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Vol. 55, No. 4, pp. 328-344 (2004)

“Corporate Governance and Accounting Problems -The Enron Scandal and U. S. Accounting Regulation Reforms-”
Tokuo Iwaisako (The Institute of Economic Research, Hitotsubashi University), Mineko Furuichi (Institute for Monetary and Economic Studies, Bank of Japan)

From the point of view of corporate governance, we provide a summary and critical assessment of recent US accounting scandals, exemplified by the collapses of Enron and its accounting firm Arthur Andersen, to draw policy lessons for Japan. Changing corporate governance in the U.S., in particular increasing emphasis on stockholders' rights, had a lot to do with creating incentives for accounting malpractice by firm managers. However, the main problem in recent scandals is dysfunction of the gatekeeper model in accounting and auditing practice. The conflict of interests between auditing and consulting business within major accounting firms is causing the failure of the gatekeeper model. The reforms of the Surbanes-Oxley Act try to solve the problems by enforcing disclosure and introduction of independent public regulatory bodies that supervise auditing practice. This direction of U.S. accounting regulation reforms affects regulatory changes in EU and Japan too. However, these reforms cannot present a complete remedy for the conflict of interests between the auditing and consulting businesses.