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letter from kenneth lay

At the height of the debate over auditor independence in 2000, Ken Lay sent this eye-opening letter to Arthur Levitt, then chairman of the SEC, urging him to back down on his efforts to eliminate the potential conflicts of interest created when accountants provide both auditing and consulting services to a single client. The letter argued that Levitt was jeopardizing the productive relationship Enron had built with Andersen, one in which Andersen had become so deeply intertwined with Enron that its staff had moved into the same building, taken over much of the internal auditing usually left to Enron employees, and expanded rapidly into the highly profitable area of consulting. Andersen touted this "integrated audit" as a new paradigm in corporate accounting.

Although ostensibly from Lay, the letter was secretly co-authored by Andersen partner David Duncan in consultation with the firm's lobbyist in Washington as a part of the accounting industry's massive lobbying effort against Levitt's reforms. Letters such as this one, coupled with enormous pressure from Congress, forced Levitt to back down on the issue of auditor independence and eventually to adopt a less stringent rule.

Kenneth L. Lay
Chairman and
Chief Executive Officer

Enron Corp.
P.O. Box 1188
Houston, TX 77251-1188
713-853-6773
Fax 713-853-5313
kenneth.lay@enron.com

September 20, 2000

Arthur Levitt, Chairman
Securities & Exchange Commission
450 Fifth Street, N.W.
Room 6102
Washington, D.C. 20549

Dear Chairman Levitt:

I would like to take this opportunity to comment on the Securities & Exchange Commission's proposed rulemaking regarding auditor independence, on behalf of Enron Corp. Enron is a diversified global energy and broadband company that prides itself on a uniquely entrepreneurial business philosophy and on creating knowledge-based value in emerging markets.

For the past several years, Enron has successfully utilized its independent audit firm's expertise and professional skepticism to help improve the overall control environment within the company. In addition to their traditional financial statement related work, the independent auditor's procedures at Enron have been extended to include specific audits of and reporting on critical control processes. This arrangement has resulted in qualitative and comprehensive reporting to management and to Enron's audit committee, which has been found to be extremely valuable. Also, I believe independent audits of the internal control environment are valuable to the investing public, particularly given the risks and complexities of Enron's business and the extremely dynamic business environment in which Enron and others now operate.

While the agreement Enron has with its independent auditors displaces a significant portion of the activities previously performed by internal resources, it is structured to ensure that Enron management maintains appropriate audit plan design, results assessment and overall monitoring and oversight responsibilities. Enron's management and audit committee are committed to assuring that key management personnel oversee and are responsible for the design and effectiveness of the internal control environment and for monitoring independence.

The proposed rule would preclude independent financial statement auditors from performing "certain internal audit services." The description of inappropriate activities included in your current proposal is so broad that it could restrict Enron from engaging its independent financial statement auditors to report on the company's control processes on a recurring basis as the company has now arranged. I find this troubling, not only because I believe the independence and expertise of the independent auditors enhances this process, but also because Enron has found its "integrated audit" arrangement to be more efficient and cost-effective than the more traditional roles of separate internal and external auditing functions. Frankly, I fail to understand how extending the scope of what is independently audited can be anything but positive.

The SEC has supported a number of measures to ensure that audit committees are informed of auditor's activities and feel the burden of determining auditor independence. Enron's audit committee takes those responsibilities very seriously. Given the wide-ranging impact of your proposed changes, I respectfully urge the Commission to reassess the need for such broad regulatory intervention when the business environment is more dynamic than ever. I also respectfully suggest the SEC give the new measures regarding the enhanced role of audit committees in ensuring auditor independence a chance to work before regulations of this magnitude are considered.

Sincerely,

Kenneth Lay [signed]

Related Link
Congress and the Accounting Wars
During the boom years of the 1990s, the accounting industry flexed its lobbying muscle on Capitol Hill as never before. Here's a look at the three major political battles of the decade's accounting wars: the fight over stock options, the fight over tort reform, and the all-out war over the SEC's attempt to separate auditing and consulting.

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