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How to Read a Financial Report: Wringing Vital Signs Out of the Numbers by John A. Tracy

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21
AUDITS OF FINANCIAL REPORTS
IN THE POST - ENRON ERA
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174 Audits of fi nancial reports in the post-Enron era
Before getting into the discussion of audits of fi nancial reports
by independent certifi ed public accountants (CPAs), I should
open this chapter with a brief history of recent events. The
Enron scandal was the tipping point that caused Congress and
the public accounting profession to take action. During the
last two decades of the twentieth century, an incredible num-
ber of accounting fraud cases were splashed across the head-
lines WorldCom, Enron, Tyco, Ahold, Xerox, Rite Aid, Global
Crossing, HealthSouth, Waste Management, and Adelphia
Communications, to name just a few. Well - known and repu-
table CPA fi rms audited the fi nancial statements of these
companies.
When the fi nancial reporting frauds committed by these
companies became known, the market prices of their stock
shares plunged and their shareholders suffered huge losses.
Unfortunately, many employees of these companies had the bulk
of their retirement savings invested in their own companies
stock shares. Many of these businesses went into bankruptcy.
Frankly, I was astonished at the large number of accounting
frauds. There had been accounting frauds over the years in
the 1930s and a rash in the 1960s. The accounting frauds in the
1980s and 1990s were much more troublesome.
Most of the companies that cooked their books were audited
by the Big Five CPA fi rms, presumably the best auditors in
the world. One CPA fi rm Arthur Andersen was convicted of
obstruction of justice for destroying evidence in the Enron case.
Almost overnight Arthur Andersen ceased to be. Thousands of
its professional staff had to fi nd jobs with other CPA fi rms or
change their careers. The remaining Big Four CPA fi rms faced
lawsuits and regulatory sanctions for failing to discover fi nancial
reporting fraud perpetrated by their audit clients.
The surge in the number and the large scale of accounting
frauds caused Congress to pass the Sarbanes - Oxley Act of 2002
(SOX), which was signed into law by President George W. Bush.
Many radical reforms were instituted by this piece of legislation,
which I discuss in more detail later in the chapter. Auditors of
public companies are now under the jurisdiction of a new federal
regulatory agency. New responsibilities were imposed on corpo-
rate management and corporate audit committees.
In short, it s a new world for audits of fi nancial reports of pub-
lic companies both for the CPA fi rms doing the audits and for
the executives of the businesses being audited. The large major-
ity of businesses that did not engage in accounting fraud are pay-
ing the price for the problems caused by the companies that did.
Opening Comments
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