http://emievil.hubpages.

com/hub/10-Scandals-That-Rocked-the-Accounting-World
Im an accountant. My profile says so. My resume highlights it. And yet, I have written only one hub about accounting (and that was looonnnggg time
ago). So here I am finding myself writing my second hub related to my profession (and my 49
th
all in all). I googled the phrase accounting scandals and
I was shocked by just how many they were. Shheeeessh, no wonder we are getting all these new accounting standards (IFRS???), auditing standards
(heard about the new ones coming in), reporting requirements (Sarbanes-Oxley, anyone?), etc., etc.
So, okay, in honor of my profession (although this hub is far from honoring it, really), I compiled some of the most famous (or infamous) of these
scandals. Some of these maybe well-known, some are not. I may have skipped over some more important ones but if I had, feel free to call my attention
to it.
So what exactly are accounting scandals? Let me just use Wikipedia's definition Accounting scandals, orcorporate accounting scandals, are
political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically
involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or
underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates. In other words, somebody did
something wrong and tried to cover it by cooking the (accounting) books, not necessarily in the same order.
Here are some of these scandals and how they rocked the accounting (my) world:
Enron This is the most popular of them all and is still being referred to even after 8 years. This scandal involved hiding debts, inflating revenues and
corruption. It resulted to the displacement of more than 20,000 people, the death of a Americas Most Innovative Company for six years in a row and
the dissolution of one of the Big 5 global accounting firms (Arthur Andersen). It also gave rise to the passage of Sarbanes-Oxley and more rigorous
auditing standards.
INTRO
Corporate managers are expected to maximize investor returns while complying with regulatorystandards, avoiding principal-agent conflicts of interest, and
enhancing the reputational capital
of t h e i r f i r ms . T h e r e c e n t a r r e s t s a n d r e s i g n a t i o n s o f t o p U . S . ma n a g e r s , h o w e v e r , i n d i c a t e a n i ncr easi ng l evel of
manager i al negl i gence and cor por at e i r r esponsi bi l i ty on Mai n Str eet and onWal l Str eet t hat has er oded domesti c and gl obal tr ust i n
U. S. mar kets . The U. S. st ock mar ketvolatility has added to the political pressure to bring 1930s-style regulatory reform to businesses.Corporate
irresponsibility in the Enron scandal, for example, has provoked multiple lawsuits andunprecedented outrage from a range of stakeholders with demands for
democratizing structuresof corporate power, improving managerial accountability, and legislating regulatory reform .T h e E n r o n s c a n d a l i n v o l v e s b o t h
i l l e g a l a n d u n e t h i c a l a c t i v i t y a n d t h e c o u r t s o f l a w wi l l determine the precise extent of civil and criminal liability that accrues to the
perpetrators. Peoplecommi t fr aud, f or i ns tance, f or a wi de r ange of moti ves i ncl udi ng per cei ved l ack of eff ecti vedeterrent punishment and
rationalization of acceptability of illegal activity (Albrecht and Searcy2001). To contr ol fr aud by f ocusi ng on onl y one di mensi on, such as mor e
eff ecti ve deter r ent puni s hments , i s l i ke tr yi ng t o put out a skyscr aper fi r e wi t h a gar den hose. I n addi ti on, peopl eharbor myths, such as
organizations cannot proactively detect or prevent fraud, which only resultin disempowered resignation to the inevitability of corruption and more future
Enrons.The Enr on scandal i s one t hat l ef t a deep and ugl y s car on t he face of moder n busi nes s. As aresult of the scandal, thousands of people
lost their jobs, some people lost their entire pensions,and all of the shareholders lost the money that they had invested in the corporation after it went bankr upt . I
bel i eve that Kennet h Lay, f or mer Enr on CEO, and J effr ey Ski l l i ng behaved i n anunet hi cal manner wi t hout any for m of j ust i fi cati on, but
the whi stl ebl ower , f or mer Enr on vi ce president Sherron Watkins, acted in a way that upheld moral principles.
Ther e ar e many causes of the Enr on col l aps e. Among t hem ar e t he confl i ct of i nt er est betweenthe two roles played by Arthur Andersen, as
auditor but also as consultant to Enron; the lack of att enti on s hown by member s of the Enr on boar d of di r ector s to the off -books fi nanci al
enti ti eswith which Enron did business; and the lack of truthfulness by management about the health of t he company and i ts busi ness oper ati ons. I n
some ways, t he cul tur e of Enr on was t he pr i mar ycause of the collapse. The senior executives believed Enron had to be the best at everything it didand
that t hey had t o pr otect t hei r r eputati ons and t hei r compensati on as the mos t succes sf ul e x e c u t i v e s i n t h e U . S . Wh e n s o me o f
t h e i r b u s i n e s s a n d t r a d i n g v e n t u r e s b e g a n t o p e r f o r m poorly, they tried to cover up their own failures
Failure of the Market to Perform and Professional Dilemmas
In reality, there is nothing wrong with markets failing to fulfill their task of leveling the playingfi el d bet ween buyer and sel l er. Such market fai l ur es ar e i n
fact how many or gani zat i ons maket h e i r mo n e y
t h r o u g h p a t e n t s ( t e mp o r a r y mo n o p o l i e s ) a n d t h e u s e o f e x p e r t i s e t h a t i s n o t universally available (competitive advantage). Yet there
are certain forms of this type of marketf a i l u r e t h a t a r e s o e g r e g i o u s t h a t t h e y u n r e a s o n a b l y i n t e r f e r e wi t h t h e r i g h t s o f o t h e r s
a n d endanger the credibility of all legitimate transactions.The most common for m of market fai l ur e i s infor mat i on asymmet ri est he busi ness
deci si on-maker knows something that the person at the other end of the transaction does not. Most of thet i me t hi s i s fi ne but t her e ar e ci r cumst ances
wher e t he unfai r ness of t hi s asymmet r y exceedssimple competitive advantage and is a threat to the rights of others and to the effective operationof the free
market as a whole. This appears to be the case at Enron. Insider trading is one of
thei n d e f e n s i b l e e x p l o i t a t i o n s o f i n f o r ma t i o n a s y mme t r i e s . I n d u e c o u r s e , we wi l l h a v e a l e g a l determination regarding whether
or not Enron officers or directors engaged in this practice. Butlegal determinations aside, Enron officers should have been far more alert to the perception thatthey might
benefit from exploitation of information asymmetry.Again ethical literacy is all about recognizing
potential
ethical issues before they become legal problems. And incidentally, since the U.S. Supreme Courts
Texas Gulf

and Sulfur
case i n 1969i t has been unl awful for di r ect or s, as t he Enr on chai r man was, who have i nsi de pri ce sensi t i ve
information to trade in that stock.
