Andersen: Enron withheld data
December 12, 2001
(Reuters) — Accounting firm Andersen told Congress Wednesday it warned Enron Corp. about possible illegal acts and said its client left it in the dark on crucial data at the heart of the energy trader's spectacular collapse.
In congressional testimony, Andersen Chief Executive Joseph Berardino admitted for the first time that the Big Five accounting firm had erred in its treatment of one Enron special-purpose entity (SPE), a type of financing vehicle widely used by the company to keep debt off its balance sheet.
``We made a professional judgment about the appropriate accounting treatment that turned out to be wrong,'' he said.
Berardino said Houston-based Enron withheld information from Andersen and that Andersen notified Enron's audit committee of ''possible illegal acts.''
``It is not clear why the relevant information was not provided to us. We are still looking into that... We notified Enron's audit committee of possible illegal acts within the company,'' Berardino said in testimony to the House Financial Services Committee.
Enron did not reveal to Andersen, its longtime auditor, a pivotal agreement with a large financial institution for a financing vehicle called Chewco, Berardino said.
If Enron had disclosed the agreement, Andersen would have required the company to include the Chewco partnership and similar ones on its balance sheet, Berardino said.
Enron filed for bankruptcy on Dec. 2 after succumbing to a dizzying downward spiral of events. At the heart of its financial troubles were highly leveraged, SPE-style outside partnerships involving company officers, which were kept off its balance sheet. The firm later restated results to include those partnerships, reducing its earnings in the four years after 1997 by almost $600 million.
Enron Chief Executive Kenneth Lay was attending a creditors hearing on Wednesday and could not attend the hearing, said committee Chairman Rep. Michael Oxley, an Ohio Republican.
Plenty of blame to go around
At the hearing, Richard Trumka, secretary-treasurer of the AFL-CIO labor confederation, pointed the finger at Andersen for not doing more to draw attention to Enron's murky finances.
``There was more than enough information in those statements alone to sound warning bells among the auditors that signed off on them,'' Trumka told lawmakers in prepared remarks.
``The financial statements themselves contain the proof that the auditors were aware of each of the transactions that led this company to grief,'' the union leader said.
The Enron saga has led to numerous investigations, shareholder lawsuits and job losses. Stock in the one-time Wall Street darling was at 58 cents at midday on the New York Stock Exchange, off an August 2000 high of over $90.
``Such a precipitous decline raises obvious questions, namely, how it could have happened, if it could have been avoided and how a similar collapse can be avoided in the future. But it seems even more obvious to ask, to begin with, why we didn't know about the problems behind the collapse, nor see it coming,'' Rep. Richard Baker, a Louisiana Republican, said in the committee hearing.
Andersen's Berardino tried to assuage criticisms of the hefty fees paid to the firm last year by Enron. Enron's proxy statement showed it paid Andersen $25 million for audit services and $27 million for other services in 2000, which critics said could have compromised Andersen's independence.
Berardino said 72 percent of total fees paid to Andersen in 2000 was audit and tax-related, after excluding fees paid to Andersen's then consulting arm, which has since been spun off into a separate company called Accenture.
Andersen, under fire for failing to better explain Enron's complex off-balance sheet entities, called for better accounting rules and disclosure in that area.
``It was not a simple company to audit,'' Berardino said. ''Given this complexity, it should not surprise anyone that the fees paid to our firm for Enron's audit were substantial.''
Clearer rules needed
A top government accountant testifying at the hearing called for clearer financial reporting rules on SPEs.
Robert Herdman, chief accountant at the Securities & Exchange Commission (SEC), declined to provide lawmakers with specific details about the SEC's probe of Enron, which has been going on for several weeks.
``In the coming weeks and months, we will learn more about what transpired at Enron, as many of the details are unknown at this time,'' he said.
Herdman said the SEC will continue to push the Financial Accounting Standards Board (FASB), an accounting rulemaker, for better guidance on when SPEs should and should not be consolidated in the balance sheet.
Separately, as the hearing got under way, the SEC issued a statement to companies and accounting firms that investors deserve full financial transparency.
``Today we are issuing cautionary advice to remind company management, auditors, audit committees, and their advisors that investors increasingly deserve and demand full transparency of accounting policies and their effects in the annual reports that public companies are required to file,'' the SEC said.
The federal regulatory agency said it may consider new rules next year to clarify disclosure requirements. ``We intend to consider new rules during the coming year to elicit more precise disclosures about the accounting policies that company management believes are most 'critical,''' the SEC said. |
