Enron, found that reinsurers refused to pay up because they argued that the bank knew up because they argued that the bank knew about the risks about the risks

Enron Enron –– BanksBanks’’ involvementinvolvement

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•• There is no doubt that the banks funding There is no doubt that the banks funding Enron must have known that the company Enron must have known that the company was involved in creative accounting and was involved in creative accounting and manipulation of its cash flow disclosuresmanipulation of its cash flow disclosures

•• EnronEnron’’s management adopted tax s management adopted tax transactions that avoided tax and generated transactions that avoided tax and generated financial statement earningsfinancial statement earnings

•• Extremely complicated transactions were Extremely complicated transactions were engineered by outside advisors including engineered by outside advisors including AndersenAndersen

Enron Enron –– BanksBanks’’ involvementinvolvement

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Enron Enron -- The AftermathThe Aftermath

•• Many other large companies such Xerox Many other large companies such Xerox made restatements of their accountsmade restatements of their accounts

•• The SarbanesThe Sarbanes--Oxley Act was issued in July Oxley Act was issued in July 20022002

•• The accounting professionThe accounting profession’’s credibility was s credibility was heavily erodedheavily eroded

Enron Enron –– The AftermathThe Aftermath

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•• Indictment (charging) of corporate Indictment (charging) of corporate executivesexecutives

•• Key corporate governance reforms Key corporate governance reforms commenced with new blueprints for commenced with new blueprints for accountability, transparency, independence, accountability, transparency, independence, objectivity and executive remunerationobjectivity and executive remuneration

Enron Enron –– The AftermathThe Aftermath

Enron Enron -- The AftermathThe Aftermath

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Case Study 2 Case Study 2 -- Arthur AndersenArthur Andersen•• Premonition of Arthur AndersenPremonition of Arthur Andersen’’s demise?s demise?

““The day Arthur Andersen loses the public trust is The day Arthur Andersen loses the public trust is the day we go out of businessthe day we go out of business””

[Steve [Steve SamekSamek, Country Managing Partner, Arthur Andersen US, on the , Country Managing Partner, Arthur Andersen US, on the firmfirm’’s Independence and Ethical Standards CD ROM for staff, 1999]s Independence and Ethical Standards CD ROM for staff, 1999]

•• Arthur Andersen, the prestigious global Arthur Andersen, the prestigious global accounting firm, established in 1913, with accounting firm, established in 1913, with 85,000 employees, went out of business in 85,000 employees, went out of business in 20022002

Case Study Case Study –– Arthur AndersenArthur Andersen

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•• CoCo--founded by 28founded by 28--year old Arthur year old Arthur Andersen, an accounting professor, in 1913Andersen, an accounting professor, in 1913

•• Quickly built up a significant reputation for Quickly built up a significant reputation for integrityintegrity

•• In 1954, Arthur Andersen began consulting In 1954, Arthur Andersen began consulting services and by 1978 had become the largest services and by 1978 had become the largest professional services firm in the world professional services firm in the world

AA AA -- BackgroundBackground

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•• In 2000, its consulting arm, Andersen In 2000, its consulting arm, Andersen Consulting, split from Arthur Andersen and Consulting, split from Arthur Andersen and became Accenturebecame Accenture

•• Sophisticated training facilities in St Sophisticated training facilities in St Charles, Chicago, for its worldwide staffCharles, Chicago, for its worldwide staff

•• Ironically, recognised the need for formal Ironically, recognised the need for formal professional ethics trainingprofessional ethics training

•• Developed ethics cases and educated Developed ethics cases and educated accounting professors to teach ethicsaccounting professors to teach ethics

•• AndersenAndersen’’s changed culture was to lead to s changed culture was to lead to its demiseits demise


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•• When the consulting practice surpassed the When the consulting practice surpassed the audit function and became most profitable, audit function and became most profitable, the generation of revenue took priority the generation of revenue took priority

•• That is when Andersen began to lose its way That is when Andersen began to lose its way –– the culture became one of generating the culture became one of generating revenue with public service becoming a revenue with public service becoming a poor poor lastlast

•• Was the first international accounting firm Was the first international accounting firm convicted on criminal charges because of its convicted on criminal charges because of its involvement in Enroninvolvement in Enron


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•• Andersen had a series of major audit Andersen had a series of major audit failures at:failures at:–– Waste Management (US);Waste Management (US);–– Sunbeam (US);Sunbeam (US);–– Arizona Baptist Foundation (US);Arizona Baptist Foundation (US);–– Global Crossing (US);Global Crossing (US);–– WorldCom (US); WorldCom (US); –– Enron (US); Enron (US); –– Bond Corporation (Aus);Bond Corporation (Aus);–– HIH (Aus).HIH (Aus).