The Neglect of Integrity Capacity by Managers
The negl ect of manager i al i nt egri t y capaci t y i s at t he moral root of Enron s l egal and fi nanci al problems. What is legally permissible today, but
morally questionable, may well become legally proscribed tomorrow. Thus, it is important for managers to proactively understand and attend tothe multiple dimensions
and moral antecedents of illegal activity (Paine 1994).
Integrity capacity
is the individual and collective capability for the repeated process alignment of moral awareness,del i berat i on, charact er, and conduct t hat demonst rat es
bal anced j udgment , enhances ongoi ngmoral devel opment , and pr omot es support i ve syst ems for moral deci si on maki ng ( Pet r i ck andQui nn
2000). It i s one key i nt angi bl e asset t hat act s as a cat al yst for reput at i onal capi t al
and i t se r o s i o n c a n j e o p a r d i z e t h e s u r v i v a l a n d c r e d i b i l i t y o f o r g a n i z a t i o n s a n d ma r k e t s ( P e t r i c k , Scherer, Brodzinski, Quinn,
and Ainina 1999). The spectacle of top Enron executives pleadingt he Fi ft h i n Congr essi onal hear i ngs about manageri al i mmoral and i l l egal
conduct i s a vi vi dexampl e of t he consequences of t he negl ect of i ndi vi dual and or gani zat i onal i nt egri t y capaci t y. Furt her mor e, t he frant i c
effor t of Art hur Ander sen, LLP, one of Enr on s cr i t i cal st akehol der swhose integrity capacity and reputation were shattered by their unprofessional
auditing services,t o st em t he t i de of fl eei ng cl i ent s whi l e negot i at i ng wi t h ot her Bi g Fi ve account i ng fi r ms for sale of parts of its business, is
another dramatic example of the costs of integrity capacity neglect(Toffler and Reingold 2003).The Enr on scandal s adver se moral i mpact on t he pri mar y
st akehol der s i s evi dent i n . Enr on stop managers chose stakeholder deception and short-term financial gains for themselves, which

destroyed their personal and business reputations and their social standing. They all risk criminaland civil prosecution that could lead to imprisonment and/or
bankruptcy. (Board members weresi mi l ar l y negl i gent by fai l i ng t o provi de suffi ci ent over si ght and r est rai nt t o t op management excesses,
t her eby fur t her har mi ng i nvest or and publ i c i nt er est s (Senat e Subcommi t t ee 2002). Indi vi dual and i nst i t ut i onal i nvest or s l ost mi l l i ons of
dol l ar s because t hey were
mi si nfor meda b o u t t h e f i r m s f i n a n c i a l p e r f o r ma n c e r e a l i t y t h r o u g h q u e s t i o n a b l e a c c o u n t i n g p r a c t i c e s ( Lor enzet t i 2002).
