Enron's auditor says broken system to blame
By Deepa Babington
NEW YORK, Dec 4 (Reuters) - Enron Corp.'s (NYSE:ENE - news) auditor Andersen, under fire for blessing the energy company's books before its collapse, on Tuesday distanced itself from the debacle and called for new rules that will make a firm's books easier to understand.
``The current financial reporting system was created in the 1930s for the industrial age,'' wrote Andersen's Chief Executive, Joe Berardino, in a Wall Street Journal opinion page article. ``That was a time when assets were tangible and investors were sophisticated and few. There were no derivatives...No instant stock quotes or mutual funds...And no Lou Dobbs or CNBC.''
Complex accounting rules and a financial reporting model that gives out-of-date information ought to be changed so investors have a truer picture of a firm's performance, according to Berardino.
So far, few in the accounting profession appear to share his views.
The Enron saga should be seen more as a failure of auditors in applying basic accounting rules and clearly explaining a firm's dealings rather than the fallout of a system filled with loopholes, accounting experts say.
``It's not the rules that need changing, what needs to be changed is the attitude of auditors and managers in applying those rules,'' said David Hawkins, an accounting consultant with Merrill Lynch and a professor at Harvard University, in an interview last week. ``They ought to be diligent and rigorous in application and appreciate the point of view and information needs of investors.''
The once-mighty energy company Enron began to unravel after it reported losses from certain partnerships led by its former chief financial officer Andrew Fastow. Those transactions, which were kept off its balance sheet, later turned sour, causing a $1.2 billion reduction in Enron's shareholder equity and contributed to a $1 billion third-quarter charge.
``What Berardino's basically saying is that the rules aren't all that clear but we did the best we could for our clients anyhow,'' said Mark Cheffers, who heads accounting consultancy www.accountingmalpractice.com and says that the accounting industry has suffered an unprecedented jolt to its credibility because of the Enron saga. ``What's at stake here for Andersen is its very survival.''
DEALS RELEGATED TO CRYPTIC FOOTNOTES?
Critics contend that Andersen should have consolidated those partnership deals into Enron's books and better explained them to investors instead of allowing them to be relegated to cryptic footnotes. They also say Andersen appears to have violated basic accounting principles by allowing Enron to record a note receivable it got in return for selling its stock to those partnerships as an asset.
Andersen, which said last week it had been subpoenaed by the Securities and Exchange Commission for information on its audit of Enron, has maintained that such judgments are premature.
For its part, the Financial Accounting Standards Board, which sets accounting rules in the United States, has said that the Enron debacle has not yet shed light on an area that needs better rules.
``It's not clear to me that there is anything there yet but we will be looking,'' said Tim Lucas, who heads a FASB task force on emerging issues, in an interview last week.
Berardino, on the other hand, said the profession ought to rethink rules on special-purpose-entities, for example, which are complicated financial entities often structured to be kept off its balance sheet. FASB has said it will be addressing the issue of special-purpose-entities in its ongoing project on consolidation policy.
Berardino also took aim at regulators and attacked the system for not keeping up pace with current financial issues. The accounting profession itself needs to clean up its act and acknowledge conflict-of-interest and other criticisms, he said.
Andersen, incidentally, may find itself at the heart of the conflict-of-interest debate raging in the accounting industry, where critics have said the hefty consulting fees raked in by accounting firms could compromise their role as independent auditors. Enron, for example, paid Andersen $25 million in auditor fees but as much as $27 million in fees for other work last year, according to its March proxy filing.
Andersen has struggled through other high-profile accounting embarrassments this year. In June, the SEC slapped a $7 million fine on Andersen to settle charges it filed false and misleading audit reports of trash hauler Waste Management Inc. (NYSE:WMI - news) in the largest-ever civil penalty against a Big Five accounting firm. Andersen did not admit or deny the charges. |
