As a CPA, teh Enron debacle has hit close to home for me. So, I'm floating this trial balloon to test a possible solution. Your mision, should you choose to accept it, is to poke holes in my theory. Admittedly, this one has NOT been fully thought thru by me yet.

First a word of explanation ....

The "independent auditors" (Arthur Andewsen, in this case) are paid for their audit BY the audit client - Enron. So, should audit issues arise, the auditors ability to get paid for their audit is diminished by blowing teh whistle. That's what we call "a conflict of interest" where I come from.

The solution for this, to the Democrats and the Marxists out there,  is to have audits paid for by the gov't. Well, naturally, I don't like this.

So, what do you do????

Its an honored American tradition that those who benefit from a service should pay for it. In this case, the shareholders are teh beneficiaries of the audit.

So, here's my solution -

All publicly traded companies audits should be paid for thru mutual funds and stock brokerage organizations. When a fund or individual security is purchased, the SEC, or the NYSE, or the NASDAQ (all non-gov't organizations) could  charge a surcharge that would form a pool of funds out of which audit fees could be paid to the independent auditors.

This would make fund managers the ones who call the shots re: the audit, and shareholders would pay the cost of getting true and accurate information.

Disclaimer: I'm not even really sure that THIS drastic a solution is necesary. But should these problems continue, it **** MAY  ***** become necessary.

All right - rip away!!!!!!!

Who audits the auditors?  

The cost should be split 50/50 between the Corporation and the shareholders. The payment funds should be estimated  based on a reasonable industry average and the funds held in escrow to ensure payment to the auditing firm.

Several qualified auditing firms should compete by closed bid process and be bound to their bid with a penalty for delays and  cost over runs. As well as be held Liable for mal-practice.

This would benefit and bind all parties.

Too simple isn't it.

Yeah, I bet the folks in North Korea are laughing so hard they can barely hold down the handful of grass they had for lunch.  [rolleyes]

Spot on, renamed.

Capitalism with all its excesses, is STILL the best "game" in the world.

Do I get the surcharge back when I sell my shares? What happens to the money if the audit is never made?

I am not opposed to capitalism but I have no use for thieves, inside traders, crooked auditors, destroyers of evidence and a host of others!!

Until corporate executives are held liable and LOCKED UP for these types of crimes there will never be a solution.  100% return of all money made by these vermin is only a start!

Anybody who invests in defined contribution retirement plan rather than defined benefit is at high risk.  To be locked into a 401k where the company controls your money is insanity!  As much as I regret the loss suffered, a lot of these people brought it on themselves.  What you can rely on is being ripped off by corporate America.

Annual audits are required for publicly held companies.

No refund as the surcharge is the fee paid for a service rendered - getting you the investor the most unbiased information for making better investing decisions.

...or, we could teach people to behave ethically.

Nah, that'll never work.

The shareholders already pay the costs, don't they? Any and all expenses lead to reduced dividends or stock prices, right?  Audits are the cost of doing business, thereby reducing profits.

I agree, that all the execs that profited should first return ALL profits, then be skinned alive, or at least be publicly flogged, as if they lived in Singapore.

You've clearly posed this as an early stage idea.

My initial reaction is fear that independent auditors would become "Independent Auditors."
With this approach accurate and timely information would become "Accurate and Timely Information."

Shareholders large and small would get similar if not equal benefits (information).  Inside dealing and under-the-table-deals would also suffer.

More thought is required here.

ONLY indirectly so.

As a CPA and auditor myself, I can tell you there is IMMENSE pressure on the auditor by his client (the auditee) to produce a "clean" opinion. When you don't, you essentially don't get paid. its not actually that black and white, but there is definately pressure, and a conflict of interest.

I'm not following you.

Please elaborate.

I think what is needed is to change the definition of "generally accepted accounting principles".

These "principles" need to be modified so its crystal clear that ALL assets and ALL liabilities, including parnerships or whatever, MUST be reported in the financial disclosures. NO EXCEPTIONS.

Had this simple rule existed Andersen would have  been COMPELLED to put these deals on the books.

I don't think we need more watchdogs, we need the accounting industry to report ALL assets and  ALL liabilities.

Your thoughts are too sound and fair !
(Read my previous comments with a [:D] in mind.)

Ahhhhh, some EXCELLENT analysis.

Yes, agreed.

But had GAAP rules that exist NOW been followed, we wouldn't be in this mess.

The problem is that the suditors didn't follow the rules. Accordingly, "New rules" arene't the answer, in my opinion.