Empl oyees wer e decei ved about t he fi r m s act ual fi nanci al condi t i on anddeprived of the freedom to diversify their retirement portfolios; they had to
stand by helplesslywhile their retirement savings evaporated at the same time that top managers cashed in on their l ucrat i ve st ock opt i ons (Jacobi us and
Anand 2001). The gover nment was al so har med becauseAmeri ca s pol i t i cal t radi t i on of char t eri ng onl y cor porat i ons t hat ser ve t he
publ i c good was
v i o l a t e d b y a n u t t e r l a c k o f e c o n o m i c d e m o c r a t i c p r o t e c t i o n s f r o m t h e m a s s i v e p u b l i c stakeholder harms
caused by aristocratic abuses of power that benefited select wealthy elite.The Enr on scandal al so har med secondar y and t ert i ar y st akehol der s. For
exampl e, Enr on t opmanagers pressured Arthur Andersen to certify maximum-risk, questionable accounting practicesi n part t o r et ai n t hei r l ucr at i ve
consul t i ng busi ness and, by accedi ng t o t hi s pr essur e, Ar t hur Andersen won huge contracts in the short run but ultimately lost their professional
credibility andclient base (Toffler and Reingold 2003). A parallel process occurred in the legal profession whenEnron managerial pressure on Vinson and Elkins to
legally condone investor and employee fraud pr evai l ed. Agai n, Ci t i group, J. P. Mor gan, and Merri l l Lynch made over $200 mi l l i on i n feesfr om
deal s t hat hel ped Enr on and ot her ener gy fi r ms boost cash fl ow and hi de debt , and, byfai l i ng t o exerci se t hei r own adequat e due
di l i gence, t hey mul t i pl i ed t he har m done t o
ot her s t a k e h o l d e r s . T h e i n d u s t r y s r e p u t a t i o n , f u r t h e r mo r e , wa s t a r n i s h e d b y E n r o n s a g g r e s s i v e market leadership practices,
the taxpaying public incurred additional shifting risk to eventuallycover bankruptcy collateral damage, and ultimately Americas stature as a model of
democraticc a p i t a l i s t p r a c t i c e s w a s r e p l a c e d b y f e a r o f t h e g l o b a l e x p o r t o f E n r o n -
l i k e c o r p o r a t e irresponsibility and crony capitalism (Mitchell 2002; Sirgy 2002).These mul t i pl e st akehol der damages can be vi ewed as t he r esul t
of seri ous l apses i n t he four di mensi ons of management i nt egr i t y capaci t ypr ocess, j udgment , devel opment , and syst em. Understanding and
correcting these lapses provides a structured way to address the moral rootsof current stakeholder remedies and reduce the likelihood of future Enrons.
Process Integrity Capacity and Enron
Process i nt egri t y capaci t y
i s t h e a l i g n me n t o f i n d i v i d u a l a n d c o l l e c t i v e mo r a l a wa r e n e s s , deliberation, character, and conduct on a sustained basis so that reputational
capital results. Theneed t o addr ess l apses i n pr ocess i nt egr i t y capaci t y i s mani fest by t he r out i ne fragment at i on
of ma n a g e r i a l mo r a l a t t e n t i o n a n d b e h a v i o r t h a t a r o u s e s s t a k e h o l d e r c o n c e r n a b o u t t h e mo r a l hypocrisy of management
practices (e.g., Enron top managers tout their public relations images

as r esponsi bl e cor porat e ci t i zens whi l e defraudi ng i nvest or s and empl oyees and secr et l y l i ni ngtheir own pockets with diverted funds) .While it is
unlikely that Enron executives failed to perceive the relevant moral issues, it is clear t hat t hey were not sensi t i ve t o t hem. They appear ed t o be
err oneousl y and overl y confi dent of their initial distorted perceptions of morally acceptable business conduct, and when
challenged,a s F a s t o w wa s r e g a r d i n g t h e a p p r o p r i a t e n e s s o f h i s f i n a n c i a l s t r u c t u r e s , r e t a l i a t e d a g a i n s t accuser s and sought
i nfor mat i on i n ways t hat confi r med what t hey al r eady bel i eved
(Messi ck a n d Ba z e r ma n 1 9 9 6 ) . S i n c e t o p ma n a g e me n t a n d b o a r d me mb e r s i g n o r e d wh i s t l e b l o we r feedback, t hey became
moral l y bl i nd, deaf, and mut e, t her eby di mi ni shi ng t hei r capaci t y
for e t h i c a l a wa r e n e s s a n d e v e n t u a l s t r a t e g i c r e s p o n s i v e n e s s f o r wh i c h t h e y a r e h e l d mo r a l l y account abl e ( Cavanagh
and Mober g 1999; Swart z and Wat ki ns 2002). Moral del i berat i on,
t hes e c o n d c o m p o n e n t o f p r o c e s s i n t e g r i t y , i s t h e c a p a c i t y t o e n g a g e i n t h e c r i t i c a l a n d co
mpr ehensi ve apprai sal of causal fact or s and r ecogni zed moral opt i ons t o arr i ve at a
bal anceda n d i n c l u s i v e r e a s o n a b l e d e c i s i o n / r e s o l u t i o n / p o l i c y t h a t p r o v i d e s a s t a n d a r d f o r f u t u r e det er mi n
at i ons ( Pet r i ck and Qui nn 1997). The deci si on maki ng st yl e of t he Ski l l i ng-Fast ow-Kopper circle demonstrated a tendency to suppress all but one
aspect of a moral decision, i.e., itsshort term financial impact, and to exclude other parameters that might inhibit decisive action or constrain executive perks (Messick
and Bazerman 1996). Enron managers and board members,who poorly analyzed and resolved moral conflicts of interest through self-centered policies alsoi gnor ed or
t ri vi al i zed t he har m caused t o ot her st akehol der s. For t hei r di mi ni shed capaci t y for bal anced moral del i berat i on Enron manager s are
hel d moral l y account abl e (Fusar o and Mi l l er 2002; Swartz and Watkins 2002).

