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Enron Discussion

January 11, 2002 at 12:00 AM EST
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TERENCE SMITH: In the fast-developing Enron probe, federal prosecutors are focusing particular attention on the energy company’s accounting practices, and that of its accounting firm, Arthur Andersen and Company. Yesterday, Andersen disclosed that it had destroyed possibly thousands of Enron-related documents over several months; prosecutors have broadened their investigation to include destruction of the documents.

Here to help us sort through some of the questions being raised in the investigation are Floyd Norris, chief financial correspondent for the New York Times, and Tyson Slocum, research director of the energy program at Public Citizen, a research and advocacy group. Welcome to you both.

Floyd Norris, explain to us the relationship in this case between Enron and Arthur Andersen – the functions they perform for Enron.

FLOYD NORRIS: Andersen was the auditor for Enron throughout its history. And as such, they certified the financial statements that were reported every year by the company. But they did a lot more than that, too. They also did consulting work for the company, and perhaps most important, Andersen provided a lot of employees for Enron. Numerous former auditors from Andersen ended up working at Enron, which created a situation which is common in American industry where the auditors often were dealing with people in the company they were auditing that were former colleagues or bosses of theirs at the auditing firm.

TERENCE SMITH: So the loyalty, Tyson Slocum, is clear, it’s to the client, in this case Enron?

TYSON SLOCUM: Absolutely. Arthur Andersen charged $5 million for its fees last year. $27 million of that was for consulting, and some of the consulting including tax consulting, which is what we’re seeing a lot of the problems with Enron and its 874 offshore subsidiaries that are creating some of the problem.

TERENCE SMITH: Floyd Norris, is that a conflict? Is that considered a conflict to be both accountant and consultant within the industry?

FLOYD NORRIS: It has been a controversy. The SEC last year imposed rules that restricted the consulting to some extent and forced far more disclosure than we’ve ever had before. The figures that you just heard cited we wouldn’t have been able to cite a year ago. They’re newly required by the SEC. Most people think it is not a conflict. Auditors have always done tax work for clients and they’re amazed that anyone is bothered by it.

TERENCE SMITH: Tyson Slocum, is it a conflict in your view?

TYSON SLOCUM: It absolutely is a conflict. And actually the rules that we got that — the reporting rules where now Arthur Andersen has to disclose on its consulting fees — was actually a far cry from what Arthur Leavitt, Bill Clinton’s Securities and Exchange Commissioner wanted. He wanted an almost end of the ability for a company like Arthur Andersen to be double dealing, to be providing the auditing services and consulting on things like tax strategies and tax havens and so forth. There is clearly a conflict of interest. And I think that shows in a lot of the big five accounting firms — the Securities and Exchange Commission estimates that there’s been over $100 billion in lost investor values since 1995 because of restating and other problems that accounting firms have had to disclose.

TERENCE SMITH: Floyd Norris, should the SEC have caught these irregularities? Were they that glaring?

FLOYD NORRIS: It’s not at all clear that they were catchable. What we know about Enron’s accounting problems is Enron has been forced to restate its earnings for a number of years. It’s not at all clear that’s the last time they’ll do that. But the restatements were not especially huge. They were a few hundred million dollars — most of it stemming from one issue of whether one off balance sheet partnership should have been put back on the balance she and thereby had to report its earnings to the public. The other thing we know though, which broadly is an important thing is that this is a company that never reported an annual loss; that until the very end, never reported a bad quarter and still managed to go broke. So you’ve got to wonder how accurate all the profits they were reporting really were.

TERENCE SMITH: Well, indeed. And I wonder Floyd Norris if that wouldn’t set off alarm bells for Arthur Andersen, and if so, was it something they thought was intolerable, what would they do about it?

