NCPA - National Center for Policy Analysis

Auditing Reforms in the Wake of Enron

February 14, 2002

One issue that should warrant more attention in the wake of the Enron scandal is the role played by auditors, observers note. American's well-policed stock markets, fearsome regulators at the Securities and Exchange Commission (SEC), rigid accounting procedures in the form of Generally Accepted Accounting Principles (GAAP) and the perceived skills of the Big Five accounting firms have been critical to the market's success.

But the "errors of judgment" to which Enron's auditing firm Arthur Andersen has admitted are not unique. Analysts believe several reforms are called for.

  • Auditors should be regulated, abandoning self-regulation and peer review of the Public Oversight Board for an independent organization reporting to the SEC.
  • Conflicts of interest should be eliminated by banning consulting work for auditing clients and order a compulsory rotation of auditors.
  • GAAP standards need to be more rigid, disallowing "pro forma" accounting procedures that deliver good numbers by omitting stock write-offs, special transactions, interest charges or depreciation.
  • Under British accounting standards, observers say, Enron would not have been able to overstate its profits by so much.

One reform option is for the SEC and its standards-setting body, the Financial Accounting Standards Board, to embrace international accounting standards.

Source: "The Real Scandal," The Economist, January 19, 2002.


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