Mo r a l c h a r a c t e r , t h e t h i r d c o mp o n e n t o f p r o c e s s i n t e g r i t y , i s t h e i n d i v i d u a l a n d c o l l e c t i v e capaci t y t o be r eady t o act
et hi cal l y. The gr eed, di shonest y, arr ogance, sel fi shness, cowardi ce, hypocrisy, disrespect, and injustice that characterized top Enron executives
intentions disclosest hei r cul pabl e mot i ves and t he corrupt i ng wor kpl ace cul t ur e t hey creat ed ( Sennet t 1998). Theo v e r e mp h a s i s o n
p e r s o n a l f i n a n c i a l g a i n a t t h e e x p e n s e o f o t h e r s d e s t r o y e d a n y r e mn a n t o f empl oyee t rust . The vi si onl ess accumul at i on
of rapi d weal t h exposed t he absence of l eader shi pwi sdom and t he del i berat e obfuscat i on of fi nanci al struct ur es t o pr ecl ude a fai r pi ct ur e
of t hefi nanci al heal t h of t he fi r m er oded t hei r charact er s; t hey de-humani zed t hemsel ves and ot her swith whom they interacted. The lack of the
political virtue of citizenship is particularly damagingto internal and external character cultivation (Logsdon and Wood
2002).Mo r a l c o n d u c t , t h e f o u r t h c o mp o n e n t o f p r o c e s s i n t e g r i t y , i s t h e i n d i v i d u a l a n d c o l l e c t i v e carr yi ng out of
j ust i fi abl e act i ons on a sust ai ned basi s. Manager s t hat exhi bi t et hi cal conduct d e v e l o p a r e p u t a t i o n f o r
d e p e n d a b i l i t y a n d a l i g n me n t o f mo r a l r h e t o r i c a n d r e a l i t y b u t t h e duplicitous exploitation of employee retirement savings exposed the
cruel behavioral hypocrisyof top Enron executives (Cruver 2002).
Judgment Integrity Capacity and Enron
Managers can attempt to evade full moral accountability by compartmentalizing and fragmentingt hei r handl i ng of management and et hi cs i ssues. One way
t o addr ess t hi s evasi on i s t o enhance
judgment integrity capacity
, the capability of analyzing complete moral results, rules, character,and cont ext i n management practi ces (Pet ri ck and Qui nn 2000). The way Enr on
execut i vesmanage i mpl i ci t l y commi t s t hem t o cer t ai n et hi cs t heori es, and j ust as si mpl i st i c,
di st ort edma n a g e r i a l j u d g me n t s p r o d u c e p o o r r e s u l t s i n h a n d l i n g b e h a v i o r a l c o mp l e x i t y , s o a l s o d o simplistic, distorted ethical
judgments produce poor results in handling moral complexity (Paine1994; Petrick and Quinn 2000).For business leaders and their firms, exhibiting judgment integrity
means being held accountablef o r a c h i e v i n g g o o d o u t c o me s ( r e s u l t s -
o r i e n t e d t e l e o l o g i c a l e t h i c s ) , b y f o l l o wi n g t h e r i g h t standards (rule-oriented deontological ethics), while strengthening the motivation for
excellence( charact er -or i ent ed vi r t ue et hi cs), and bui l di ng an et hi cal l y support i ve envi r onment wi t hi n andoutside the organization (context-
oriented system development ethics).
Learnings from the Enron case
I do believe Enron will be the morality play of the new economy. It will teach executives and theAmerican public the most important ethics lessons of this
decade. Among these lessons are:
Y o u m a k e m o n e y i n t h e n e w e c o n o m y i n t h e s a m e w a y s y o u m a k e m o n e y i n t h e o l d economy - by providing
goods or services that have real value.2. Fi nanci al cl ever ness i s no substi t ut e f or a good cor por at e str at egy. 3. The ar r ogance of cor por ate
executi ves who cl ai m t hey ar e t he best and t he br i ghtest, "t hemos t i nnovati ve, " and who pr es ent t hems el ves as s uper s tar s shoul d be a
"r ed fl ag" f or investors, directors and the public.4. Executi ves who ar e pai d t oo much can t hi nk they ar e above the r ul es and can be tempt edto
cut ethical corners to retain their wealth and perquisites.5. Gover nment r egul ati ons and r ul es need t o be updat ed f or the new economy, not
r el axedand eliminated
CORPORATE CONDUCT: THE AUDITORS; Scandal's Intricacies Put Grant Thornton's Italian Unit Under Pressure
The investigation into what appears to have been an intricate fraud at Parmalat is raising the inevitable questions about the liability of its former auditor, Grant
Thornton.
Recent disclosures from Milan suggest that Grant Thornton employees may have known about questionable corporate structures used to hide Parmalat debt. This comes
on the heels of news that for months, at least, the auditors missed the fact that a bank account supposedly holding nearly $5 billion in cash and securities for a Parmalat-
controlled company was a fiction.
In a statement, Grant Thornton said yesterday that it was cooperating with the investigation and that this month it had helped uncover the questionable transactions now
under review. It was in response to a request from Grant Thornton that Bank of America indicated that the account did not exist, the firm's statement noted.
''Grant Thornton International has almost certainly been the victim of a fraud,'' David McConnell, its chief executive, said in a phone interview.
Working in Milan, Grant Thornton served as Parmalat's primary accountant from 1990 until 1999, when it switched to auditing some of its subsidiaries, including
Bonlat Financing, which held the fictitious bank account. The accounting firm said its Italian member, Grant Thornton S.p.A., had ''been active and prompt in notifying
the Parmalat auditors and the Italian authorities when significant concerns came to light.''
Grant Thornton, with 585 offices, is one of the largest of the so-called second-tier accountants that rank behind the largest firms, KPMG, Deloitte & Touche, Ernst &
Young and PricewaterhouseCoopers. Grant Thornton specializes in companies like Parmalat that are owner-managed. It has been growing in recent years by focusing
on emerging markets in Asia and Latin America.
