Following the Money
The Enron Failure and the State of Corporate Disclosure
Publication Year: 2003
A few years ago, Americans held out their systems of corporate governance and financial disclosure as models to be emulated by the rest of the world. But in late 2001 U.S. policymakers and corporate leaders found themselves facing the largest corporate accounting scandals in American history. The spectacular collapses of Enron and Worldcom as well as the discovery of accounting irregularities at other large U.S. companies seemed to call into question the efficacy of the entire system of corporate governance in the United States. In response, Congress quickly enacted a comprehensive package of reform measures in what has come to be known as the Sarbanes-Oxley Act. The New York Stock Exchange and the NASDAQ followed by making fundamental changes to their listing requirements. The private sector acted as well. Accounting firms watching in horror as one of their largest, Arthur Andersen, collapsed after a criminal conviction for document shredding tightened their auditing procedures. Stock analysts and ratings agencies, hit hard by a series of disclosures about their failings, changed their practices as well. Will these reforms be enough? Are some counterproductive? Are other shortcomings in the disclosure system still in need of correction? These are among the questions that George Benston, Michael Bromwich, Robert E. Litan, and Alfred Wagenhofer address in Following the Money. While the authors agree that the U.S. system of corporate disclosure and governance is in need of change, they are concerned that policymakers may be overreacting in some areas and taking actions in others that may prove to be ineffective or even counterproductive. Using the Enron case as a point of departure, the authors argue that the major problem lies not in the accounting and auditing standards themselves, but in the system of enforcing those standards. Rather than attempting to craft a single set of accounting and reporting standards for all companies throughout the world, the authors advise policymakers to allow competition between the two major sets of standards: Generally Accepted Accounting Principles and International Financial Reporting Standards. The authors also believe that the corporate disclosure system needs to be updated to reflect changes in the underlying economy. In particular, they recommend new forms of disclosure for a variety of nonfinancial indicators to better enable investors and analysts to ascertain the source and nature of intangible assets. They also urge policymakers to exploit the advantages of the Internet by encouraging more frequent financial disclosures in a form that will make them more widely accessible and more easily used.
Published by: Brookings Institution Press
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Only a few short years ago, after the Asian financial crisis of 1997–98, Americans held out their systems of corporate governance and financial disclosure as models to be emulated by the rest of the world. Thomas Friedman, in his best-selling book The Lexus and the Olive Tree, cited these features of the U.S. economic system with approval. ...
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Chapter 1. The Crisis in Corporate Disclosure
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Only a few short years ago, the American system of corporate disclosure—the combination of accounting and auditing standards, the professionalism of auditors, and the rules and practices of corporate governance that are designed to ensure the timely dissemination of relevant and accurate corporate financial information—was championed as a model for the rest of the world. ...
Chapter 2. What's Wrong--and Right--with Corporate Accounting and Auditing in the United States
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Criticism of corporate accounting is not new. Strident complaints about dishonest and deceptive accounting in the 1920s1 and the distress of the Great Depression led to the creation in 1933 of the Securities and Exchange Commission. The SEC was given the authority to prescribe, monitor, and enforce accounting rules that presumably would help investors make informed decisions. ...
Chapter 3. Fixing Corporate Disclosure
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Many proposals for “fixing” the U.S. disclosure system have been offered, and as we discuss in this chapter, some have been enacted by Congress and signed into law by the president. But while policymakers deliberated, the market itself engaged in a lot of “self-correction.” Managers and directors of many companies began paying far more attention to disclosure, ...
Chapter 4. Disclosure Challenges Ahead
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The continuing flow of accurate, relevant, and timely information is central to the functioning of capital markets. The accounting debacles of 2002 harshly reminded investors of this simple truth. When investors cannot trust the earnings figures companies publish, they fear buying stocks. ...
Appendix: What Are the Major Differences between GAAP and IFRS, and Why Do They Matter?
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Page Count: 126
Publication Year: 2003