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•• Indication of a lack of focus on audit business, Indication of a lack of focus on audit business, with acceptance of greater audit risk and thus with acceptance of greater audit risk and thus less analysis and fewer tests when examining less analysis and fewer tests when examining the financial statements of a corporationthe financial statements of a corporation

•• More importantly, these failures are arguably More importantly, these failures are arguably indicative of a deteriorating professional indicative of a deteriorating professional culture at Andersen in the 1990sculture at Andersen in the 1990s

•• When the consulting practice surpassed the When the consulting practice surpassed the audit function and became the most profitable, audit function and became the most profitable, the generation of revenue took prioritythe generation of revenue took priority


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•• A good reference by Barbara Ley Toffler, A good reference by Barbara Ley Toffler, Final AccountingFinal Accounting-- ambition, greed and the fall ambition, greed and the fall of Arthur Andersenof Arthur Andersen, (Broadway Books, New , (Broadway Books, New York, 2003), describing the cultural change York, 2003), describing the cultural change that led to Andersenthat led to Andersen’’s undoings undoing

•• Toffler was formerly partner Toffler was formerly partner –– in in –– charge of charge of the Ethics and Responsible Business Practices the Ethics and Responsible Business Practices Division, Arthur Andersen, US, 1995 Division, Arthur Andersen, US, 1995 –– 1999 1999

•• Previously she was a business ethics professor Previously she was a business ethics professor at Harvard University and later ran her own at Harvard University and later ran her own consulting practiceconsulting practice

AA AA -- ReferenceReference

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Key Issues regarding Arthur AndersenKey Issues regarding Arthur Andersen

•• The auditors became identified with large The auditors became identified with large audit clients and hence the strong desire to audit clients and hence the strong desire to maintain clients; audit personnel even look maintain clients; audit personnel even look forward to joining clients as a possible forward to joining clients as a possible future career path future career path

•• Innovative audit approach devised to Innovative audit approach devised to perform an audit with minimum time but perform an audit with minimum time but requiring a higher level of analyses requiring a higher level of analyses

AA AA –– Key IssuesKey Issues

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•• Judgement sampling gave way to statistical Judgement sampling gave way to statistical sampling, and then to strategic risk auditingsampling, and then to strategic risk auditing

•• Tighter time budgets with broadened focus Tighter time budgets with broadened focus on other nonon other non--audit outcomes, leading to audit outcomes, leading to services which provided advice on business services which provided advice on business processesprocesses



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•• Growing conflicts between serving the Growing conflicts between serving the management team and maintaining the management team and maintaining the interest of the shareholders were recognised interest of the shareholders were recognised but not reinforced with ethical principlesbut not reinforced with ethical principles

•• Lack of ethical culture from top managementLack of ethical culture from top management•• Flaw in internal controls for quality audit Flaw in internal controls for quality audit ––

auditaudit partner overriding other reviewspartner overriding other reviews•• Apparent mistakes on Enron as well as at Apparent mistakes on Enron as well as at

several other clientsseveral other clients



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•• IncompetenceIncompetence•• Judgement errors as to the significance of Judgement errors as to the significance of

audit findingsaudit findings•• Lack of supporting information for audits Lack of supporting information for audits

and failure to follow upand failure to follow up•• Misunderstanding of fundamental fiduciary Misunderstanding of fundamental fiduciary

duties of auditorsduties of auditors•• The famous paper shredding of the Enron The famous paper shredding of the Enron

paperspapers



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Case Study 3 Case Study 3 -- WorldComWorldCom•• WorldCom was the second largest US WorldCom was the second largest US

telecommunications giant and almost 70% telecommunications giant and almost 70% larger than Enron in assetslarger than Enron in assets

•• During the 15 years of its existence, the During the 15 years of its existence, the company grew at a scorching pace, fuelled company grew at a scorching pace, fuelled by the almost insatiable appetite of its by the almost insatiable appetite of its former chief executive officer (CEO) former chief executive officer (CEO) Bernard J. Bernard J. EbbersEbbers for acquiring companiesfor acquiring companies

Case Study Case Study –– WorldComWorldCom

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•• As long as the stock market boomed and the As long as the stock market boomed and the dot com business expanded recklessly, not a dot com business expanded recklessly, not a thought was given to the fundamental thought was given to the fundamental financials of the companyfinancials of the company

