It used to be said that the most creative people in Hollywood were the
accountants, which accounted for the fact that, no matter how profitable
a movie seemed to be, there never seemed to be any "net profits". Of
course, this only mattered to stars who were foolish enough to accept
deals that entitled them to a percentage of net (rather than gross)
profits.
But if you happen to be a shareholder of Enron, or one of the numerous
other companies coming under accounting scrutiny recently, you may take
an increasing interest in the fact that the best fiction is coming from
the guys and gals who used to wear the eye shades, and now seem to have
an increasing interest in high-volume paper shredders.
(In case you haven't been paying attention, here's the way the system is
supposed to work: Corporations report their financial results to
analysts, investors, and the general pubic; accounting firms perform
"audits" on corporate books to make sure that the results reported by
the corporation accord with generally accepted accounting principles,
known as GAAP.)
What's going on? We talked to some lawyers and accountants experienced
in the nooks and crannies of corporate accounting and asked for their
take on the current rash of accounting "irregularities". Here's what
they had to say:
- Accounting irregularities are due to the fact that accounting firms
that perform auditing work are under increasing pressure to make money,
and are not willing to lose the business of corporate clients who insist
on certain accounting "interpretations" that enable them to show better
short-term profits.
- A general decline in ethical standards among both auditing staff and
corporate financial staff, coupled with the usual pressure to make
money, leads to less resistance by auditors to corporate shenanigans.
- Major accounting firms like Arthur Anderson package a large group of
services to huge corporate clients. The unspoken agreement is that the
corporation will pay high fees for the entire package in return for
auditing standards that are "sympathetic" to the company's short-term
needs.
