Practices in U.S. Public Companies
Has the Environment Changed?
Linda M. Nichols
NOVEMBER 2006 - The
bankruptcy of Enron Corporation in 2001, with its $62 billion
in assets, was the largest in U.S. history, to that point.
It resulted in thousands of employees losing both their
jobs and their retirement savings. In addition, Arthur Andersen,
then one of the world’s leading international accounting
firms, essentially ceased to exist in June 2002 after being
found guilty of obstruction of justice in an Enron-related
case. Since Enron, accounting scandals have plagued U.S.
business. In July 2002, WorldCom filed for bankruptcy with
$100 billion in assets, making the Enron bankruptcy appear
small in comparison. These scandals have resulted in changes
in the regulatory environment surrounding financial reporting.
Sarbanes-Oxley Act of 2002 (SOX) has dramatically affected
the accounting and auditing professions. SOX led to the
creation of the Public Company Accounting Oversight Board
(PCAOB), whose role is to oversee and inspect the audits
and auditors of public companies. SOX also increases management’s
responsibility for financial reporting by requiring the
CEO and the CFO of public companies to certify the quarterly
and annual statements submitted to the SEC. Criminal penalties
may be imposed on anyone who knowingly falsely certifies
the financial statements. Another major change is SOX’s
requirement that all public companies issue a report on
internal control, acknowledging management’s responsibility
for maintaining controls and assessing the effectiveness
of the company’s internal control structure and procedures.
new regulations, and the perception that financial reporting
is under closer scrutiny, led the environment of accounting
departments in public companies to really change? If changes
have occurred, have they taken place at public companies
of all sizes? To obtain insight into these questions, controllers
from both large and small public companies were asked to
complete a short survey, the results of which follow.
controllers of both large and small U.S. public companies
were surveyed regarding the change in the accounting environment
within their companies over the last five years. For the
purposes of this study, large companies were defined as
those with over $400 million in sales for 2003, and small
companies were defined as those with less than $200 million
in sales in 2003. Respondents were asked to compare 1999
to 2004 and state their level of agreement or disagreement
with 15 statements based on a five-point Likert scale (1
= strongly disagree, 5 = strongly agree).
surveys were mailed to the controllers of 100 U.S. public
companies in the oil and gas industry; there was a 63% overall
response rate, with 34 respondents from large companies
and 29 from smaller companies. The results are presented
in the Exhibit.
respondents disagreed slightly with Statement 1, thus indicating
that some changes have occurred in their accounting practices
Both large- and small-company respondents agreed that their
accounting practices have become more conservative over
the past five years (Statement 2), with the highest level
of agreement found in the respondents from smaller companies.
respondents indicated a strong level of agreement with Statement
3, reflecting an overall increase in the quality of financial
reporting since 1999.
respondents were basically neutral regarding the question
of whether the complexity of transactions has increased
(Statement 4), although large-company respondents indicated
some slight agreement that transactions have become more
complex. Large companies probably deal more with complex
issues, such as derivatives and special-purpose entities.
representing smaller companies strongly agreed with Statement
5, indicating that smaller companies have spent time evaluating
their accounting practices. Respondents from large companies
showed slight agreement with this statement. The difference
in response between large and small companies may indicate
that large companies did not feel a need to reevaluate their
accounting practices, being more confident in what they
had been doing in the past.
respondents from small companies agreed with Statement 6
(consideration of proper GAAP has increased), while the
respondents from large companies were about neutral. The
same holds true for this statement as for the last. Management
of large companies may not have felt a need to reevaluate
their accounting practices and application of those practices,
being more confident in what they had been doing in the
respondents disagreed that pressure has increased to meet
earnings goals (Statement 7), with respondents from smaller
companies expressing a higher level of disagreement.
from large companies reported a higher level of agreement
with Statement 8, regarding increased scrutiny of financial
records, than did respondents from smaller companies. Most
of these large companies are audited by the Big Four. While
all audits have increased in scope post–Sarbanes-Oxley,
the difference seems to be especially pronounced among the
Big Four firms.
respondents agreed slightly that accounting staff members
now feel more comfortable questioning accounting practices
(Statement 9), while small-company respondents were neutral
on the question. Large companies may have been more apt
to instill internal whistleblowing procedures, in the wake
of the Enron scandal.
respondents strongly agreed that the workload for their
accountants has increased (Statement 10). This may reflect
the streamlining of American businesses in an attempt to
operate more efficiently and cut costs.
respondents were neutral with respect to Statement 11; the
perceived level of job security in their accounting departments
has not changed since 1999.