•• Wall Street analysts and investment bankers Wall Street analysts and investment bankers looked the other way, even as auditors failed looked the other way, even as auditors failed to exercise due diligence to exercise due diligence

WorldCom WorldCom -- BackgroundBackground

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•• In March 2002, the U.S. Securities and In March 2002, the U.S. Securities and Exchange Commission (SEC) sought Exchange Commission (SEC) sought information from WorldCom about its information from WorldCom about its accounting procedures and about loans it accounting procedures and about loans it had extended to its officers had extended to its officers

•• Soon after, Standard & Poor's and Moody's Soon after, Standard & Poor's and Moody's downgraded WorldCom's credit ratings and downgraded WorldCom's credit ratings and the share price collapsedthe share price collapsed

WorldCom WorldCom -- BackgroundBackground


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•• In April 2002, In April 2002, EbbersEbbers resigned as CEO after resigned as CEO after a Securities and Exchange (SEC) probe a Securities and Exchange (SEC) probe revealed that WorldCom had lent US$340 revealed that WorldCom had lent US$340 million to him to cover loans that he took to million to him to cover loans that he took to buy his own sharesbuy his own shares

•• On 25 June, the company announced that On 25 June, the company announced that improper accounting of US$3.8 billion in improper accounting of US$3.8 billion in expenses had covered up a net loss for 2001 expenses had covered up a net loss for 2001 and the first quarter of 2002 and the first quarter of 2002

Case Study Case Study –– WorldComWorldCom


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•• On 26 June, the SEC filed a suit alleging On 26 June, the SEC filed a suit alleging "securities fraud" against WorldCom in a "securities fraud" against WorldCom in a district court in New Yorkdistrict court in New York

•• It alleged that WorldCom's top management It alleged that WorldCom's top management "disguised its true operating performance" "disguised its true operating performance" and "misled investors about its reported and "misled investors about its reported earnings" earnings"

WorldCom WorldCom –– the lawsuitthe lawsuit

The LawsuitThe Lawsuit

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Accounting SkewedAccounting Skewed

•• By classifying ordinary dayBy classifying ordinary day--toto--day expenses day expenses as investments and longas investments and long--term expenses term expenses associated with the acquisition of capital associated with the acquisition of capital assets, WorldCom was able to hide expenses assets, WorldCom was able to hide expenses to the tune of nearly $4 billion and instead to the tune of nearly $4 billion and instead show this as profitsshow this as profits

•• Nothing complicated; Accounting 101 Nothing complicated; Accounting 101 journal entriesjournal entries……

WorldCom WorldCom –– Accounting skewedAccounting skewed

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WorldCom AftermathWorldCom Aftermath

•• The shock of investors turned to anger as it The shock of investors turned to anger as it became known that Arthur Andersen, the became known that Arthur Andersen, the nownow--disgraced auditing and consulting firm, disgraced auditing and consulting firm, and a player in the Enron saga, was and a player in the Enron saga, was WorldCom's auditor too WorldCom's auditor too

WorldCom WorldCom -- AftermathAftermath

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•• The company, which inflated reported The company, which inflated reported earnings by $11 billion or more and cost earnings by $11 billion or more and cost investors as much as $200 billion, has also investors as much as $200 billion, has also produced criminal cases against various produced criminal cases against various former WorldCom executives as well as former WorldCom executives as well as numerous private lawsuitsnumerous private lawsuits

WorldCom WorldCom -- AftermathAftermath

WorldCom AftermathWorldCom Aftermath

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What happened to What happened to EbbersEbbers??•• ExEx--CEO Bernard CEO Bernard EbbersEbbers turned himself in turned himself in

to the FBI in March 2004, later pleading not to the FBI in March 2004, later pleading not guilty to charges he helped mastermind the guilty to charges he helped mastermind the biggest accounting fraud in the history of biggest accounting fraud in the history of American businessAmerican business

•• The trial of The trial of EbbersEbbers on conspiracy to defraud on conspiracy to defraud began in January 2005 and he has since began in January 2005 and he has since been convicted and sentenced to 25 years been convicted and sentenced to 25 years in prison in prison

WorldCom WorldCom -- EbbersEbbers

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Lawsuit SettlementLawsuit Settlement•• In January 2005,10 former directors of In January 2005,10 former directors of

WorldCom agreed to pay US$18 million of WorldCom agreed to pay US$18 million of their own money to settle a classtheir own money to settle a class--action action lawsuit by investors who lost hundreds of lawsuit by investors who lost hundreds of millions of dollars when the company millions of dollars when the company collapsedcollapsed

