Congress Fought Changes to Accounting Rules Over Past Decade Congress is opening

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Congress Fought Changes to Accounting Rules Over Past Decade

Congress is opening hearings to determine how Enron's financial mess escaped the attention of its auditors. But some of Enron's most vocal Congressional critics have routinely opposed significant new accounting rules over the past decade. Lynn Turner, a former chief accountant at the Securities and Exchange Commission (SEC), said that pressure from Congress has led to compromises that weakened proposed accounting rules. The SEC, which oversees the Financial Accounting Standards Board (FASB), an independent rule-making body, has complained that pressure from Congress makes it harder to impose needed regulations.
Rep. Richard Baker, a Louisiana Republican who chairs a House subcommittee on capital markets, securities, and government-sponsored enterprises, recently criticized Enron's misleading disclosures. Yet, in 1994, Mr. Baker helped block a FASB proposal to force companies to deduct employee stock options from profits. More recently, he opposed a proposal to require better disclosure of derivatives (investments pegged to the underlying value of assets, such as commodities or currencies). Through his efforts and pressure from Congress, the FASB issued a new, less stringent standard.
Sen. Joseph Lieberman, a Connecticut Democrat, chairs the Senate Governmental Affairs Committee. He plans to ask why Enron's auditors allowed the company to overstate its profits for four years, using what now appear to be very questionable accounting practices. Yet, during the 1990s, he rallied opposition to overhaul accounting for corporate mergers and acquisitions. Companies complained the change would reduce their earnings. Under pressure from Congress, the FASB compromised. Similarly, in 1994, he led the Senate in a resolution to urge the FASB to back off from an accounting change that would have required companies to reflect the value of future stock options in current earnings. The FASB did.
Discuss the following questions based on the above case study:

1. How far do you agree that Congress should have an influence on the FASB?
2. What is the auditor

Explanation / Answer

Eyebrows have been raised by the latest amendments by the Financial Accounting Standards Board (FASB) to fair-value measurements and other than temporary impairment (OTTI). The FASB proposed the changes on March 16, four days after FASB chairman Robert Herz was told to ease standards by the US Congress' House Financial Services Subcommittee. Paul Kanjorski, chairman of the subcommittee, said: "We can no longer deny the reality of the pro-cyclical nature of mark-to-market accounting. It has exacerbated the ongoing economic crisis. If the regulators and standards setters do not act now to improve the standards, then the Congress will have no other option than to act itself." The rules were adopted on April 2, after little more than two weeks of consultation. "Financial institutions wanted more guidance and leeway; this is what they lobbied Congress for," said Wallace Enman, a senior accounting specialist at Moody's Investors Service in New York. The International Accounting Standards Board (IASB) has not been immune from political pressure either. In October 2008, the European Commission pushed for changes to IAS 39 in order to allow the reclassification of financial instruments. The rule was amended on October 13, after just 10 days. One chairman of a European accounting standards board claimed the IASB and the FASB had been "ambushed" by politicians and pressurised into changing their rules on fair-value accounting. Public pressure on the auditing profession to "do our part" in finding fraud is understandable. Unfortunately, when fraud occurs, both the perpetrators and the auditors are blamed because the auditors "should have caught it." The assumption that people make is that it is the role of auditors to find fraud. Indeed, many in the auditing community support this notion. We conduct fraud training with the implicit assumption that one of us could find the next "smoking gun" of fraud, but fail to question whether we have the ability to successfully find it. Auditors look for fraud because the Government Auditing Standards (Yellowbook) requires it. GAGAS Standard 6.30 of the 2011 Yellowbook exposure draft states, "In planning the audit, auditors should assess the risk of fraud occurring that is significant within the context of the audit objectives." According to Standard 6.31, if an auditor determines there is a risk of fraud in the system, the auditor should "design procedures to obtain reasonable assurance of detecting such fraud." Therefore, the Yellowbook requires auditors to first perform a risk assessment as part of audit planning, and then to test items in that risk assessment in order to find fraud where it occurs.

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