Creative accounting
Archived article from Nov 18, 2002
By Dave Muha
Fifteen Rutgers students are getting in-depth cooking lessons this fall. No, they are not enrolled in a culinary arts program. They are graduate students at the Rutgers Business School- Newark and New Brunswick studying the past year's accounting scandals as part of a new M.B.A. elective, "Cooking the Books."
The course is the brainchild of Professor Miklos Vasarhelyi, who based the syllabus on 700 articles he collected from a variety of newspapers and financial publications.
"I got interested in what's happening and decided that it would be worth talking about in the classroom," said Vasarhelyi. "It's very good for the students from the standpoint of understanding what's happening in today's environment and providing practical applications for accounting and finance."
The course began with an examination of the Enron debacle and other corporate scandals. From there, students learned about what Vasarhelyi terms "cooking technology" - how accounting methods have been used to obfuscate financial results. The course covers who's responsible for setting standards, the nature of the standards that are being set, conflicts of interest with analysts and the relationship between corporate compensation and valuation - an important topic in understanding why cheating has become so prevalent.
"The whole concern with the overstatement of earnings has only happened since options became a big issue in corporate compensation packages," he observed, noting that most fraud traditionally involved understating earnings to minimize tax liability. "Executive compensation and company performance became tightly linked. If the executives got immediate results, they were compensated. If the results didn't come, there was incentive to help get the results by fictitiously increasing certain drivers of valuation like earnings and sales."
Because knowing how to detect that the books have been cooked requires knowing how to cook the books, the course teaches students the tricks of the trade. But they also learn about the new initiatives promulgated by Congress, the New York Stock Exchange, the American Institute of Certified Public Accountants and others aimed at combating fraud. Students are challenged to critique the effectiveness of these proposals and put forth their own solutions.
Of course, when it comes to addressing the problem, Vasarhelyi has some ideas of his own. An expert in the field of continuous auditing, a new technology that brings the after-the-fact auditing process to the moment of the business transaction, he recently co-authored a paper that argues that the discipline could have helped detect that Enron's books were being cooked.
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