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University of Massachusetts Amherst

Family Business Center

Financial Reporting: Enron and You

by Shel Horowitz

Howard Cheney, of FBC sponsor Meyers Brothers Kalicka, updated FBC's June 2006 meeting on post-Enron accounting practices, starting with a little recent history.

2001 saw "some of the country's largest frauds and bankruptcies--but there were things they were doing that were within accepted accounting practices of the time. Colossal financial failures were occurring on a regular basis, and there was a concern that auditors weren't doing their job very well. "In 2002, the federal response was Sarbanes-Oxley (SOX), which changed the level of responsibility taken by senior management and auditors" regarding both external and internal reporting. SOX created the Public Company Accounting Oversight Board. "The SEC and the American Institute of CPAs still have roles, but SOX added this other organization.

Family business owners may wonder, "'how does this affect me, I'm not publicly traded?'-but there's a trickle-down effect: other legislative bodies say, if it's good for the federal level, it's good for us too." Massachusetts has not yet adopted new laws in this area, but California and other states have.

Also, if you serve on nonprofit boards, which receive federal or state assistance, you may see some effect from the new standards. "The landscape starts to change. GAAP [Generally Accepted Accounting Principles] doesn't provide karma for privately held family businesses. It's all one set of rules."

What are your options?

  1. Follow all the GAAP rules except the one you don't want to bother with. Accountants issue a report on your financial statements; you have the option to choose not to implement a complicated rule that's not designed to apply to you, and the accountant will then add some language to their report that says this company did everything in accordance with GAAP, except this. If you get your banker on board with this concept, no problem.
  2. Convert your reporting to a basis that is not GAAP, such as income tax basis. Then your financial statements will take on the appearance of your corporate tax returns. Some of the items on the P&L may be different, like depreciation. Your expenses will be a bit higher, your earnings a bit lower. If you do what's necessary for third parties to understand, you're all set.
  3. Have your accountant do something other than the typical year-end report. If your loan agreement calls for certain benchmarks ad metrics, under 'agreed-upon procedures,' we design procedures to look at those metrics. It's more straightforward and less time-consuming than a full-blown audit, ad it provides third parties with the level of comfort they're looking for."

Cheney warns that these options won't work in every case, but that your chances are good if you involve your financial statement users in the process. "If you want to do one of these things that's a bit different, you don't want to say 'hey, look what I did,' but go to them early in the process and say, 'this will give you the information you need.'"

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