Congress and Accounting Scandals: Is the Pot Calling the Kettle Black?

Abstract

Congress, outraged by Enron, WorldCom and similar scandals responded with the Corporate and Auditing Accountability, Responsibility, and Transparency Act of 2002 (Sarbanes-Oxley Act). The FASB imposes, and Sarbanes-Oxley reinforces accounting standards applicable to the private sector. Although the federal government has adopted FASAB rules, which impose similar standards upon government agencies, the Government Accounting Office (GAO) reports that a substantial number of agencies are in noncompliance. Moreover, these rules simply do not apply to the federal budget process itself. This Article examines the pervasiveness of this double standard and describes numerous ways in which Congress uses number games and gimmicks, including the off-budget trick, to mislead the public as to the true extent of the federal deficit. Many of these gimmicks are remarkably similar to those that Congress found so outrageous when they were used by Enron and others to mislead investors on their true financial conditions.

Keywords: Sarbanes-Oxley, FASB, budget, tax policy

JEL Classification: H61, H62, K23, K34