•• This settlement sets a precedent for personal This settlement sets a precedent for personal liability by directors liability by directors

WorldCom WorldCom -- SettlementSettlement

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Further litigationFurther litigation

•• The 10 former WorldCom directors also The 10 former WorldCom directors also agreed to cooperate with lawyers against agreed to cooperate with lawyers against remaining defendants in remaining defendants in WordComWordComsecurities litigation, including the now securities litigation, including the now defunct Arthur Andersen and 16 banks that defunct Arthur Andersen and 16 banks that sold WorldCom bonds to the publicsold WorldCom bonds to the public

WorldCom WorldCom –– Further litigationFurther litigation

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Case Study 4 Case Study 4 -- ParmalatParmalat•• ParmalatParmalat, a huge international Italian , a huge international Italian

company, announced on Friday 19 company, announced on Friday 19 December 2003 that the Bank of America December 2003 that the Bank of America had reported that a document certifying had reported that a document certifying assets worth 3.95billion Euros in the assets worth 3.95billion Euros in the Cayman Islands was false Cayman Islands was false

•• The document, dated 6 March 2003, had The document, dated 6 March 2003, had been used to certify the 2002 accounts of a been used to certify the 2002 accounts of a subsidiary, subsidiary, BonlatBonlat Financing CorporationFinancing Corporation

Case Case SudySudy -- ParmalatParmalat

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InvestigationInvestigation•• On 20 December, Italian prosecutors raided On 20 December, Italian prosecutors raided

the Italian offices of Grant Thornton and the Italian offices of Grant Thornton and Deloitte & Deloitte & ToucheTouche, , ParmalatParmalat’’ss auditorsauditors

•• On 24 December 2003, On 24 December 2003, ParmalatParmalat went into went into administration administration

•• On 31 December 2003, the Grant Thornton On 31 December 2003, the Grant Thornton SpASpA chairman of the Italian partnership chairman of the Italian partnership resignedresigned

ParmalatParmalat -- InvestigationInvestigation

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Arrests and LawsuitsArrests and Lawsuits•• Partner in charge of the audit and the Partner in charge of the audit and the

chairman of the firm were arrested on chairman of the firm were arrested on suspicion of falsely certifying suspicion of falsely certifying PamalatPamalat’’ssbalance sheetsbalance sheets

•• On 6 January 2004, On 6 January 2004, ParmalatParmalat auditors auditors Deloitte and Grant Thornton were cited Deloitte and Grant Thornton were cited along with Citicorp and other advisors in a along with Citicorp and other advisors in a class action suit bought on behalf of US class action suit bought on behalf of US investorsinvestors

ParmalatParmalat –– Arrests and LawsuitsArrests and Lawsuits

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ParmalatParmalat and Grant Thorntonand Grant Thornton•• On 8 January 2004, Grant Thornton On 8 January 2004, Grant Thornton

International severed ties with the Italian International severed ties with the Italian Grant Thornton firmGrant Thornton firm

•• Fortunately for Grant Thornton, it did Fortunately for Grant Thornton, it did not have the unique worldnot have the unique world--wide wide partnership structure of Arthur partnership structure of Arthur Andersen, and was thus able to distance Andersen, and was thus able to distance itself from its Italian affiliateitself from its Italian affiliate

ParmalatParmalat –– Grant ThorntonGrant Thornton

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Impact of Impact of ParmalatParmalat and Criminal and Criminal ProceduresProcedures

•• The Italian accountants responsible for The Italian accountants responsible for internal and external audits at the internal and external audits at the ParmalatParmalat dairy group were among the 29 dairy group were among the 29 firms and individuals named in May firms and individuals named in May 2004 by prosecutors who are seeking to 2004 by prosecutors who are seeking to bring criminal charges arising from the bring criminal charges arising from the affairaffair

ParmalatParmalat -- ImpactImpact

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Case Study 5 Case Study 5 -- HIH InsuranceHIH Insurance•• In March 2001, AustraliaIn March 2001, Australia’’s largest insurance s largest insurance

company, HIH Insurance Limited, was company, HIH Insurance Limited, was placed into provisional liquidation placed into provisional liquidation

•• This followed actions taken by the This followed actions taken by the Australian Securities and Investments Australian Securities and Investments Commission (ASIC) to seek suspension of Commission (ASIC) to seek suspension of trading in HIH shares, and to commence a trading in HIH shares, and to commence a formal investigation into its corporate formal investigation into its corporate governance, disclosure and possible governance, disclosure and possible insolvent trading activitiesinsolvent trading activities

