DEMAREST: Public accounting firms lead charge on new regulations
Opinions Column: Tax and Turmoil
This month marks the 15-year anniversary of the tragic reveal of the most notable corporate accounting scandal of all time, Enron. Enron was a world-leading energy company in not only the oil and gas industry, but had significant ties to the electricity and mining industries within the U.S. as well.
When Enron made the decision to invest into energy providing opportunities and drilling operations in multiple countries in the Middle East, they started to see some less-than-satisfying returns on their investments. This was devastating to the executives of the company because investors would soon lose interest in the company stock if their foreign operations were completely debunked.
Being a public company, Enron was required to have Certified Public Accountants internally compile financial statements to publish to be in compliance with the U.S. Securities and Exchange Commission's standards. Not only that, but after those statements are published publicly traded companies are required to hire a public accounting firm to audit and review the published statements and then give an opinion on the accuracy of the statements.
What Enron did was strategically report this global operations to be falsely claiming significant financial performance, and Arthur Anderson LLP, the third party audit firm they paid to give an opinion on the statements, was aware of the inaccuracy and still published that the reporting was adequate. This eventually resulted in Enron going bankrupt, as well as millions of people who invested into Enron’s stock because of false reporting and false audit opinions losing everything they put in.
Not too long after this, countless people sued Arthur Anderson as a firm for being responsible for their lost investments for not drawing attention to the reporting discrepancies, and Arthur Anderson went out of business. Not too long after, Congress then passed Sarbanes-Oxley Act, which in summary was a law that made the requirements of an audit more thorough, put more liability on the accountant in terms of performing an audit and increased the amount of checks and balances required for public companies, more commonly known as internal controls.
This is drastically affecting the world of business today in terms of what companies are spending a lot of time, money and effort on. The four biggest global audit firms, KPMG, Deloitte, Ernst & Young and PricewaterhousewCoopers, have launched specific practices to harness a thorough examination of the information reporting process tools used in internal audit of public companies, and the efforts are completely ignored by large media outlets.
For the most part, public companies in the U.S. use software referred to as enterprise resource planning to compile all information regarding the companies operations, and makes it available to the certified accountants so they can compile the statements that are required of the company. The innovative side of the accounting firms is they are developing and mastering not only the act of auditing the financial information’s accuracy, but also auditing the process in which all operational information a public company encompasses in terms of reporting.
This is so huge for the professional services environment because now investors in these large companies can be ensured the information being accessed by their accountants isn’t just company from some crazy cyber-space process, but from a process that has been thoroughly examined and approved by third party professionals that understand the importance of the task of Sarbanes-Oxley compliance as a whole.
In that process of auditing it opens up a wide range of ways that companies can assess their information more affectively and gives them the chance to run analytics in a quantitative capacity to streamline their business practices to also produce value for their shareholders and executives alike.
The craziest thing about all of this positive reinforcement in the world of compliance and reporting at the corporate level is that regular people do not know anything about it, and that is at the fault of American journalists. Americans that do not care about what the largest service providers in our country are doing with their money are lazy, uninformed and a nuisance to the information sharing community that is the 2016 world economy.
When it comes to the economy, everything revolves around information that can be confirmed, and it seems to be software developers and accounting firms are the only entities doing their best to improve the public’s knowledge of this. If someone wants to challenge my accusations of this I invite you to skim through the content of every major publication in the country, and I assure you that your findings will have a lot more to do with national anthem debates and not topics that effect the world economy on a highly in-depth level.
Nicholas Demarest is a Rutgers Business School senior majoring in accounting. His column, “Tax and Turmoil,” runs on alternating Mondays.
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