What other motivation has management had to manipulate the data, beyond personal greed?
LR: All sorts of important contracts are tied to the numbers. Certainly the executive bonus contracts play a role, but so do lending agreements between firms and financial institutions. Banks say if your debt-to-equity ratio gets too high, the loan is immediately due. You saw what Enron was trying to do with off-balance-sheet debt. The company didn’t want its loans called or the interest rate stepped up, so they used the latitude in GAAP to hide liabilities. They exploited the gaps in GAAP. It sounds as if there’s an institutionalized framework in place that encourages “creative accounting.” How has Sarbanes-Oxley alleviated the crisis, and is this legislation sufficient? LR: Sarbanes-Oxley has helped somewhat, primarily by limiting the type of work an auditor can do and thereby minimizing the egregious conflicts of interest we’ve seen between accounting firms conducting audits for the same companies to whom they offer consulting services. But auditors are still hired by those whose pe
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- What other motivation has management had to manipulate the data, beyond personal greed?
