Experts: Basic Accounting Tripped Enron
By Deepa Babington
NEW YORK (Reuters) - As experts look through the remains of Enron Corp. (NYSE:ENE - news) for someone to blame, eyes are turning toward the auditors who allowed it to break accounting rules, rather than on the rules themselves.
Once the biggest trader in the newly deregulated power market, Enron is now near collapse. The auditing profession, which gives financial statements the stamp of approval, needs to be more vigilant to prevent similar future disasters, the experts said.
``The auditors -- the Big Five auditing firms -- have got to look at themselves and say, how can this sort of thing happen?'' said David Hawkins, an accounting consultant with Merrill Lynch and a professor at Harvard University.
``The rules are there. Have we lost our way, so to speak? Do we need a new compass direction?''
My answer would be creative finance has become too creative. Rules have become to flexible or this could not happen. In our quest to write laws and completely cover meaning we create more complexity which allows more intricacy. Here we see a point where interpretation will result in a suit against Anderson.
Enron, once a Wall Street darling with a share price that hit more than $90, started coming apart after it reported losses from transactions that were led by its former chief financial officer and kept off its balance sheet.
kept off its balance sheet.
Who appears here to be even more creative. What he accomplished is somewhere in bank balances they did not search completely enough to find it on this audit
Experts said it failed to apply generally accepted accounting principles and failed to disclose sufficient information to explain its dealings.
Andersen, the accountancy firm that audited Enron's books, said such judgements are premature.
``The best idea is to gather information, as the Securities and Exchange Commission and Enron board are doing, and then decide what lessons we can learn,'' Andersen spokesman David Tabolt said. ``Instant judgements often are based on presumptions ... that often turn out later to be incorrect.''
But already, Andersen's handling of Enron is beginning to receive close scrutiny. Andersen on Friday said fellow Big Five accounting firm Deloitte & Touche had expanded its peer review of Andersen's audit practice following the Enron saga. The expanded review -- an assessment of the firm's quality control systems for its accounting and auditing practice -- will include a review of procedures in Andersen's Houston office, which handled Enron's audit.
On Thursday, Harvey Pitt, chairman of the SEC, which is investigating Enron and Andersen, said that the agency is looking at whether accounting principles were applied ''appropriately'' in the Enron case and what may need changing.
ACCOUNTING 101
But the rules that Enron appears to have violated are quite straightforward, according to some experts.
For example, recording the note Enron received in return for selling equity to its limited partnerships as an asset is contrary to an accounting rule that bans such treatment unless the note is to be paid off in a few days, Hawkins said.
Ultimately, those transactions turned sour, causing a $1.2 billion reduction in shareholder equity and losses that contributed to a $1 billion third-quarter charge.
``This is Accounting 101 here,'' said Paul Brown, chairman of the accounting department at New York University's Stern School of Business. ``It may be that the way it was dressed up was so complicated that it was hard for the auditors to ferret it out but, then again, that's their job.''
The Financial Accounting Standards Board (FASB), which sets accounting rules, said firms must disclose extensive information about related-party transactions. Enron may well have violated the spirit of that law by inadequately explaining its transactions, the experts said.
When Enron began to unravel, analysts criticized Andersen for failing to explain the firm's dealings in its financial statements. Enron reported its transactions in cryptic footnotes that many said were almost incomprehensible.
Andersen has also come under fire for failing to consolidate those partnerships into Enron's books, which would have given a truer picture of Enron's debt.
Enron later restated its results to reflect those transactions in its books, cutting earnings by almost $600 million since 1997, effectively admitting it made a mistake, but not before its credibility had been shattered.
PATCHING UP LOOPHOLES
To be sure, critics have long called for better accounting rules, particularly those regarding the type of off-the-balance-sheet financing that Enron engaged in.
Tim Lucas, who heads a FASB task force on emerging issues, said FASB was trying to complete big projects on business combinations and asset retirement obligations this year, before tackling the issue.
Lucas said the Enron saga may also hold some implications for rules on financial instruments such as derivatives and recording them at fair value.
``We will certainly be aware of this (Enron situation) and if it sheds some light on an area where we can improve the rules we will try and do that,'' he said. ``But it's not obvious to me yet that it does.''
But apart from raising questions about Andersen's role, the implications of Enron's near collapse may well force the entire auditing community to do some serious soul searching to prevent future disasters. ``This is a wake up call,'' New York University's Brown said.
This is a wake up call
It is also a cost increase in audits better it be that return to standards of certified being certified than numerous others iffy situation that blows up in your face later. Of course one does not expect that companies that are governed by the SEC keep two sets of books.
I would like this looked at on audit base of CA British Standards as i think they aren't quite so creative. |
