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Accounting fraud rising
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January 11, 2002: 4:05 p.m. ET
Enron is simply the latest case as accountants face increasing client pressure.
By Staff Writer John Chartier
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NEW YORK (CNN/Money) - As details unfold about the accounting shenanigans that led to Enron's collapse, federal regulators note the case is simply the latest in a growing string of high profile scandals at major U.S. corporations in recent years.
The number of fraud cases investigated by the Securities and Exchange Commission jumped 41 percent in the last three years, according to agency data, resulting in tens of millions of dollars in fines to settle the charges.
Regulators said such cases are becoming all too common in an increasingly cutthroat atmosphere where client pressure to make sure the numbers add up often leads to ethical breaches.
"Accountants don't have that sensitivity. They don't have the sense that numbers hurt," said one former corporate accountant who asked not to be identified. "Early on in their career they learn to shave the truth."
Before Enron (ENE: unchanged at $0.67, Research, Estimates) slid into bankruptcy, wiping out the retirement savings of many of its employees, several high-profile companies attracted SEC interest, and ultimately paid fines, to settle accounting charges. Waste Management (WM: up $0.39 to $33.55, Research, Estimates) , Cendant (CD: up $0.14 to $19.02, Research, Estimates) , Sunbeam and MicroStrategy (MSTR: down $0.03 to $4.00, Research, Estimates) all faced federal scrutiny.
Pressure from clients on their accountants to make the numbers add up is so great that accountants are faced with a dilemma when there's a problem, betray the client, or overlook it, hoping no one notices and risk getting caught, industry watchers said.
Much of the pressure brought to bear on accountants stems from the cozy relationships the firms have with corporate clients. Corporations often hire accountants and other personnel from their auditors and accountants, regulators said.
That's what happened in Waste Management's case.
"I think for all the relevant periods, the chief accounting officers at Waste Management came from Arthur Andersen," said one SEC regulator. "The relationship is too cozy."
Statistics appear to support the idea that companies are increasingly trying to get away with cooking the books. According to SEC data, regulators investigated 112 cases in 2001. That's a 41 percent increase from the 79 cases investigated in 1998.
"There are more financial misstatements and fraud now," SEC spokesman Thomas Newkirk said. "There was a time it was a rare day to get caught in a fraud case. In the last year or two lots of big capitalization, nationally known companies have been involved in financial fraud."
The list keeps growing
Andersen, which admitted late Thursday to destroying Enron-related documents, was fined $7 million in June, the biggest civil penalty ever assessed against a Big Five accounting firm, after the SEC said its audits of Waste Management's financial statements were "false and misleading."
The SEC said the company failed to stand up to the biggest U.S. trash hauler to prevent accounting irregularities.
In November, Waste Management itself paid $457 million in fines to settle charges of violating securities laws in its 1998 merger with USA Waste Services and its 1999 financial statements.
In 1999, Cendant Corp., the travel and transportation conglomerate that owns Ramada Hotels and the Avis car rental chain, agreed to pay shareholders $2.83 billion to settle a suit alleging irregularities in its merger with CUC International Inc. The company's auditor, Ernst & Young LLP, was not fined.
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Accountants don't have that sensitivity. They don't have the sense that numbers hurt
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former corporate accountant |
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Appliance maker Sunbeam Corp. was forced to restate financial results for 1996 and 1997 last May, and the SEC sued former CEO Al Dunlap (Chainsaw Al) and other executives after he was accused of using phony accounting to boost profits. The company later filed for bankruptcy. Again, Arthur Anderson was the auditor, but was not fined.
And three top executives of software firm MicroStrategy, including CEO Michael Saylor, were ordered to pay $350,000 apiece for similar practices. The company and its auditor, PricewaterhouseCooopers LLC, were not fined.
Newkirk said it's important for regulators to catch the small, seemingly insignificant irregularities early on in order to prevent them from ballooning into Enron-sized situations that hurt employees and investors.
"If you fail to arrest problems when you first find them you end up in a situation of either having to go along with bigger violations in the future, or of standing up to the client and correcting it," Newkirk said. "Of course doing that involves both embarrassment to the firm and the auditor." 
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