NORWALK, Conn. (AP) – By now its no secret one of Americas 10 largest companies might not have belonged among the biggest and best, after all. But heres a bit of news: The board responsible for closing the loopholes that became Enrons noose is nowhere near ready to prevent a repeat.
Accountants working for Enron puffed it up by quickly listing fat profits that sometimes failed to materialize. They enticed skittish buyers by hiding debt off the books.
In short, they got creative, and Edmund Jenkins, chairman of the Financial Accounting Standards Board, says it could take years to figure out how much of what was done, if any, can cleanly be labeled wrong.
FASB writes the standards that guide accountants in preparing financial statements of publicly traded companies.
Despite hundreds of news stories, the start of congressional hearings and an inquiry by the Securities and Exchange Commission, Jenkins said this week that the board remains in wait-and-see mode.
If you do rush to judgment on things, you are going to have situations where the result doesnt reflect the underlying facts, Jenkins said in an interview with The Associated Press. And that would lead to financial reporting that isnt transparent.
The transparency hes talking about is the ability of a fairly astute investor to figure out whats going on in a company by reading the financial statements prepared by in-house accountants and verified by outside auditors. It might be the only thing standing between investors and a blind rush toward ruin.
Enrons accounting statements fell far short. The company routinely formed off-the-books partnerships to shoulder debt that otherwise would have brought its share price down. Keeping just two such deals separate from Enrons own ledgers allowed Enron to inflate its 1997 profits by as much as 75 percent.
Ultimately, an external review prompted the company to restate three years of debt and revenue numbers, tipping its balance sheets sharply toward the red.
In theory, the Securities and Exchange Commission is responsible for regulating how companies prepare financial statements. In reality, the commission has always relied on the private sector to write the rules. Right now, its done by the Financial Accounting Standards Board (FASB) and to a lesser extent the American Institute for Certified Public Accountants (AICPA). Because they are private organizations and not part of the government, neither can prosecute an accountant for faulty practice, and the SEC only rarely invokes its authority to do so.
FASB IS responsible for establishing rules like the ones telling companies when they are allowed to record income from a sale. For example, one choice would be at the time a deal is struck, another after goods have been delivered and a third after a cash payment is actually received.
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Simple, right? Not in todays complex markets. In fact, questions like these account for more fraudulent and mistaken financial reporting than any other category.
What we try to do out of these unfortunate circumstances, Jenkins said of the Enron collapse, is to see, once we know the facts, what lessons can be learned and then try to continue to improve on things.
The process can take years. FASB researches accounting questions, circulates drafts for public comment and often further revises and redistributes the drafts. Each step takes months, and in the past FASB has resisted issuing narrow rulings in favor of taking more time to review the big picture.
Such care is needed in part to satisfy accountants, academics, corporate leaders and politicians, all of whom are affected by FASBs decisions. Moving cautiously also helps prevent adopting rules that carry unintended consequences.
In Enrons case, its particularly tricky. The company has long had a reputation for complicated bookkeeping. Even the brightest minds in the industry are having trouble piecing together exactly what Enron did and how.
But some industry watchers say thats not good enough.
Michael Granof, an accounting professor at the University of Texas at Austin, said FASB must strike a better balance between hearing out its constituents and getting things done.
The main criticism of FASB over the years has been that it has been much too slow, he said, a matter he blames squarely on auditors and politicians who pressure the group to slant its accounting standards in favor of rosy corporate earnings.
Its a tough fight, especially because FASB relies on the public accounting profession for more than half its annual budget.
That problem and others have come to light since the SEC started looking into Enrons accounting in mid-October, after the company reported a third-quarter loss of $618 million.
By November, Enron had corrected three years of financial statements. On Dec. 2, it declared bankruptcy, the largest company in U.S. history to go belly up. Thousands of employees were left without jobs and their retirement savings all but gone because the funds were heavily tied to Enrons stock. Other investors and creditors also have lost hundreds of millions.
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