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CU Endorses Legislative Package To Curb Enron-Style Accounting Abuses

Monday, April 15, 2002
Gail Hillebrand: 415-431-6747
Consumers Union West Coast Regional Office

Reform Measures Will Help Investors Get Reliable Information
Necessary to Make Wise Financial Decisions

Sacramento, CA – Consumers Union, the nonprofit publisher of Consumer Reports, announced its support for tougher state rules to prevent future accounting abuses like those that prevented investors in Enron from learning the truth about the company’s dire financial situation. The consumer group endorsed a package of accounting industry reform proposals offered by members of the California Assembly and Senate at a news conference in Sacramento today.
“Public confidence in the stock markets depends on reliable accounting and honest and complete reporting of financial risks and results,” said Gail Hillebrand, a Senior Attorney with Consumers Union’s West Coast Regional Office. “We need vigorous, independent accounting so consumers can invest with confidence and protect their family’s financial security from Enron-style abuses.”
Just over half of all U.S. households are investing in the stock market, many through hard-earned retirement savings. Public confidence in the stock market has been shaken by the Enron scandal and the revelation that accounting firms that audit the books of major corporations may not always provide the most reliable information about company performance. Over 200 corporations restated their earnings from 1997 to 2000, which suggests that the way earnings are calculated and audited is inadequate. The former chief accountant for the Securities and Exchange Commission has estimated that financial fraud and revised financial statements have cost investors $100 billion in the last half dozen or so years.
The Enron scandal has highlighted concerns about whether accounting firms are maintaining proper independence from their clients. Andersen, the firm that handled Enron’s books, earned higher fees from the company for its non-audit related services. This is typical for many publicly held companies, and raises questions about whether these high consulting fees may cause firms to overlook questionable financial practices of their corporate clients. According to Business Week, 31 percent of the accounting industry’s fees came from non-auditing consulting services in 1991. By 1999, 51 percent of the accounting industry’s fees were made from non-auditing services.
“When accounting firms earn higher fees for the non-audit related services they provide to clients, they have a financial disincentive to raise objections about questionable bookkeeping practices,” said Hillebrand.
To help re-build public confidence in the stock market and give consumers the information they need to make wise investment decisions, Consumers Union endorsed a number of legislative proposals aimed at correcting accounting industry abuses:
* AB 1995 (Correa) Bans audit firms from performing non-audit services.
* SB 1527 (Burton) Requires audit firms to certify that they will not provide non-audit services to audit clients at the time a firm registers or renews registration as an accountancy partnership or accountancy corporation.
* AB 2970 (Wayne) Imposes a “cooling off” period before responsible members of an audit team may accept employment as a financial officer of a company they have audited.
* AB 2873 (Frommer) Bans shredding or destruction of audit workpapers for seven years, and requires mandatory rotation of audit firms every four years.
* SB 2023 (Figueroa) Strengthens peer review and related Board of Accountancy enforcement powers.
“In the 1990s, corporate America’s message to individual investors was ‘trust us’,” said Hillebrand. “Consumers have a message for corporate America in the wake of the Enron collapse: ‘show us.’ Show us sound accounting practices. Show us full disclosure of information, made in plain language so that we can make smart financial decisions for our families.”

Consumer Union, publisher of Consumer Reports, is an independent, nonprofit testing and information organization serving only the consumer. We are a comprehensive source of unbiased advice about products and services, personal finance, health, nutrition, and other consumer concerns. Since 1936, our mission has been to test products, inform the public, and protect consumers.