Case Case SudySudy –– HIH InsuranceHIH Insurance

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Insurance RepercussionsInsurance Repercussions

•• The HIH directorsThe HIH directors’’ assets were frozen in assets were frozen in May 2001May 2001

•• Due to the unprecedented impact the Due to the unprecedented impact the collapse had on the operations of businesses collapse had on the operations of businesses left without insurance cover, the Australian left without insurance cover, the Australian government approved a $500 milliongovernment approved a $500 million--plus plus rescue package and ordered a Royal rescue package and ordered a Royal Commission into the HIH collapseCommission into the HIH collapse

HIH HIH –– Insurance RepercussionsInsurance Repercussions

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Court ActionCourt Action

•• At the same time, ASIC launched court At the same time, ASIC launched court action against the exaction against the ex--CEO Ray Williams CEO Ray Williams and subsequently criminal proceedings and subsequently criminal proceedings against one exagainst one ex--director, Rodney Adler director, Rodney Adler

•• Both Williams and Adler were jailed for up Both Williams and Adler were jailed for up to 4 yearsto 4 years

HIH HIH –– Court ActionCourt Action

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Court ActionCourt Action

•• This action against the HIH executives was This action against the HIH executives was followed by the HIH liquidator filing a suit followed by the HIH liquidator filing a suit against the by then defunct auditor, Arthur against the by then defunct auditor, Arthur Andersen, and also an actuary, for Andersen, and also an actuary, for negligencenegligence

•• Still not resolvedStill not resolved

HIH HIH –– Court ActionCourt Action

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Auditor AccountabilityAuditor Accountability

•• The auditor of HIH was alleged to have The auditor of HIH was alleged to have ceded to management on controversial ceded to management on controversial accounting issues, breached professional accounting issues, breached professional standards and failed to display independencestandards and failed to display independence

•• HIHHIH’’ss accounts overstated profits and accounts overstated profits and understated liabilitiesunderstated liabilities

HIH HIH –– Auditor AccountabilityAuditor Accountability

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Conflict of InterestConflict of Interest•• Moreover, three former Arthur Andersen Moreover, three former Arthur Andersen

partners sat on the board of HIH, with partners sat on the board of HIH, with various consultancy arrangements and close various consultancy arrangements and close relationships between the former partners relationships between the former partners and the audit team and the audit team

•• HIH was placed into liquidation with HIH was placed into liquidation with estimated losses of $5 billionestimated losses of $5 billion

HIH HIH –– Conflict of InterestConflict of Interest

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Financial Failures of HIHFinancial Failures of HIH•• Wastage, extravagance and trading lossesWastage, extravagance and trading losses•• A spiral of under provision, claims made out A spiral of under provision, claims made out

of inadequate reserves and current income, of inadequate reserves and current income, inadequately priced policiesinadequately priced policies

•• The HIH Group reported profits when it was The HIH Group reported profits when it was making lossesmaking losses

•• Accounting profits were generated by Accounting profits were generated by questionable accounting treatments, usually questionable accounting treatments, usually by oneby one--off end of the year entries and off end of the year entries and aggressive accounting practicesaggressive accounting practices

HIH HIH –– Financial FailuresFinancial Failures

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Financial Failures of HIHFinancial Failures of HIH

•• Intangible assets, such as goodwill, future Intangible assets, such as goodwill, future income tax benefits, and deferred costs, income tax benefits, and deferred costs, amounted to 23% of shareholder equity in amounted to 23% of shareholder equity in 1997; by 1999, it rose to 60%; of the $939 1997; by 1999, it rose to 60%; of the $939 million shareholder equity in 2000, $703 million shareholder equity in 2000, $703 million was intangiblesmillion was intangibles


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Financial Failures of HIHFinancial Failures of HIH•• A failure of a new electronic financial A failure of a new electronic financial

system rendered incorrect the figures on system rendered incorrect the figures on debtors and premiums, and alongside the debtors and premiums, and alongside the lack of reconciliation of the general and lack of reconciliation of the general and subsidiary ledgers, added further subsidiary ledgers, added further complicationscomplications

•• There were problems with the functioning of There were problems with the functioning of the audit committeethe audit committee


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Composition of the BoardComposition of the Board•• Chairman Cohen was both the chair of Chairman Cohen was both the chair of

the board and of the audit committee; he the board and of the audit committee; he admitted he did not read the auditorsadmitted he did not read the auditors’’presentations and rarely supported the presentations and rarely supported the auditors over management auditors over management