Grant Thornton's Italian member firm could face both civil and criminal liability in Italy, said Raffaele Lener, a corporate partner in the Rome office of Freshfields
Bruckhaus Deringer, a law firm. ''We have some interesting precedents in the last five years of courts sentencing auditors for having acted badly or negligent behavior
in auditing the balance sheet of some big companies,'' he said in a phone interview. ''So in principle this is possible.''
Critics said that even if Grant Thornton auditors did not know the bank account was fake until this month, the audit of Bonlat was still lax. Several lawyers said that an
auditor not realizing that assets a company claimed to have did not exist for years was inexcusable.
''This is the simple stuff; it's not Enron-type complexity,'' said Jonathan B. Schiff, an accounting professor at Fairleigh Dickinson University. ''It's like Accounting Fraud
101.''
Mr. Lener said Grant Thornton could be liable if auditors were negligent in verifying the contents of the account of Bonlat, the Cayman Islands finance company
controlled by Parmalat. Under Italian law, the firm could be penalized by essentially losing its license to practice public accounting -- a potentially devastating blow.
The firm could also face lawsuits by investors, Mr. Lener said, but he added that Italian law does not allow for securities class-action litigation.
The structure of the Grant Thornton network of firms makes it unlikely that other member firms, like the United States limited liability partnership, could find
themselves liable to creditors or investors trying to recover any losses. However, firms directly involved in audit work at Parmalat, several lawyers said, could be
vulnerable. (Grant Thornton L.L.P., the United States partnership, worked for Parmalat but was not involved in auditing either the company or Bonlat, according to the
firm.)
Grant Thornton International is a membership organization that the various accounting firm partnerships in each country belong to, said Mike Starr, managing partner
for strategic services at the United States firm, who is responsible for overseeing legal issues. Grant Thornton International is looser than a partnership but tighter than
an association, and is run by its own chief executive, Mr. Starr said.
''Each of the countries is a member firm of Grant Thornton International,'' he said. ''Each firm in each country will be a separate legal entity.''
The chief executive of Grant Thornton International is not the boss of the executives who run each country's partnership, he said. ''He has a management team,'' Mr.
Starr said, whose responsibilities include marketing, merger and growth plans and coordinating service for a client whose business crosses borders, among other issues
involving the various member firms.
Member firms are independently capitalized and Grant Thornton International, the overall organization, is financed by all of them. How much capital each firm has is a
closely guarded secret, as is the policy limit on each firm's insurance coverage.
Grant Thornton will have to walk a careful path in the coming weeks, said Stephen P. Younger, a partner at Patterson, Belknap, Webb & Tyler, a law firm in New York.
''There are so many different moving pieces to this,'' Mr. Younger said. ''You have to have a global strategy to try to deal with the whole problem. Usually what the
auditors try to do is say, 'We were defrauded, too. We were misled by company management.'''
Investors, on the other hand, will have to weigh their options and try to gather information about potential sources of recovery, Mr. Younger said. That may be harder
overseas than it would be here, he added. ''One thing that a lot of countries have in common in Europe is you get very little discovery,'' he said, speaking of the legal
process that can be used to compel parties in a lawsuit to turn over evidence.
Investors have already banded into groups to try to recoup some losses, and say that they will relentlessly pursue anyone that may have been involved in making
Parmalat appear to be in better financial condition than it was.
Evan D. Flaschen of Bingham McCutchen, a law firm for many institutional bondholders who invested more than $2.5 billion in Parmalat, said it was too early to
assign blame, but he indicated a willingness to start pointing fingers later.
ACPAPP: Redefining the public accounting practice
Redefining the public accounting practice
In his acceptance speech as the 2005 president of the Association of Certified Public Accountants (CPAs) in Public Practice (ACPAPP), Greg
Navarro very candidly described the current predicament of CPAs by borrowing Dickens famous opening line from the novel A Tale of Two Cities: It
was the best of times, it was the worst of times. Looking back at recent events that affected the profession and what CPAs now have on their plates, the
comparison could not have been more apt.
Four years after the biggest scandal in corporate America brought down a leading power company and one of the big five accounting firms, CPAs all
over the world are still struggling with the slow climb towards rebuilding the publics eroded trust. The scandals urged accounting professionals
everywhere to take a hard look at themselves, says Navarro, who is also managing partner and COO of Punongbayan & Araullo, a leading public
accounting and tax advisory firm in the country.
In the Philippines, CPAs were already cleaning house even before the scandal broke out; early in 2001, the Philippine Institute of CPAs approved the
adoption of international auditing standards (as promulgated by the International Auditing Practices Committee) to establish a global, more
comprehensive benchmark for local practitioners. The move would effectively put local CPAs in step with their global counterparts in harmonizing
financial reporting standards.
The government has also put in motion a measure to curb corporate abuses. House Bill 286, or the Corporate Reform Act, mirrors the USs Sarbanes-
Oxley Act of 2002 and proposes to establish clearer standards for corporate accountability and impose tougher penalties on violators.
The country has its share of Enrons, Tycos and World Coms, admits Navarro, who has taken on the theme CPA Redefined: Setting the Standards for
Good Governancefor his term as ACPAPP president. As the local advocate of individual and institutional public practitioners, ACPAPP is likewise
throwing its weight behind efforts at strengthening integrity in the countrys corporate culture.
One of the associations main concerns right now is training CPAs on the details of the newly adopted International Financial Reporting Standards
(IFRS) issued by the International Accounting Standards Board. Seen as a shift from the rules-based standards which many white-collar criminals
were able to sidestep partly because it was too detailed to principles-based standards, the IFRS aims to provide accountants with a conceptual basis
for good reporting.
