WSJ; Overheard On Wall Street: Whose Rules Are Followed Tinted By Fraud

Accounting rules aren't always black and white. So when scandals hit, companies sometimes claim there isn't a problem because they were within the rules. That, though, isn't always enough. As Public Company Accounting Oversight Board Chairman James Doty stressed in a December speech, intent matters.

Mr. Doty noted that while loopholes exist in rules, authorities can still go after wrongdoing. In fact, executives who deceive investors can be in hot water even if they complied with accounting rules.That was the holding of several important legal decisions, Mr. Doty said.

Two involved frauds at WorldCom and Adelphia. In both, Mr. Doty said, a federal appeals court rejected arguments that accounting rules allowed fraudulent reporting. In one case, the judge noted that even if the defendants complied with the rules, the jury could have found that they intentionally misled investors. Even more reason why auditors need to look at the accounting forest and not just count trees.