NYT/Lynn Turner: Lessons for Auditors in Enron's Collapse
December 2, 2001
FIVE QUESTIONS FOR
By JONATHAN D. GLATER
Among the many questions raised by the stunning collapse of Enron (news/quote) last week was the role of Arthur Andersen, Enron's auditor. The Securities and Exchange Commission is investigating, influential lawmakers have called for hearings and a criminal inquiry may be started.
Lynn Turner, former chief accountant for the S.E.C. and now director of the Center for Quality Financial Reporting at Colorado State University, is already using Enron as a textbook case of a disaster. He spoke on Friday about what's next. Here are excerpts.
Q. What does Enron's collapse mean for auditors?
A. Coming on the heels of a rash of similar situations — Cendant (news/quote), Sunbeam, Waste Management (news/quote), Xerox (news/quote), Lucent (news/quote), it goes on — this is just the tsunami that's going to destroy public confidence. There needs to be a thorough investigation of the matter, of Andersen itself and of the profession by the Public Oversight Board. The profession itself needs to adopt some stronger auditing procedures and get back to serving the public interest rather than worrying about raising consulting revenues.
Q. Are there other accounting time bombs, warning signs?
A. Given the way audits have been conducted, more by inquiry than by real investigation in the last few years, we will undoubtedly see more. This is an iceberg, and the Titanic just hit it. A study by Andersen last year showed that there were 230 restatements, the majority in the technology industry, but manufacturing was in there as well. That would be something to look for. But I think more than that, I'd encourage investors to look for C.E.O.'s or C.F.O.'s who are aggressive in their financial reporting and accounting practices, and that's where the time bombs are likely to be.
Q. Should there be increased regulation of accountants?
A. About 15 years ago, the C.E.O. of Pricewaterhouse proposed establishment of a quasi-governmental, self regulatory organization. I think we need to seriously revisit that issue.
Q. Andersen has been involved in other controversial audits. Should we read anything into this?
A. It tells me that typically there's an issue of culture, and that culture is usually ingrained systematically from the tone at the top down. For example, the C.E.O. or the head of the audit practice will say, "We want you to do good audits," but a good part of their compensation may be based on how much new business or consulting fees they generate. That becomes ingrained and you get into the type of recurring situations like we're seeing here, where people were identifying problems but just didn't get them fixed. Andersen is going to have to go through a major cultural change.
Q. Should a criminal investigation be undertaken?
A. It is time — given the magnitude of this loss — for there to be a criminal investigation of the entire matter. Not just Andersen, but the C.F.O. and management team, because they're the ones who created the wrong numbers. And this is the piece that I really hate: You've got 21,000 employees, many of whom had their retirement tied up in a 401(k) plan with Enron's stock. Those 21,000 people woke up wondering whether they were going to have jobs and wondering about Christmas, because a lot of people didn't do what they were supposed to do.
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