from both large and small companies agreed slightly that
there has been an increase in technical training for their
accountants (Statement 12). Small-company respondents had
a slightly higher level of agreement than large-company
respondents, indicating that training may have increased
more noticeably in small companies.
respondents from small companies disagreed with Statement
13, while large-company respondents were neutral. The results
indicate that training on ethical issues has not increased
respondents strongly disagreed with Statement 14, indicating
that turnover in accounting staff has not increased in the
past five years.
all respondents very strongly agreed that GAAP is becoming
increasingly complex and difficult to interpret (Statement
of the Results
results reveal that, in many areas, there has not been a
great deal of perceived change in the accounting environment
of oil and gas companies since the Enron collapse. Some
areas, however, have seen changes. There was an overall
level of disagreement with the statement that pressure to
meet earnings goals has increased. This is not a surprising
result in the wake of Enron and SOX. Now that both the CEO
and the CFO have to sign off on the fairness and accuracy
of financial statements, they must more carefully consider
the possible consequences of manipulating numbers to meet
was also overall disagreement that the turnover of accounting
staff has increased. The job market in accounting is good,
due in part to new employment opportunities created by SOX.
For example, audit firms have increased their hiring levels
of new accounting graduates. According to this survey, however,
the turnover level of existing industry accounting staff
has not significantly increased.
turnover has not increased, the survey results reveal that
the workload per accountant in oil and gas companies has
increased over the last five years. This could be attributed
to cutbacks in accounting personnel as companies strive
to trim costs. The tight job market might also mean that
accountants are willing to work longer hours in order to
keep their present employment.
respondents agree that GAAP has become increasingly more
difficult to interpret and apply. Following the Enron collapse,
much criticism was voiced against U.S. GAAP because of the
highly technical manner in which the standards are written.
The standards are rules-based, and are often difficult to
interpret and apply to transactions in varying situations.
Many commentators have proposed that a principles-based
set of accounting standards be developed for use in the
United States. Under a principles-based system, standards
would be more theoretical, providing guidelines but not
consisting of highly technical and detailed rules. Judgment
would need to be applied by managers and auditors in applying
the guidelines to specific transactional situations. The
survey’s finding implies support for the development
of standards that would be easier to interpret and apply.
is general agreement that outside auditors have increased
their scrutiny of company financial records and reports.
Public pressure exerted on the auditing profession after
the Enron collapse, along with the provisions of SOX, has
served to increase testing in the audit environment. Increased
scrutiny in audits should result in more reliable financial
statements and, ultimately, an increased level of confidence
in American business.
and perhaps most important, the respondents indicated that
the quality of financial reporting within their companies
has increased. This likely results from accounting managers
being increasingly concerned with fair and accurate reporting
due to increased pressure and penalties from the SEC.
some slight differences were noted, the responses of large-
and small-company controllers in the survey did not differ
significantly. A more detailed analysis of the responses
does not reveal any significant differences when the company
size is broken down more finely. The results indicate that
the post-Enron changes in the accounting environment have
occurred at companies of all sizes.
SOX was met with skepticism by the accounting profession,
this survey indicates that it may have had a positive impact
on the quality of financial reporting. All accountants need
to be diligent in making sure that these benefits are not
lost as the number of scandals and, therefore, the level
of public scrutiny of the profession decrease. Newly implemented
procedures should continue to be carried out with due diligence
and toward the goal of fair and representative reporting.
interesting finding that should be addressed by the profession
is in the increasing workload for individual accountants.
Both public accounting firms and corporate America are under
pressure to reduce personnel costs. Reducing the number
of accounting personnel too much, however, could result
in increased, and sometimes unreasonable, workloads for
accountants—a dangerous practice. If individual accountants
are overworked, mistakes are more likely to occur as they
try to rush through their duties and responsibilities. While
balancing workload and personnel costs is a delicate matter,
members of the profession in supervisory capacities must
recognize that high-quality reporting and auditing requires
that accountants and auditors be given reasonable workloads
that allow time to critically assess situations and resolve
collapse of Enron and the resulting demise of Arthur Andersen
has led to a reassessment of the accounting and auditing
professions. The result has been a regulatory environment
reshaped by SOX. While accountants and auditors have struggled
with the changes, their overall effect appears to be positive.
As this survey indicates, controllers believe that the quality
of financial reporting within their companies has increased.
The reputation of the accounting and auditing professions
has suffered greatly over the last few years. The positive
changes resulting from increased public scrutiny should
help restore public confidence in financial reporting and
in the accounting and auditing professions. More important,
an increase in reporting quality should serve to prevent
major corporate collapses due to accounting scandals in
M. Nichols, PhD, CPA, is a professor of accounting
at Texas Tech University, Lubbock, Texas.