I guess I still think the answer is in making the auditors answer to the shareholders and mutual fund managers DIRECTLY.

Right now they answer to the corporation being audited, who holds the Sword of Damocles over their head.

Don't change anything.

Benjamin

The signs were there.

The only thing that might need to be changed is that the company needs to allow employees to put their retirement plans anywhere they wish. As it is at most places.

Benjamin

ECS,
(I know this is a touch pickey.)
Had this simple rule existed Andersen would have been REQUIRED to put these deals on the books.

Still there is no protection for the audit firm from either the client or the audit firm's internal pressures to generate revenue.

I 'BELIEVE' garandman is seeking to place audit firms in a situation where they may have an opportunity to be truly independent.

The situation as described in the original topic would allow for true indepenence.  

[smoke]

Hello garandman:

I posted my rant because the popular press was churning out propaganda with a decidedly left wing slant and almost no one was defending the GOP. No surprises there.

Personally, I have no connection with Enron or CPAs and could not care less. Except... that we are entering the '02 election year. If we want to save our rights, this year is important.

CPAs do a good job. Inflation tends to make the latest business scandal "the largest in history". Personally, I have zero thoughts beyond that except that CPAs need to remember that the economy, the world economy, depends upon the CPA's personal integrity. Like judges who are sometimes corrupt, there isn't any easy answer.

Hmmm, you know this fact has not been widely reported, at least I have not heard this.

I suggest we keep the other half of the equation in mind also - - its being reported more and more that Enron officers knew what was going on; some even expressed their concerns in writing, yet Enron did nothing to unwind these deals.

Anderson needs to clean up their act. Personally I think some Enron officers need to go behind bars.

sorry for the rant, its a bit off your original idea.
[soapbox]

Edited because I can't spell.

I'm guesing this is a pretty safe bet.

Garandman, your idea is sound so it is unlikely to ever happen.  It appears auditors failed to do their job at best or more likely lied like crazy.  Some auditors need to do hard time along with the Enron creeps.

Anything that will make auditing more independent is clearly a good thing.  Criminal penalties for both crooked auditors AND corporate CEO, Pres, VP, and board members are in order as well.

I haven't really been up on this Enron thing. It seems shady, but a lot of big business seems to work that way.

I've noticed people complaining that they lost money, that is also business. Sometimes you make money sometimes you go broke. I realize in this case though the company executives seemed to have advance warning so they sold of their stock before it was worthless.

Someone made a comment that stock analysts had listed Enron as a "buy" until the end. Most trading houses also have capital banking divisions. Many make more money on the banking side than the stock commision side. So if you are an analyst do you down grade stock that's comapny is funded by your banking division?? You will see very few "sell" recomandations, ever.

But anyway I was watching the national news, they were talking about Enrons federal tax situation. In the past 5 years they paid NO TAXES. In fact they may have gotten up to $382 million in tax rebates............. Must be nice.

Your idea shows imagination, but unfortunately some factors make your solution less than ideal.  First, the fundamental conflict of interest that currently exists would likely still be present.  Remember, shareholders are CURRENT owners of a company.  They are individuals who have already put money into a company, and have an interest similar to management's in promoting the stock.  Surely it is not in the interests of current shareholders for an accounting company to destroy the value of a stock they already own.  Thus, they are unlikely to choose a highly critical accounting company to evaluate the value of their current investment.  Make no mistake, it is who chooses who audits, not who pays, that makes the difference.

The best answer is to have a single set of accounting principles.  In other words, change GAAP to conform to tax law.  We already have federal auditors, albeit a relatively small force compared to all of the outside corporate auditors.  It would seem that there would be no need for groups such as the supposed regulatory body AICPA.

Personally, as an accountant (not a CPA though), I'd like to keep the government regulators as far out of the accounting industry as possible. Look at current tax law. Do you want financial,cost, and audit accounting to become as thickly woven as not-forprofit/governmental and tax accounting? I'll pass thanks....
My opinion on the audit independence issue? Let the various funds and independent stockholders foot the bill completely. Company's already have internal auditors, the external audit should be for the shareholders (and paid for by them). When the audit opinion comes out, plain old risk evaluation will dictate what happens to the stock price.

Just saw on the PBS news, that employees of Enron, that recieved Enron stock as part of their 401(k)'s, were NOT ALlOWED to sell their stock, after the upper level management had divested itself, as the stock prices were crashing.

It's stuff like this that makes me just as suspicious of big business as any other entity.  

I think the Bush administration should bail out Enron. You gotta stick with your friends in times of need. A $15 billion package similar to that approved for the airlines should do it.