Contents
Preface xi
PART I My Investments Went Ouch! 1
1 What? Another Accounting Scandal? 3
Accounting Prophets: “They Have No Profits” 4
A Rash of Bad Accounting 5
Debt? What Debt? 11
Summary and Conclusion 15
Notes
2 Balance Sheet Woes 33
Investment Risks 34
Some Ratios That Index Financial Risk 34
Financial Leverage and its Effects 36
Stock Prices and Financial Leverage 41
Bankruptcy Prediction Models 43
Bond Ratings Prediction Models 45
Cost of Lying 46
Summary and Conclusion 47
Notes 48
PART II Hiding Financial Risk 51
3 How to Hide Debt with the Equity Method 53
Brief Overview of Accounting for Investments 54
Equity Method versus Trading-Security
and Available-for-Sale Methods 55
Boston Chicken 57
vii
30
Details about the Equity Method and Consolidation 58
Hiding Debt with the Equity Method 63
Summary and Conclusion 70
Notes 71
4 How to Hide Debt with Lease Accounting 73
Present Value 74
Brief Overview of Lease Accounting 83
More Details about Lease Accounting 90
Adjusting Operating Leases into Capital Leases 91
Summary and Conclusion 101
Notes 101
5 How to Hide Debt with Pension Accounting 103
Definitions and Concepts Underlying Pension Plans 105
Brief Overview of Pension Accounting 111
Adjusting Pension Assets and Liabilities 117
Summary and Conclusion 122
Notes 123
6 How to Hide Debt with Special-Purpose Entities 125
Special-Purpose Entity Landscape 126
Securitizations 131
Synthetic Leases 137
Accounting for Special-Purpose Entities 141
Preliminary Corporate Responses
about Special-Purpose Entity Accounting 142
Summary and Conclusion 143
Notes 144
PART III Failures that Led to Deceptions 149
7 Failure of Managers and Directors 151
Failure of Managers 152
Failure of Directors 155
Business Ethics: As Oxymoronic as Corporate Governance? 161
Culture 164
Summary and Conclusion 167
Notes 168
CONTENTS
viii
8 Failure of the Auditing Profession 173
Securities Laws and the Auditing Profession 174
Evolution of Underauditing 177
Changing Nature of the Big, Independent Auditor 180
Serving the Public Interest 185
Andersen Verdict 187
Young Model: A Reprise 188
Summary and Conclusion 190
Notes 191
Appendix Sutton’s Critique of Serving the Public Interest 195
9 Failure of Regulation 213
Failure of the Financial Accounting Standards Board 214
Failure of the Securities and Exchange Commission 219
Failure of Congress 223
Failure of the Courts 227
Summary and Conclusion 227
Notes 228
10 Failure of Investors 233
Failure of Financial Governance 234
More Accounting 235
Enron—A Reprise 238
Rules for Investing 242
Summary and Conclusion 247
Notes 247
PART IV Making Financial Reports Credible 251
11 Andersen Has the Solution—Really! 253
Arthur Andersen Forgets its Roots 255
Purpose of Financial Reporting 256
Socialization 262
Andersen’s Accounting Court 263
Summary and Conclusion 265
Notes 267
Bibliography 269
Index 291