After Enron and Worldcom: The Government, Aicpa, and Fasb Responses

Abstract

This paper examines the responses of the government, the AICPA, and the FASB after the Enron and WorldCom accounting scandals. The major failures of these companies center on their creative accounting and bad corporate governance. The Congress responded to these issues with the Sarbanes-Oxley Act of 2002. The SEC responded with a variety of measures to restore confidence in the accounting profession; expand the role of management; improve disclosures and financial reporting; improve the performance of audit committees; and enhance enforcement tools. The Auditing Standards Board of the AICPA responded by issuing SAS No. 99, which provides auditors with additional guidance for detecting material fraud. The FASB has been slower to respond due to its lengthier due process rules. The paper discusses whether those responses would have been enough to prevent the Enron and WorldCom financial disasters, and whether they are ample now to prevent corporate failures in the future.

Keywords: Enron, Congress, SEC, AICPA, FASB, Financial Reporting

JEL Classification: G34, G38, M41, M43, M49