•• Three former Andersen partners Three former Andersen partners (including Cohen) sat on the board and (including Cohen) sat on the board and audit committee of HIH; two of the audit audit committee of HIH; two of the audit committee members were lawyers with committee members were lawyers with consulting interests with HIHconsulting interests with HIH

HIH HIH –– Composition of the BoardComposition of the Board

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Key findingsKey findings•• Inadequate audit methodology was used Inadequate audit methodology was used ––

relying on the HIH consulting actuaryrelying on the HIH consulting actuary•• The HIH Royal Commission summarised The HIH Royal Commission summarised

the issues including:the issues including:–– Financial failuresFinancial failures–– Mismanagement of risksMismanagement of risks–– Mismanagement of cultureMismanagement of culture–– Corporate governance failuresCorporate governance failures–– Accounting frauds and lack of Accounting frauds and lack of

independenceindependence

HIH HIH –– Key findings Key findings

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Case Study 5 Case Study 5 -- One.TelOne.Tel

•• The Australian telecommunications The Australian telecommunications company was placed in administration and company was placed in administration and subsequently liquidated in May 2001, with subsequently liquidated in May 2001, with estimated debts of A$600 million estimated debts of A$600 million

•• The Australian Securities and Investment The Australian Securities and Investment Commission (ASIC) announced an Commission (ASIC) announced an investigation into One.Tel for potential investigation into One.Tel for potential breaches of the Corporations Actbreaches of the Corporations Act

Case Study Case Study –– One.TelOne.Tel

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Alleged WrongdoingAlleged Wrongdoing•• The alleged breaches included:The alleged breaches included:

–– Insolvent tradingInsolvent trading–– Insider trading Insider trading –– Misleading market disclosuresMisleading market disclosures

•• The joint The joint CEOsCEOs received bonuses of A$7 received bonuses of A$7 million each, while the company reported an million each, while the company reported an A$291 million loss A$291 million loss

One.TelOne.Tel –– Alleged WrongdoingAlleged Wrongdoing

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ASIC Investigation into ASIC Investigation into One.TelOne.Tel•• Creative accounting in capitalising Creative accounting in capitalising

expenses had attracted expenses had attracted ASICASIC’’ss interest, interest, which insisted that accounting practices which insisted that accounting practices must be changed, leading to a $245 must be changed, leading to a $245 million loss reported in August 2000million loss reported in August 2000

•• ASIC subsequently brought an action ASIC subsequently brought an action against former executive directors and against former executive directors and the chairman for alleged failures and for the chairman for alleged failures and for withholding information and insolvent withholding information and insolvent trading trading

One.TelOne.Tel –– ASIC InvestigationASIC Investigation

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Case Study 6 Case Study 6 -- Harris Harris ScarfeScarfe•• The Australian retailer had been trading for The Australian retailer had been trading for

150 years before it was placed into 150 years before it was placed into voluntary administration by the directors in voluntary administration by the directors in April 2001April 2001

•• Harris Harris ScarfeScarfe owed A$93 million to owed A$93 million to unsecured creditors and had A$50 million in unsecured creditors and had A$50 million in company debtcompany debt

Case Study Case Study –– Harris Harris ScarfeScarfe

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ASIC Investigation into Harris ASIC Investigation into Harris ScarfeScarfe•• ASIC investigations found that the company ASIC investigations found that the company

had systematically overstated its profits for had systematically overstated its profits for over 6 yearsover 6 years

•• Its CFO, Alan Hodgson, had altered its Its CFO, Alan Hodgson, had altered its accounts to show a misleading picture of accounts to show a misleading picture of financial health, based on instructions by the financial health, based on instructions by the managing directormanaging director

•• The CFO was jailed for 6 yearsThe CFO was jailed for 6 years

Harris Harris ScarfeScarfe –– ASIC ASIC InvestigationlInvestigationl

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Lawsuits regarding Harris Lawsuits regarding Harris ScarfeScarfe•• The ANZ bank has filed a suit against the The ANZ bank has filed a suit against the

auditors Ernst and Young and auditors Ernst and Young and PricewaterhouseCoopers, seeking recovery PricewaterhouseCoopers, seeking recovery of A$70 million and alleging their of A$70 million and alleging their negligencenegligence

•• A shareholder class action was also filed A shareholder class action was also filed against the directors for false and misleading against the directors for false and misleading conduct over a fiveconduct over a five--year periodyear period

