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Enron 101: accounting strategies to avoid

Even a small company can learn from the Enron school of scandal. Sure, the bigger they are, the harder they fall, but the accounting issues that toppled the energy giant can bring down any size operation.

Don't let your company follow bookkeeping bad examples. Here are ways to ensure your company and employees behave in a profitable -- and ethical -- manner.

Don't cheat. "You can't win the game if you don't play by the rules," says Robert Gass, president of WBD Accounting Inc., a CPA firm based in Sunrise, Fla. "And there are enough legal ways that you don't need to do this fancy stuff to make money."

Know the basics of accounting. While you may not be keeping your own books, that doesn't mean you should be totally ignorant of financial matters. "Take some accounting courses so you know the fundamentals," Gass says. "If you don't understand what your accountant is doing, you're paying the guy, so ask him to explain it."

Take an active part in your company's bookkeeping. "Ask questions," says Curt Anderson, CEO of Fair, Anderson & Langerman, a CPA firm based in Las Vegas. For example, find out whether your accountant takes aggressive or conservative accounting positions. "Don't blindly turn over your finances to an accountant who isn't willing to work closely with you as a client, as a neighbor," Anderson says.

Cultivate an open relationship with your accountant and auditor. "Encourage your auditors to discuss their work openly with you and to not fear the consequences of their discoveries," says Anderson. Spend time working with your financial professionals so you are familiar with your company's bookkeeping

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Establish a professional distance. Prohibit the hiring of consultants, auditors or other professionals who have worked on your company's account. "This will establish the perception of independence between auditor and client," Anderson says.

Stay away from dubious deals. If a business deal makes no economic sense but might temporarily help your bottom line, steer clear of it, advises Michael Shaub, a professor of accounting at St. Mary's University in San Antonio. See if a transaction passes the grandmother test. In other words, if you'd be afraid to tell your grandmother how you were making a living, then you probably shouldn't be doing it.

Don't set impossible revenue goals. If your company's yearly goals are unreasonable and your employees are afraid to tell you so, don't be surprised if they find ways, albeit illegal, to keep you happy.

Avoid inner circles with members who all think the same way. Part of Enron's problem was a group of higher-ups who convinced each other that the questionable accounting was above board. Don't fall into that trap. "Insist on having at least two board members who are truly independent of the company and [are] unafraid of telling management the truth," says Professor Shaub.

Don't hire accounting "yes men." It's human nature for employees to want to tell the boss what he wants to hear. But that can be dangerous when it comes to company accounts. Instead, work with bean counters who will take an objective look at your company's finances and won't be afraid to be honest when it comes to bad news. The hiring of truth tellers, says Shaub, "may be as important to the company's success as hiring intelligence and experience."

Give employees ways to voice their objections. Workers who believe their colleagues or company officers are doing something wrong or illegal need to be heard. And be sure you have the management in place that will listen to whistle-blowers and who will act on complaints.

Cultivate integrity. Make your own personal integrity a part of your company's culture. "All the rules and regulations will not make up for personal integrity in business," Anderson stresses.

Recognize that wrong decisions can be made -- and corrected. No company is immune from occasional bad and unethical business decisions. Correcting and recovering from these missteps is what sets a business apart. It's a matter of having the right mechanisms in place so such wrongdoing is caught early before any damage is done.

"The large majority of discovered fraud in the United States takes place in small businesses, and it is almost never discovered by the auditors," Shaub says. "It is usually discovered by honest people in the company who notice something out of the ordinary."

Jenny C. McCune is a contributing editor based in Montana.

-- Posted: June 19, 2002

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