In a timely article on recent activities by U.S. audit and accounting regulators, mainly the SEC and PCAOB , Eleanor Bloxham, writing for Fortune magazine, asks: “Can corporate accounting ever be reformed?”.
Ms. Bloxham’s article summarizes recent SEC and PCAOB proposals for improving corporate governance and the article provides some context supporting the issuance of those proposals.
Such activities by security market regulators are not unusual. Obviously, those regulators are always proposing guidance that they believe will improve corporate governance and financial accounting and reporting. So, I was surprised at the dramatic tone suggested by the Fortune article’s title.
Then, I read several articles covering Toshiba Corporation’s proposed adjustments of over $2 billion resulting from “six years of overstated profits” (see “Toshiba to book $2-$3 billion in losses over accounting scandal,” by Taro Fuse of Reuters). Those articles reminded me that as long as corporate leaders are compensated for improved earnings and stock price results, they will be tempted to manipulate the accounting results.
Interestingly, Ms. Bloxham’s article quotes former Enron CFO, Andrew Fastow’s comments about his role in manipulating financial results at Enron.
In a speech at a Financial Times conference, Mr. Fastow told his audience: “I wasn’t the chief finance officer at Enron, I was the chief loophole officer.” Ms. Bloxham further noted that Mr. Fastow added “that massaging [financial information] was very much in use today” for certain types of transactions in which subjective evaluations are required such as in the oil and gas industry and in valuing pension assets and obligations.
Considering the alleged accounting malfeasance at Toshiba, a Japanese corporation, and the history of improper accounting and reporting in the U.S., maybe the title of Ms. Bloxham’s article did not overstate the importance of the ongoing regulatory activities of the SEC and the PCAOB. I concede that those regulators are correct to keep pushing for regulations focused on improving public companies’ corporate governance policies and practices over their financial accounting and reporting activities.