Audit Papers Usually Held For Years, Accountants Say
January 12, 2002
The New York Times
By FLOYD NORRIS and REED ABELSON
There are no hard and fast rules
governing how soon an accounting
firm can destroy documents related to
an audit, but the papers are generally
maintained for years, accountants said
yesterday after the disclosure that
Arthur Andersen had destroyed Enron
documents.
Only some audit papers are maintained,
however, and accounting firms have long held that less important papers can be
destroyed as soon as an audit is completed.
But lawyers and accountants agreed that all relevant documents must be preserved
once an auditor learns of a government investigation related to the audit, even if it
would have been permissible to dispose of them before that. Investigators reported
on Thursday that Andersen auditors continued destroying Enron papers as
recently as November, after the Securities and Exchange Commission had begun a
formal investigation of the Enron collapse.
One major firm, Ernst & Young, decided to halt all routine document destruction
while it reviews its policy. Larry Parnell, a spokesman for Ernst & Young, said the
firm had been reviewing its practice for some time but did not decide until
yesterday to stop following the policy of allowing audit work papers to be destroyed
after six years.
It is not clear whether the documents destroyed by Andersen constituted work
papers, which must be preserved for at least some period of time.
Andersen has not discussed the nature of the documents, and a Congressional
investigator said that many of the documents were e-mail messages between
auditors and Enron executives - documents that might or might not be viewed as
vital to an audit. Andersen has also not disclosed the dates of the documents in
question.
Officials of PricewaterhouseCoopers said yesterday that
their practice had been to preserve documents for six
years, or longer if the matter was a subject of litigation or
investigation. The other major accounting firms, KPMG
and Deloitte & Touche, declined to comment on their
practices.
"With respect to retention, we really do not have a
definitive standard," said Charles E. Landes, the director
of audit standards for the American Institute of Certified
Public Accountants, which cites the six- year figure in a
handbook for accountants but emphasizes that firms
should consult their own lawyers.
The general standard for auditors, unchanged since 1982,
requires that "the auditor should adopt reasonable
procedures for safe custody of his working papers and
should retain them for a period sufficient to meet the
needs of his practice and to satisfy any pertinent legal
requirements of records retention."
Itzhak Sharav, an accounting professor at Columbia
University, said that made clear that any destruction of
recent audit papers by Andersen would be a violation of
the industry's ethical standards, particularly if it took
place after the S.E.C. began its inquiry.
Whatever the standard retention policy, there is a general
agreement that no documents should be destroyed if an
auditor is aware of an investigation.
"Any company records manager will tell you that is an
absolute," said Galina Datskovsky, the chief executive of
MDY Advanced Technologies, a
records-management company. "Any corporate counsel
will tell you that. That is an absolute standard."
Michael J. Wagner, a partner in the law firm of Baker &
McKenzie in Chicago, agreed and noted that in a lawsuit
or criminal case, juries can be instructed to assume that a
destroyed document was damaging to the party that
destroyed it.
Papers that are not considered work papers, like early
drafts of documents, have never been viewed as necessary
to save, some accountants say. But many are saved simply
because no one takes the time to dispose of them. It is not
clear if many, or even all, of the documents destroyed by
Andersen fell into the category of papers that need not be
saved.
David Tabolt, a spokesman for Andersen, declined to say
what his firm's policy was. But he said on Thursday that it
was being reviewed and that no documents would be
destroyed until the review was completed.
If it turns out that Andersen auditors destroyed actual
work papers, many accounting experts would be shocked.
"I would find it unbelievable that they would destroy their
audit work papers," said Peter Knutson, a retired professor
of accounting at the Wharton School of the University of
Pennsylvania. The paperwork that is necessary "should all be there, and none of
that should be destroyed," he said.
The timing of the destruction of documents could be crucial. According to
Congressional investigators, Andersen auditors began destroying documents in
September, before Enron's stock collapsed and before the S.E.C. started its
investigation. If the papers involved were not deemed to be work papers, that
destruction would probably not have violated Andersen's rules or industry practice.
The S.E.C.'s preliminary inquiry into Enron's accounting was disclosed on Oct. 22,
and Enron announced on Oct. 31 that the inquiry had become a formal
investigation. After that, lawyers said, no documents should have been destroyed,
even though no subpoena had been served on Andersen.
But Congressional investigators said the destruction continued into November. Mr.
Tabolt said that after Andersen was served with a subpoena in November, it notified
all its personnel to retain all documents. But, he said, the firm was not sure that
directive was followed.
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