The new ethical, accounting and auditing standards provide guidelines on how CPAs should do their work, conduct themselves, prepare their reports,
and also what ethical and professional standards they have to meet, explains Navarro, who lauds the development. But these standards are new not
only to the Philippines, but to the rest of the world as well, so there are no precedents or prior guidelines on how to roll them out.
This is where ACPAPP hopes to play a significant part. For the past ten years, the association has been very active in standards training, with
institutional members collaborating in sharing resources and collating training materials for the instruction of the individual members and small
practitioners. With the adoption of the IFRS, ACPAPP is laying out plans to make sure CPAs even those practicing in outlying provinces will have
access to IFRS materials and will be instructed in its tenets. Not all practitioners can afford to attend the seminars abroad, or even dole out P60,000 for
training fees, reveals Navarro. And thats precisely why he has hit the road running as ACPAPPs new president: Were joining the worldwide reform
not just as a follower, but as proactive professionals; were taking a bullish attitude towards these changes.& ;rdq uo;
http://www.wealthdaily.com/articles/lehman-brothers-enron-accounting-gimmicks/2375
Lehmun Brothers' 'Repo 105' Accountlng Scundul
Accounting Gimmicks or Outright Fraud?
By Adam Sharp
Monday, March 15th, 2010
Nearly 18 months after the collapse of Lehman Brothers, it looks like we might finally get some answers.
The long-awaited bankruptcy examiner's report came out Friday and it's a whopper clocking in at 2200 pages. The examiner looked at 10 million e-
mails and 20 million documents in the case.
The financial world is still digesting the report, but the first scandal is already emerging. The biggest revelation so far is that Lehman was cooking their
books since at least 2007. In the final quarter before filing bankruptcy, accounting tricks boosted their balance sheet by $50 billion.
Let's Get Some Lipstick on This Pig
Insiders called the scheme a "Repo 105." And let me tell ya, Lehman took a page straight out of Enron's playbook with this one.
Here's how it worked: Lehman entered into repurchase agreements with banks in the Cayman Islands. Under the deal, Lehman would "sell" toxic assets
to the other bank with the understanding that they would buy them back in a short time.
The trick made Lehman Brothers look much healthier on paper, at least. These guys were desperate to fool investors and credit rating agencies. They
had screwed up on a truly collosal scale, and lined their pockets all the while.
If (or when) the truth got out, executives knew their careers and reputations would be at stake. But by engaging in this kind of book-cooking to cover it
up, they could end up behind bars.
Banks use similar repo agreements all the time. But they mark them on the books as loans, because that's what they are. Lehman marked them
as sales. That might not sound like a huge deal, but the effect was that Lehman had $50b more in cash on its books, and $50b less in toxic mortgage
assets.
This is complicated stuff, and that's not a mistake. Scams like this are complex by design. The goal is to confuse the mark. In this case, we were all the
mark.
Accounting "Gimmicks," or Just Plain Fraud?
The examiner's report tip-toes around the f-word (fraud) using very careful language. Not one mention of fraud in sight. They refer to "gross negligence,"
but that's not necessarily a crime. And media outlets are reporting on Lehman's accounting "gimmicks," "tricks," or my favorite "shenanigans."
Let me get this straight: Lehman intentionally manipulated their accounting with the goal of deceiving investors, rating agencies, and possibly their
regulators, leading to the largest corporate bankruptcy in U.S. history... And that's only considered "negligence"?
Being negligent means you lack concern or aren't paying attention when you should be. It doesn't mean willfully lying on your financial statements. What
Lehman did sounds a whole lot more fraudulent than negligent. And this type of blatant manipulation is being referred to as a gimmick? Ridiculous.
The Repo 105 scandal is just getting started, but already the accusations are flying. Dick Fuld, former CEO, is denying knowledge of the Repo 105
transactions. Not true, according to COO Bart Mcdade. When interviewed by the bankruptcy examiner, Mcdade said, "Fuld knew about the accounting of
Repo 105."
I'll be surprised if anyone actually goes to jail, but we should get much more information in the coming months. Expect a whole lot of "I do not recall
having that conversations" when these guys are hauled up on Capitol Hill this time.
One of the biggest questions is this: Were any other banks using similar tricks? And are they still cooking the books today?
We don't know yet, but it wouldn't surprise me one bit. These investment banks were notorious for stealing each other's ideas. And the fact that it all took
place under Tim Geithner's nose when he was president of the NY Fed is also something that needs to be explored.

BIRsuspendsfieldauditsuntilJan.6
By: Ronnel W. Domingo
Philippine Daily Inquirer
MANILA, PhilippinesFor some taxpayers wary of the taxman, the holidays will not turn into a sunny afternoon whenas the song saysthe taxmans
taken all [their] dough.
Internal Revenue Commissioner Kim S. Henares has ordered the suspension of field audit and other field operations as well as serving of certain notices
until January 6 next year in observance of Christian holidays.
The activities referred to include examinations and verifications of taxpayers book of accounts, records and other transactions.
Revenue Memorandum Circular No. 58-2011, signed last December 15, states that revenue officers shall not conduct any form of business visits in
relation to the serving of letters of authority or audit notices pursuant to any mission orders.
Likewise, no written orders to audit and/or investigate taxpayers tax liabilities shall be served, the circular added.
However, RMC 58-2011 laid down exceptions, including the investigation of cases that must be wrapped up by April 15, 2012or the deadline
of tax filings for 2011as well as other matters where deadlines have been imposed or which the commissioner has ordered wrapped up.
