It was only short time ago that the American system of corporate disclosure the combination of Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS), the professionalism of auditors, and the rules and practices of corporate governance that are designed to ensure the timely dissemination of relevant and accurate corporate information — was championed as a model for the rest of the world. In the aftermath of the Asian financial crisis of 1997-98, which was marked by among other things a woeful lack of disclosure by companies, commercial banks and even central banks, American commentators and experts were urging not only Asian countries but others as well to adopt the key features of the U.S. disclosure system.
How much has changed since then. The number of American corporations whose earnings have been restated had been modestly rising throughout the 1990s, but then took a big jump in 1998 and hit a peak of over 200 in 1999. Numerous high profile lawsuits have been filed and official investigations launched against accounting firms for auditing failure, as shown in Table 1-1. All the while, concern has continued to mount about earnings management by many companies, a practice first decried by the previous chairman of the Securities and Exchange Commission (SEC), Arthur Levitt, whereby firms exploit the discretion allowed under accounting rules to ensure that their earnings show continued growth or at least hit the quarterly earnings estimates put out by financial analysts.