Harris Harris ScarfeScarfe -- LawsuitsLawsuits

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Impact on EmployeesImpact on Employees

•• A management buyout of the company's A management buyout of the company's assets in November 2001 secured the assets in November 2001 secured the future of the retailer's 23 stores in South future of the retailer's 23 stores in South Australia, Victoria and Tasmania, as Australia, Victoria and Tasmania, as well as the jobs of 1,700 employeeswell as the jobs of 1,700 employees

Harris Harris ScarfeScarfe –– Impact on EmployeesImpact on Employees

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A Spate of ReformsA Spate of Reforms•• The previous discussion gives an overview The previous discussion gives an overview

of the seminal events that demonstrated the of the seminal events that demonstrated the greed and failure of ethical standards in greed and failure of ethical standards in both business and the profession, leading both business and the profession, leading to a spate of reviews and reforms, to a spate of reviews and reforms, including the following:including the following:–– SarbanesSarbanes--Oxley Act 2002 in the USOxley Act 2002 in the US–– CLERP 9 (Audit Reform and Corporate CLERP 9 (Audit Reform and Corporate

Disclosure) Act 2004 in AusDisclosure) Act 2004 in Aus–– Many other reviews and regulationsMany other reviews and regulations

Legislative ReformsLegislative Reforms

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SarbanesSarbanes--Oxley Act 2002Oxley Act 2002•• The SarbanesThe Sarbanes-- Oxley Act (SOX) constitutes Oxley Act (SOX) constitutes

the most far reaching US security law the most far reaching US security law changes since 1933 and has created an changes since 1933 and has created an international regulatory framework for international regulatory framework for corporations seeking access to the US corporations seeking access to the US capital markets and their auditorscapital markets and their auditors

•• International companies listed on the US International companies listed on the US stock exchanges have to comply with SOXstock exchanges have to comply with SOX

SarbanesSarbanes--Oxley Act 2002Oxley Act 2002

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SOX SOX –– New FrameworkNew Framework•• SOX also established a new framework for SOX also established a new framework for

the US accounting profession that replaces the US accounting profession that replaces selfself--regulation by the profession with a regulation by the profession with a Public Company Accounting Oversight Public Company Accounting Oversight Board (PCAOB)Board (PCAOB)

•• The PCAOB oversees all accounting firms The PCAOB oversees all accounting firms that audit companies registered with the that audit companies registered with the Securities and Exchange Commission (SEC)Securities and Exchange Commission (SEC)

SOX SOX –– New New FramworkFramwork

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Purpose of SOXPurpose of SOX

•• SOX was enacted to restore public SOX was enacted to restore public confidence in the corporate system re:confidence in the corporate system re:–– Roles and accountabilities of directors, board Roles and accountabilities of directors, board

committees and auditorscommittees and auditors–– Reduction of conflicts of interest that influence Reduction of conflicts of interest that influence

directors and auditors so that they exercise directors and auditors so that they exercise loyalty, independent judgement and objectivity loyalty, independent judgement and objectivity in the best interests of the shareholders and the in the best interests of the shareholders and the companycompany

SOX SOX -- PurposePurpose

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Purpose of SOXPurpose of SOX–– Ensuring directors are sufficiently informed Ensuring directors are sufficiently informed

regarding the companyregarding the company’’s affairss affairs–– Ensuring directors possess the required Ensuring directors possess the required

competence and other expertise (especially competence and other expertise (especially financial)financial)

–– Ensuring financial reports are accurate, Ensuring financial reports are accurate, complete, transparent and understandablecomplete, transparent and understandable

–– Ensuring oversight of auditors and that their Ensuring oversight of auditors and that their appointment and operation are appropriate and appointment and operation are appropriate and in the public interestin the public interest

SOX SOX -- PurposePurpose

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SOX SOX –– Accountants and AuditorsAccountants and Auditors•• Key provisions of SOX concerning Key provisions of SOX concerning

accountants and auditors are:accountants and auditors are:–– The audit subcommittee of the board must be The audit subcommittee of the board must be

directly responsible for the appointment, directly responsible for the appointment, compensation and oversight of the accounting compensation and oversight of the accounting firm employedfirm employed

–– Procedures must be in place to receive and Procedures must be in place to receive and address complaints including anonymous address complaints including anonymous complaints and to approve noncomplaints and to approve non--audit services audit services engagements with accounting engagements with accounting firm(sfirm(s))

SOX SOX –– Accountants and AuditorsAccountants and Auditors

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–– All members of the subcommittee must be All members of the subcommittee must be financially literate, be independent directors, financially literate, be independent directors, and the auditors are to report to the audit and the auditors are to report to the audit subcommitteesubcommittee