To continue during the holidays as well are the processing and the verification of returns of those retiring from business and those related to estate tax,
donors tax, capital gains tax, withholding tax and documentarystamp tax on the sale of real properties or shares of stocks.
Also exempted from the suspension is the audit of national government agencies, local government units and government-owned and -controlled
corporations, including their subsidiaries and affiliates.
In general, examiners and investigators shall make use of this period to do office work on their cases and to complete the report on those with already
completed field work, the circular said.
Even then, service assessment notices, warrants and seizure notices will still be served.
More importantly, all efforts should be directed to ensure maximum collection in the remaining days of the year, the circular said.
Last week, Henares expressed confidence that the Bureau of Internal Revenues target for 2011 of collecting P940 billion would be met.
As of end-November, the BIR has collected a total of P854.5 billion, missing the 11-month target of P860.3 billion by just 0.7 percent.
http://www.mb.com.ph/node/263244/filipino-cpa-receive

Filipino CPA receives US award
By MADEL R. SABATER
June 22, 2010, 4:17pm
A Filipino certified public accountant (CPA) and owner of a US-based accounting firm has been conferred the 2010 Lifetime Achievement Award by the
Illinois Certified Public Accountants Society (ICPAS), the Philippine Consulate general in Chicago said.
The ICPAS conferred the 2010 Lifetime Achievement Award to Edilberto Ortiz, a Filipino American managing partner of the E. C. Ortiz & Co. LLP, a
wholly-owned and managed public accounting limited liability partnership.
According to Illinois CPA Society immediate past president Lee Gould, the award was given to Ortiz in recognition of his significant contributions to the
accounting profession and the Illinois CPA Society, and for establishing one of the successful and big public accounting companies not only in Illinois but
in the entire United States as well.
For his part, Philippine Consul General in Chicago, Illinois Leo Herrera Lim lauded Ortiz for bringing honor to the Philippines.
"Mr. Ortiz has brought tremendous honor not only to himself and his family but to our country and kababayans by proving that Filipinos can be
successful in a truly competitive environs and gain the respect and admiration of their peers.
Mr. Ortiz is truly one of the best Filipinos in the US, Herrera-Lim said.
In his acceptance speech, Ortiz said his profession opened vast opportunities for him in eventually put up his own CPA firm in the US.
"I was not born of privilege, and as such I had to work to support myself through college. I am glad I became a member of the CPA profession, one that
has provided opportunities and experiences that helped me build a diverse CPA firm with goal of providing outstanding services to our clients,"
he said.
Ortiz finished Bachelor of Science in Accountancy at the Far Eastern University (FEU). He attended the Executive Education Program at the Tuck
School of Business in Dartmouth.
He started practicing public accounting in the 1960s and established the E. C. Ortiz and Co., CPAs in 1974. In 2003, his CPA firm was restructured to
become a limited liability partnership (LLP).
Ortiz was Board of Director of the Illinois CPA Society from 1998 to 2000.

Access of Pinoy accountants overseas pushed
January 14, 2011, 2:26am
MANILA, Philippines Philippine trade negotiators should seek the liberalization of various trade barriers particularly on market access, national
treatment and domestic regulation to exploit the competitiveness of Filipino accountants.
This was stressed by Tereso Tullao Jr. and Michael Angelo Cortez of De La Salle University-Manila in a paper titled "Accounting and Outsourcing for
Philippine Export of Services" written for the Trade-Related Technical Assistance Project 2.
Tullao and Cortez said the request for such liberalization should not be pursued at the multilateral negotiations given the pace of discussions is
proceeding at the General Agreement on Trade in Services (GATS).
"Aside from not getting immediate results in these multilateral negotiations, the Philippine request may be matched by counter requests from other
countries that may affect key and sensitive sectors of the country not necessarily in services."
The move would enable the country to benefit from the growing market for accountancy services worldwide, particularly auditing.
"Filipino accountants are seen to be highly competitive under the supply mode of movement of natural persons whether they are engaged in developed
countries or developing countries," Tullao and Cortez said.
They believed that Filipino accountants could be competitive in the Association of Southeast Asian Nations (ASEAN) market.
The country may push for the implementation of the ASEAN Framework Agreement on Services (AFAS) particularly on the liberalization on the
movement of professionals.
However, should the Philippines forges free trade agreement (FTA) with the United States, the liberalization of movement of natural persons will serve
the interest of Filipino accountants given their competitiveness in that country where the market for accounting and auditing services is huge.
They likewise asked Filipino negotiators as well as leaders of the profession to determine whether the governments of countries of interest to local
accountants are complying with the GATS Disciplines on Accountancy to ensure that their domestic regulations are not unnecessarily strict and become
veiled trade barriers.
In line with the liberalization of movement of natural persons in the ASEAN, US, Canada and Australia, the country should push for the establishment of
mutual recognition agreements (MRAs).
The MRAs would govern rules on the equivalence of educational, licensing, experience and other requirements in the practice of accounting profession
to facilitate entry in markets where the competitiveness of Filipino accounts is very high.
