Enron Audit Fee Raises Some Brows
By JERRY HIRSCH
LA Times Staff Writer
January 23, 2002
The fee Enron Corp. paid the Andersen accounting firm to audit its books was one of the richest in corporate America, a fee that reflects the complexity, and possibly the risk, inherent in the job.
Enron paid Andersen $25 million for the year 2000 audit, a figure higher than all but one of the companies in the Dow Jones industrials that reported their audit fees. The average charge among the blue chips was just $9 million, according to a review of such fees by The Times.
It also was large compared with the fees other energy companies paid their accountants, even Andersen. In a review of fees listed in Securities and Exchange Commission filings, The Times found that audit contracts averaged $3 million at nine large energy companies, including Andersen clients Mirant Corp., UtiliCorp United Inc., Dynegy Inc. and Calpine Corp.
Andersen's fee was a red flag to some experts and critics who say it could have clouded the company's judgment as it examined Enron's tangled financial structure. The high fee no doubt reflected the difficulty of the audit, but it also may have hinted that Enron's finances contained unknown risks. Indeed, Andersen executives debated internally whether the audit and other fees would be perceived as a breach of the firm's independence.
An Andersen spokesman defended the fee, saying it reflected the size and complexity of Enron.
"This was a very sophisticated business," Andersen spokesman David Tabolt said. "The fee is set by the scope of the audit and the kind of people that have to be brought in to do the work. There are a whole lot of factors that go into it."
Tabolt said the audit fee was in line with those of Enron's peers--the top 10 companies in the Fortune 500. But even by that standard, the fee was large.
The nine other companies at the top of that list paid an average of $14.5 million for their audits. Only Citigroup Inc., the nation's largest financial services company, paid more than Enron: $26.1 million.
Even if Enron were looked at as a financial services company, the fee it paid was unusual. The Times examined the fees of seven large financial services companies--including Citigroup, American International Group, Goldman Sachs Group Inc. and Bank of America Corp.--and found that the average audit charge was $15.5 million.
Several accounting professors and industry insiders said the high fees could be an indicator of the complicated nature of the Enron audit or the perceived risk of the account.
"The relationship between a client and its auditors is a complicated thing because auditors get paid by the client but are supposed to be independent," said Rick Antle, an accounting professor at the Yale School of Management.
"If you tell your client 'no' too many times, you don't have a client. But if you go along with everything they suggest, you could end up in jail," said Antle, who added that there is insufficient information yet to determine whether the high fees Andersen collected influenced its judgment.
However, critics of the accounting industry say the fees Enron paid Andersen--including an additional $27 million for consulting work--and the scandal arising from the audit highlight problems that include the independence of auditors and how the business is marketed and sold.
They argue that the fee clouded the minds of auditors, who were loath to endanger Andersen's contract by forcing Enron to adhere to stricter financial standards.
The audit--and its failure to more fully disclose internal conflicts of interest of Enron executives, billions of dollars in hidden debt and hundreds of millions of dollars in losses--is now the subject of multiple federal investigations.
Even top Andersen executives debated the propriety of the fees it was collecting from Enron--which, including the consulting work, reached $1 million a week.
In a meeting almost a year ago, a group of the firm's top partners on the Enron engagement and at Andersen headquarters in Chicago discussed "whether there would be a perceived independence issue solely considering our level of fees," according to a Feb. 6 internal e-mail summarizing the meeting.
The partners estimated that the combined take on the Enron audit and consulting contracts could reach $100 million annually. Ultimately the partners decided that they were not troubled by such a figure "as long as the nature of the services was not an issue."
The amount a firm charges for accounting services can be a warning sign for audit problems, said Mark Cheffers, who operates the AccountingMalpractice.com Web site.
Certainly, the Enron fee was large enough to have the potential to color the judgment of the firm's staff, Cheffers said.
But there is equal danger at the other end of the scale, where low audit fees are designed to gain an accounting firm entry to a large company so it can sell a host of profitable consulting and other services, Cheffers said.
Companies only last year began disclosing what they paid auditors, and there is not enough information yet to interpret what differences in fees mean, said Lawrence Revsine, a Northwestern University accounting professor.
"We can't say that when there is a $25-million audit versus a $15-million audit, something rotten is afoot here, but we will be able to as more information about audit fees comes out now and it is studied," he said.
Revsine said researchers will look at how differences in a company's number of locations, employees, complexity of transactions and other factors can affect an audit.
Audits are intended to provide independent verification that a company is giving investors an accurate picture of its finances and that it is following consistent and generally accepted accounting rules and standards.
Enron's downfall, caused in part by the accounting treatment of a series of partnerships and ventures affiliated with the Houston energy trader, has thrown thousands of employees out of work and has cost the company's pensioners and investors billions of dollars in stock value losses.
Yet it would be a mistake to assume that all audited financial statements go through the same type of scrubbing and are comparable, said Ira Solomon, who heads the accounting department at the University of Illinois.
For example, two identical companies with the same level of sales and cost structures could have different profit figures based upon the way they construct their financial statements. The cost of inventory can be calculated by two methods that yield different results in the short term. Each approach is an accepted practice, and each produces a different profit figure, Solomon said.
J. Terry Strange, vice chairman, assurance and advisory services, for accounting firm KPMG, which audits Citigroup, said it makes sense that financial services companies pay higher audit fees than other companies.
"The size of the fee is directly related to the size, and more importantly, the complexity of the enterprise being audited," Strange said. "Financial services companies are, generally speaking, the most complicated businesses. The reason they are complicated is that they are in the financial risk business.
"So risk enters into [calculating an audit fee]--the nature of risk that the enterprise takes and the amount of work that must be done to become comfortable that the auditor understands and agrees with the accounting and believes that the enterprise has controls in place to manage the risk they are taking," he said.
By those standards, it would make sense that Enron would be an expensive audit. The company in many ways operated as a financial services business, developing new trading mechanisms and markets for everything from energy to telecommunications services--in the process inventing transactions that were new to the business world.
With that came high risks.
"Clearly this was a very high-risk client. They were doing things in an industry that had never been done before," said Randolph Beatty, dean of USC's Leventhal School of Accounting.
But Andersen spokesman Tabolt said the company does not build a "risk premium" into its audit fees.
Each of the five largest accounting firms conducts the audits of 2,000 to 3,000 publicly traded companies in the United States, according to the Public Accounting Report, an industry newsletter. They so dominate the business that the No. 6 firm in the country, BDO Seidman, has only 325 SEC-reporting clients.
Although companies occasionally change auditors for such reasons as fees or arguments or service issues, most companies stay with the same auditor for years, occasionally putting their contracts out to bid.
Certain firms specialize in industries. Andersen, which audits only two of the 30 companies that make up the Dow Jones industrial average, has a large energy business practice. PricewaterhouseCoopers specializes in large companies and audits 14 of the Dow 30.
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Times staff writer Ralph Frammolino in Chicago contributed to this report. |