–– Meetings are to be held without the presence of Meetings are to be held without the presence of managementmanagement

–– Requirements for certification by Requirements for certification by CEOsCEOs and and CFOsCFOs on the adequacy of internal control and on the adequacy of internal control and financial reportsfinancial reports



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–– Any undue influence on the conduct of the Any undue influence on the conduct of the audit is illegalaudit is illegal

–– A list of matters concerning accounting A list of matters concerning accounting policies, alternative accounting treatments, policies, alternative accounting treatments, review of and attestation of management review of and attestation of management assertions, and material weaknesses in internal assertions, and material weaknesses in internal controls, are all required to be reported by controls, are all required to be reported by auditors to the audit subcommittee of the boardauditors to the audit subcommittee of the board



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•• The PCAOB will ensure the compliance The PCAOB will ensure the compliance with auditing standards, quality controls and with auditing standards, quality controls and independence by auditorsindependence by auditors

•• Mandatory rotation of audit partners (5 Mandatory rotation of audit partners (5 years), prohibition of retired auditors joining years), prohibition of retired auditors joining the board within a certain periodthe board within a certain period



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CLERP 9CLERP 9•• Following the development of the Following the development of the

Commonwealth Law and Economic Commonwealth Law and Economic Reform Program discussion paper No. 9 Reform Program discussion paper No. 9 (CLERP 9), the paper was subsequently (CLERP 9), the paper was subsequently passed into law passed into law

•• It became the CLERP 9 (Audit Reform It became the CLERP 9 (Audit Reform and Corporate Disclosure) Act 2004 and Corporate Disclosure) Act 2004 (usually referred as the CLERP Act (usually referred as the CLERP Act 2004) and laid down certain 2004) and laid down certain requirementsrequirements

CLERP Act 2004CLERP Act 2004

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Financial Reporting CouncilFinancial Reporting Council•• Both accounting and auditing standards Both accounting and auditing standards

setting are now under the control of the setting are now under the control of the Financial Reporting Council (FRC), a Financial Reporting Council (FRC), a government appointed body government appointed body –– both areas both areas previously controlled by the accounting previously controlled by the accounting professionprofession

•• The FRC oversees audit independence and The FRC oversees audit independence and is required to report to the Australian is required to report to the Australian Treasurer annually on audit independence Treasurer annually on audit independence mattersmatters

Financial Reporting CouncilFinancial Reporting Council

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•• Retention of audit working papers for 7 Retention of audit working papers for 7 yearsyears

•• Certain audit competency standards are to Certain audit competency standards are to be establishedbe established

•• A new audit liability framework is A new audit liability framework is introducedintroduced

•• Prohibition of conflict of interest situations Prohibition of conflict of interest situations and a list of nonand a list of non--audit engagements by audit engagements by auditorsauditors



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•• Four years waiting period for a retiring Four years waiting period for a retiring partner to join an audit clientpartner to join an audit client

•• Rotation of lead and review partners every 5 Rotation of lead and review partners every 5 years, with a minimum cooling off period years, with a minimum cooling off period of 2 years before reassignment to the audit of 2 years before reassignment to the audit

•• Auditors are required to attend AGMs and Auditors are required to attend AGMs and to answer questionsto answer questions

•• Auditors are required to report any breach of Auditors are required to report any breach of the law by the client on a timely basisthe law by the client on a timely basis



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ConclusionConclusion•• The collapses of Enron, WorldCom, Arthur The collapses of Enron, WorldCom, Arthur

Andersen, HIH etc. and the resultant loss of Andersen, HIH etc. and the resultant loss of billions by shareholders, have led to seminal billions by shareholders, have led to seminal changes in regulation of the accounting changes in regulation of the accounting profession and businessprofession and business

•• Business is now under pressure to have Business is now under pressure to have more transparent corporate governance more transparent corporate governance processes and are now subject to increased processes and are now subject to increased regulation and compliance requirements regulation and compliance requirements

ConclusionConclusion

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•• The profession has effectively lost its self The profession has effectively lost its self regulatory statusregulatory status

•• We are all paying the price for corporate We are all paying the price for corporate greed and the failure of ethical standards in greed and the failure of ethical standards in the professionthe profession

•• It will take a number of years for the It will take a number of years for the accounting profession to rebuild the trust, accounting profession to rebuild the trust, credibility and regulatory independence it credibility and regulatory independence it once enjoyedonce enjoyed



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