ENRON AND ARTHUR ADNDERSEN: THE CASE OF THE CROOKED E AND THE FALLEN A

Global Perspectives on Accounting Education, 2006 by Cunningham, Gary M, Harris, Jean E

The SEC requires that SEC registrants must be audited by a CPA licensed by a state. Also, the SEC grants permission for specific accounting firms to represent clients before the SEC. The SEC has relied largely on the states for the regulation and qualification of accountants.

Private voluntary professional associations, such as the American Institute of Certified Public Accountants (AICPA), have influence, but no direct role in regulating financial reporting and auditing. Historically, however, the AICPA had more influence on the practice of public accounting than it now has.

Financial Reporting

The SEC as well as state securities agencies and various private stock exchanges specify the kinds of financial reports that public companies must issue. The SEC web site http://www.sec.gov gives the SEC requirements. Among other things, the SEC requires registrants to file unaudited quarterly financial statements (10-Qs) and audited annual financial reports (10-Ks). SEC filings are available to the public via Internet or via written request, and annual reports must be sent to shareholders individually.

In general, the approach of the SEC is non-activist; it does not attempt to monitor information. Instead, by assuring information is available to the public, it has relied on the market place to be self-regulating, based on the notion that financial markets are efficient and will respond immediately and in an unbiased manner to publicly available information. The expectation is that the SEC will respond quickly with enforcement action and apply sanctions when suspected irregularities are brought to its attention. In some cases, the SEC does monitor the reports of companies that it suspects of improper reporting. The SEC is now under pressure to expand its monitoring and enforcement activities.

Conduct of Audits

Audits in the US are performed in accordance with Generally Accepted Auditing Standards (GAAS); auditing is not addressed by GAAP. Until 2002, auditing was largely self-regulated. Auditing standards were established by the Auditing Standards Board (ASB), a senior technical committee of the AICPA. Additionally, mandatory quality reviews for auditing firms with AIPCA members were directed by the AICPA's Division of Firms and conducted by members of the AIPCA.

In 2002, in response to a wave of financial reporting scandals, the US Congress adopted the Sarbanes-Oxley Act. Part of this act provides for the creation of the Public Companies Accounting Oversight Board (PCAOB) to establish auditing standards with approval by the SEC and to oversee the quality of work performed by auditing firms. Thus, the auditing of publicly traded companies is now regulated by the US federal government rather than by the profession itself.

PART III FINANCIAL REPORTING PRINCIPLES AND DISCLOSURES

US federal law requires publicly traded companies to present financial reports in accordance with GAAP, and the SEC has the authority to establish GAAP. Rather than exercising this right, the SEC has relied on other organizations to set financial reporting standards under its oversight. The evolution of written GAAP is presented in Exhibit 6. Currently, the Financial Accounting Standards Board (FASB) establishes GAAP for publicly traded companies. The FASB began as a private-sector organization but has evolved into a quasi-public organization supported by the US federal government and by sales of publications.