FLOYD NORRIS: Well, Andersen has taken the position since Enron collapsed that the rules need changing; that they enforced the rules that in one case Andersen was lied to by Enron officials. But they’ve insisted that they generally did nothing wrong. Now we have this stunning disclosure yesterday that Enron auditors that Andersen were destroying documents, were told by congressional investigators that the destruction started in September, which is before the public had any idea there were problems at Enron, but then continued through October when Enron began to get into trouble, and even into November after the securities and exchange commission had begun a widely publicized formal public investigation. In the accounting profession, it is an absolute no-no to destroy documents relating to an ongoing investigation. And it’s at least conceivable that’s what happened. That’s what appears to have happened. To make it even worse, when Enron– when Andersen was asked yesterday, "Did you stop destroying documents after the SEC served the subpoena on your firm?" Their answer was "We issued a directive not to destroy any documents but we’re not sure that directive was complied with by our people." That absolutely shocked everyone in the accounting business.

TERENCE SMITH: Tyson Slocum?

TYSON SLOCUM: Well, I think it’s clear that there is a culture of unaccountability in both companies being audited and the auditing companies. I mean we’ve seen that Enron’s main business strategy over the past couple of years to be to remove as much government oversight in its operations. That’s why its bankruptcy was a shock because so much of their operations were underground because they were able to buy so many political connections in Congress and at the state level. For accounting firms as well, their self-regulatory body, the Independent Association of Accounting Firms, doesn’t have any enforcement capability. They don’t really enforce accounting firms very well. So that’s a big problem here. We’ve got too much ability to double deal on the part of the accounting firms and the firms being accounted liken Ron, especially in the energy industry are having less and leg regulatory oversight allowing them to commit more alleged acts of fraud against consumers and shareholders.

TERENCE SMITH: Floyd Norris, where, if anywhere in this, is the protection for the investor? What can he count on?

FLOYD NORRIS: In general that is perhaps the most important issue facing. The American securities markets have long been viewed as in one sense the safest in the world. Not safest in the sense that you can’t lose money, but safest in the sense that you can rely upon the audited financial statements the companies are releasing. So far, all of the scandals we’ve had, and this is not the first, have not served to discourage investors very much. If they had, you would be running stories tonight about a collapsing stock market. But the industry, the accounting industry, is worried about people losing confidence. The big five firms are more scared than I’ve ever seen them as a result of this Enron scandal. They’ve been meeting together to try to figure out what to do, and I don’t think they’ve come up with any good answers.

TERENCE SMITH: Should Arthur Andersen be scared? Is there survival at issue?

TYSON SLOCUM: I think I am going to slightly disagree with Floyd. I think there is a crisis of confidence in investors. You can look at the millions of investors who have lost billions of dollars because of this Enron debacle. That was something Arthur Andersen should have been able to prevent. They should have immediately seen that when Enron was employing 874 offshore subsidiaries in places like the Cayman Islands, plates that don’t have bank disclosure laws, very easy to hide money in, that should have been setting off alarm bells at Arthur Andersen.

TERENCE SMITH: What should she they have done?

TYSON SLOCUM: They should have immediately ended their contract and reported this to the Securities and Exchange Commission because they have a duty to protect shareholders. I think that’s the problem here. We’ve got millions of people out there who have lost a lot of money because of this corporate abuse. And we need to have more aggressive regulatory oversight over both energy companies liken Enron and the accounting firms that are supposed to guarantee to the public that these companies are legitimate.

TERENCE SMITH: Is that right, Floyd Norris? Is that what accounting firms are expected to do?

FLOYD NORRIS: Accounting firms are supposed to certify financial statements, to certify they’re accurate in what they say is all material respects. One of the issues in Enron case, as in a number of other cases, is that we know that Andersen some profits reported by Enron for several years that Andersen thought shouldn’t have been reported. And instead of stopping Enron from reporting them, Andersen allowed itself to be persuaded that the amount of the profits even though it was millions of dollars, was not material, to use the jargon of the industry, and therefore they could allow the profits, the phony profits, to be reported. That’s one of the things that always shocks me that auditors discover what they believe to be wrongly reported profits and allow them to be reported together on grounds of materiality. That is however legal under the current accounting rules.

TERENCE SMITH: We’ll stay tuned. Thank you both very much.