Accountants need to be held accountable
by: Jennifer Wells
The Toronto Star
thestar.com
WELL that about wraps it up.
Any bets that Arthur Andersen, the big accounting firm, could survive the Enron debacle are off.
One need look no further than the latest, calamitous, disclosures about what Andersen calls the Enron "engagement." Through the fall, after the departure of Enron's chief executive and after the energy giant knew that it was in deep trouble, the accounting outfit commenced the destruction of Enron documents.
This would be the Rose Mary Woods moment, recalling the devoted personal secretary to Richard Nixon who "accidentally" left her foot on the pedal of her transcription machine. There Ms. Woods was, scrupulously transcribing that June, 1972, conversation between Nixon and H.R. Haldeman, the one that took place three days after the Watergate break-in, and, you know, she takes a phone call and WHOOPS!, 18 minutes and 30 seconds of the good stuff gets over-recorded.
Nixon's credibility was sunk.
Andersen's is now sunk, too.
We don't know how many documents were shredded or electronically erased. Andersen says that "in recent months" a "significant but undetermined number of electronic and paper documents and correspondence" were destroyed.
When asked for clarification as to what the company meant by "recent months" Andersen replied: "Discarding of documents occurred during the months before the (Securities and Exchange Commission) issued a subpoena to Andersen."
As if that provides any relief.
It doesn't.
Andersen has been insisting — in congressional hearings, in the press — that its integrity is above reproach. Sure those "special purpose entities" were vetted by Andersen, and allowed Enron to offload some of the company's uglier numbers, thus disguising its true corporate health. But there was nothing illegal in that, insists the auditor. Andersen CEO Joseph Berardino told the House of Representatives Committee on Financial Services in December that his firm made a single blunder — failing to consolidate one of these SPEs — but that the blunder was relatively small. Translation: it's not our fault the company melted. Any errors made, he said, were "made in good faith." As to any funny business, Berardino told Congress to focus on Enron itself, which, said Berardino, had been withholding information.
We now know, thanks to a report in Time magazine, that an Oct. 12 memo ordered the destruction of what Time terms "all audit material, except for the most basic `work papers.'"
Andersen had lots of time to keep the shredders running. Enron announced on Oct. 16 that it had lost $618 million (U.S.) in the third quarter of the year. On Oct. 22 it said it was voluntarily co-operating with the SEC to illuminate the regulators about related-party transactions. The SEC didn't issue a subpoena until Nov. 8. In the meantime, Enron was scrambling to establish a "special committee" to investigate the company's massive earnings restatements, hoping that it could skin the cat by pushing through a sale of itself to a competing company called Dynegy Inc., and hoping, too, that calls to the likes of Treasury Secretary Paul O'Neill would result in a fresh bank loan or two.
In other words, there was lots going on.
To what professional standards, pray tell, was Andersen adhering when it started detonating its files?
Andersen says it now has suspended its "current records management policy." The policy, says the firm in what has become its characteristically weasly way, "required in certain circumstances the destruction of certain types of documents." It sounds like a spy game.
Such an opaque defence is particularly disturbing coming from Andersen. We still don't know the whole story behind the Sunbeam Corp. caper. In May of last year, the SEC filed a civil injunction against five Sunbeam officers, and an Andersen partner, saying that fraudulent reporting created the illusion of a successful restructuring of Sunbeam. Without admitting or denying any guilt, Andersen, Sunbeam's auditors, paid $7 million (U.S.), the largest civil penalty in an SEC enforcement action. Andersen was also the auditor on the Waste Management Inc. file, in which the garbage hauler overstated pre-tax income by more than $1 billion.
Investors were shaken. Andersen, which has been around for nearly 90 years and was, once, the largest accountancy in the world, needed a public relations fix. Joseph Berardino was meant to provide that.
Instead, Berardino has emerged as the poster boy for everything that's wrong with accounting. The fact that the profession is self-regulating. That's got to go. The industry defence that accountancy firms open themselves up to "peer review," which is meant to provide reassurance enough to the public. That's got to go, too. (Deloitte & Touche, which has had troubles of its own, recently conducted a peer review of Andersen and concluded there was not a thing wrong with its methodologies.) The inherent conflict that arises in a single firm drawing auditing fees and consulting fees from the same client. Just kill it.
In a speech last June, before he resigned as chief accountant at the SEC, Lynn Turner reminded auditors that they need to be, first, "critical skeptics" who place "getting the numbers right" ahead of client relationships. He had many examples of "engagement" failures to turn to. None nearly so large as Enron, whose collapse is unparalleled. Change to the profession should have come before. It must come now. |
