Regulation and enforcement of financial reporting in South Africa : a historical analysis from 1973 to 2011

M.Com. (International Accounting)One would be hard-pressed to find an accountant who does not know about the Enron collapse which took place over a decade ago. The scandal was the largest the corporate world had seen at the time, and its impact was significant. Shareholders of the company lost tens of billions of dollars (Jickling, 2002), 4,000 employees lost their jobs (Bratton, 2002), the reputational damage suffered by their auditors Arthur Andersen was severe enough to break up the firm (Fearnley, Brandt & Beattie, 2002) and members of the public stood in awe that this was even possible. This incident was succeeded in following years by more high-profile international corporate scandals involving Tyco International, WorldCom and Parmalat, each one affecting a variety of stakeholders and broader society. The common thread that weaves these corporate collapses together appears to be seized opportunities to misreport financial information. Corporate failures of companies as big as Enron are inclined to give cause for future business regulation (Bratton, 2002). As noted by FearnIey et al. (2002), the Enron collapse provided regulators with an opportunity to reconsider fundamental issues associated with the regulatory framework for corporate financial reporting. Bratton (2002) explains that numerous regulatory-related concerns had been implicated prior to the completion of the Enron investigation. As with the demise of the other companies, the cause thereof involved questionable practices, particularly relating to the accounting treatment of transactions and the reporting of the financial position and performance to the users of financial statements. The result was that stakeholders of the entities did not have access to accurate and complete information regarding the entity in order to make sound economic decisions. This phenomenon is referred to as information asymmetry (Gaffikin, 2008)