Enron-Andersen’s problems

In the field of financial activities, Andersen’s name has been a well-known one among the big five accounting firms of the world (Price Waterhouse-Coopers, Ernst-Young, Andersen, Deloitte & Touche, and KPMG). And last week, in this Oral Written Communication class, by presenting the Enron’s problems, I talked about something related to shredding Enron’s accounting documents auditing by Andersen. Shredding accounting documents created Andersen’s problems. Via Enron-Andersen’s problems, what kinds of observations can be derived for whom it may concern?

The following paragraphs might answer such a question.

Andersen’s problems:

Shredding accounting documents relating to the sources of facts presented to the Securities and Exchange Commission (S.E.C.) is a violation of the law and the Justice Department has likely accused Enron/Andersen of criminal obstruction. Civil litigations from shareholders and Enron’s employees are currently in process. Some big clients such as Merck, Delta Airlines, and Freddie Mac, have been associated with Andersen for more than 30 years. Now detected, others have placed their relationship with Andersen under review.

Enron-Andersen’s problems.

Using Accounting tricks suggested by Andersen, Enron submitted obfuscated financial documents to the S.E.C. which caused the public investors to be misled. Total loans from global creditors were $60 billion and Debts showed $40 billion on Balance Sheet and off Balance Sheet $ 20 billion.

What’s off Balance Sheet in Enron-Andersen’s case?

This big question is quite complicated for a person just having an introductory level course in accounting such as myself. Allow me to quote a short paragraph presented in The Economist issued on 12/22/01, which may help us to shed some light on Enron-Andersen’s case. By auditing/consulting:

Andersen did not spot the fact that Enron was publishing

incorrect financial statements. For failing to do its job,

Andersen now faces the wrath and legal claims of thousands

of staff, shareholders and creditors who will lose billions

from Enron’s collapse. In Nov. 2001, Enron announced that

it would restate all its annual financial statement from 1997

to 2000,resulting in a cumulative profit reduction of $591 m

and an increased in debt of $628m. The reason, it said, was

that it should have added in three off balance sheet entities

, vehicles used by some companies to acquire more capital

without adding debt to their balance sheets.

If the global creditors did forget real loans and $20 billion started falling due in 2000, Mr. Kenneth Lay, CEO of Enron and Mr. Joseph Berardino, CEO of Andersen would have enjoyed life and today I might have presented another assignment.

How could Andersen’s staff have missed all of this at the time? Andersen’s CEO confessed to Congress that his staff made an “ Error judgment.” Technically speaking, is this auditing or providing “professional services?”

This is not the first time that Andersen has been in trouble. Last year, it was fined over its audit of Waste Management in Texas and it also had to settle a suit over the audit of Sunbeam in Florida. In 2000, Andersen had revenue more than $9 billion reflecting the performance of its 85000 employees in 84 countries. Enron was Andersen’s client since 1983 –Enron’s year of establishment . By simultaneously providing auditing and consulting services, in 2000 Andersen received $52m fees from Enron where $27m was paid for “professional services” which provided Enron everything from advice on information technology system, to legal help, to tax planning and recruitment. What are “professional services?” Are there any conflicts of interest between auditing and consulting? Most accounting professors in U.S. universities say yes. Does the existence of conflicts of interest only Harbor Andersen? Conflicts of interest are intrinsically existing in almost every auditing firm. In 2000, General Electric (GE ) paid $103.6m fees to KPMG ( Auditing firm ) in which $79.7m was in non-auditing and $23.9m in auditing. In 2000,General Motors Company paid Deloitte & Touche $96m where $79m was consulting fees.

Comments of financial experts

Conflicts of interest do exist in accounting firms. Enron-Andersen’s problems could have been potentiality creating financial crisis which may undermine all global financial operations.

America’s accounting standards become ever less meaninful,

says Baruch Lev of New York University’s Stern School of

Business . They fail to reflect a blurring of corporate boundaries

caused by the proliferation of joint ventures ,outsourcing, and

so on . Nor do they fully report the emergence of new sorts

of assets ( such as intangible assets ) and liabilities ( off-balance-

sheet financing, derivative contracts ,etc ) This creates an

environment in which firms can too easily manipulate their

figures: Facilitating what Mr Arthur Lewitt-former chairman of

SEC in 2001 said is a move towards “indecipherable “ earnings

“ The profession of auditing and accounting is in crisis “ says

Paul Volcker,a former chairman of the Federal Reserve System

who is now head of the International Accounting Standards

Committee Foundation. “ It hard to make meaningful change

when there is a sense that things are going reasonably well.

There is a silver lining in Enron. We do now have a sense of

crisis” Fingers crossed.

Lessons could be derived

The world business is profit motivated and thus profits are the lifeblood of businesses. In order to get profits through investment, global investors place confidence in audited financial statements. The S.E.C. is accountable for seeing that corporations make full and fair disclosure of their affairs. The ultimate responsibility of the S.E.C. is to create a safe and sound nest for investors so a world disturbance could not have a chance to emerge. The highest responsible institutions: the Legislative and Executive branches must promptly cooperate and coordinate in order to carry out a true reform in

the field of finance.

Regulations applying to auditors should be much stricter. Enron-Andersen’s problems are evidence that in some areas of auditing - notably the treatment of off balance sheets dodges - the current standards are too relax. It is the right time for the S.E.C. to impose more rigorous standards through sound principles.

Auditing and consulting are two separate operations and they should be done completely and independently in two different business entities.

The S.E.C. has been becoming the international center by releasing global financial information for world investors. International accounting standards of all financial statements are worth observing by S.E.C. authorities.

Chau Nguyen

04/03/2002

* The Economist 01/19/2002

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