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's role in finding a fraud?