Tullao and Cortez said the Department of Trade and Industry and Department of Foreign Affairs and key leaders of the profession are to launch
promotional activities and market the competitiveness of Filipino accountants in countries where their competitiveness is high. (EHL)
----I am very happy to hear such news. The competitiveness of filipino accountants are seek in the world. No doubt, we can do what others can. I am still
an accountancy student but inspired and motivated by the news. JPIAns desire is to establish good reputation.
http://www.philstar.com/Article.aspx?articleId=737419&publicationSubCategoryId=66
BSP relaxes tainting rule
By Lawrence Agcaoili (The Philippine Star) Updated October 15, 2011 12:00 AM Comments (0)

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has eased its tainting rule to encourage banks and financial
institutions to participate in the liability management initiatives of the government.
BSP Governor Amando Tetangco Jr. has issued Circular 738 Series of 2011 providing the guidelines on treatment of securities offered
and accepted in tender offers pursuant to liability management transactions of the government.
The circular stated that the central bank approved the exemption of government securities booked in the held to maturity category
that are offered and accepted in tender offers pursuant to liability management transactions of the government from the tainting
rule under Philippine Accounting Standards (PAS) 39 for prudential reporting purposes.
The tainting rule under PAS 39 requires the reclassification of the entire held to maturity portfolio to the available-for-sale category
and prohibits a bank or a financial institution from using the held to maturity category during the reporting year and for the
succeeding two full financial years, whenever it sells or reclassifies more than an insignificant amount of held to maturity
investments before maturity, other than for reasons permissible under PAS 39.
The bank regulator put in place the tainting rule to discourage banks or financial institutions from manipulating their earnings or
capital by shifting from cost-based accounting or accounting for held to maturity to fair value accounting or accounting for held for
trading and available for sale securities and vice versa to take advantage of price movements.
The grant of the recent regulatory relief by the BSP is expected to promote the participation of banks or financial institutions in
liability management initiatives of the national government, the BSP stressed.
The recent exemption granted by the BSP expands the scope of the central banks earlier regulatory relief to encompass all types of
liability management transactions of the national government in addition to debt exchange offerings.
In order to be granted exemption from the tainting rule, banks or financial institutions are required to maintain appropriate
documentation on their liability management transactions with the NG.
This will ensure that only those eligible bondholders who participate in the national governments initiative shall be able to benefit
from the regulatory relief, the BSP clarified.
In recognition of the significance of the governments liability management programs to the promotion of domestic capital markets
and fiscal management, the BSP earlier granted banks or financial institutions exemption from the tainting rule for prudential
reporting purposes, in respect of securities that are offered and accepted in debt exchange offerings of the national government.
'Creative accountants'
Page Eleven
By ELINANDO B. CINCO
February 17, 2011, 11:05pm
MANILA, Philippines They sweep the dirt under the rugs, play around with the figures, paint a rosy picture, and spray the financial mess with the most
potent sweet-smelling deodorants one can find in the arsenal of numerical legerdemain called creative accounting.
You think you will encounter creative accountants and their newer accomplices, imaginative bureaucrats, only in the advertising game?
You are in for a big surprise. These highly paid denizens are sought-after by some vicious-thinking officials of government, as well as villainy corporate
honchos.
Lately, this special breed of scheming financial personalities figured prominently in media via a series of Senate inquiries. They have been charged for
the disappearance of huge amounts of funds and monetary allocations in some agencies of government, traced to have gone into the pockets of high
and middle-level military and civilian officials.
In fact, as per testimonies, these creative accountants paved the way for these top-echelon characters to raid the treasury clean and deftly cover the
tracks. Well, until lately, when this was revealed in the Senate hearings.
And what about those imaginative bureaucrats?
Again, a few weeks ago, government investigations uncovered their lairs in some Government-Owned and Controlled Corporations (GOCCs), and,
surprisingly, in the Senate itself and in the House.
And their expertise?
They are good at concocting a barrage of appellations to label the myriads of bonuses and allowances being given to choice officials of those
government agencies.
These think tank denizens, the government counterpart of the advertising industrys wordsmiths, have devised some highfalutin terminologies such as
productivity bonus (given to financially losing GOCCs), high performance bonus (beneficiaries are mostly absentee members of the board),
productivity bonus (given to legislative officials and employees), bi-monthly bonus and grocery allowance, spa and wellness allowance, ad infinitum.
Apparently embarrassed, one senator remarked that the appellations concocted by those imaginative bureaucrats have exceeded all the 26 letters in
the English alphabet!
Back to creative accounting. Three days ago, no less than President Noynoy showed exasperation when he visited Sulu with its flood and landslide
destructions. Upon inspection, he noticed that river control infrastructures, floodgates, and retaining walls were nowhere to be found!
When I was in Congress, I remember, we allotted some P12 billion (for infrastructures against devastation from natural calamities) to the ARMM, he
said. (Manila Bulletin, February 12, 2011, banner story).
Had the Chief Executive read the regions annual reports, he would have noticed that the wherewithal along with the funds are described there. But the
infrastructures are nowhere in the places where they were programmed to be constructed.
Credit that to the creative accountants at ARMM.
But to me, the bigger concentration of creative financial guys are in the AFP. Already three witnesses have been talking about fund diversion,
monetary conversion, pasalubong budget and pabaon allotments, and what have you, mostly going to Chiefs of Staff.
In the swirling midst of this scandalous monetary mess, even the United States government and the United Nations are concerned, to say the least.
Ostensibly, they want to know where their money went.
You see, Uncle Sam gives his share in the budget for the staging of joint military exercises (war games). And the world body funds the expenses and
allowances of the 1,000-man Philippine contingent, as part of the UN peace-keeping forces in trouble-plagued nations around the world.