Magazine article The CPA Journal

Enron and Andersen: Auditors under the Microscope

Magazine article The CPA Journal

Enron and Andersen: Auditors under the Microscope

Article excerpt

From the moment the Enron story broke, it was clearly a public relations nightmare par excellence: the biggest bankruptcy in history, with the auditing firm's judgment and integrity called into question. The story has been on the cover of Business Week, and it has been frontpage news in every major newspaper The twists and turns the story has taken on an almost daily basis have made for captivating reading. Nevertheless, as Louis Grumet points out in his Publisher's Column on page 9, we cannot rush to judgment. Once the initial shockwaves of the Enron case have receded, careful, reasoned judgment will be required to develop correctives to ensure this kind of disaster does not happen again. In this light, The CPA Journal presents the thoughtful perspectives of four people worth listening to on the subject-a contribution to the comprehensive dialogue on the unfolding events.

AUDIT COMMITTEES UNDER THE

MICROSCOPE

Enron raises many interesting issues because the company has high-quality board members and a reputation for good ethical standards. One thing that will definitely happen as this unfolds is that the audit committee issues will go under the microscope: What did they know? Did they really understand what they were told? Did they look at what was happening? The company was interacting with many partnerships. Audit committees need to understand those areas, and they need to understand derivatives and external auditors.

I think it will take about a year to 18 months for the entire episode to play out. Class action suits have been filed and are being consolidated.

DON'T RUSH TO JUDGMENT

This case involves very difficult, complex transactions, and the accounting standards that apply to such transactions provide an entity with wide latitude. Auditors are in a tough position-it's hard to get your arms around all of the facts. I disagree with Lynn Turner and others who say that Andersen compromised its audits in order to maximize its consulting fees. No one is going to compromise an audit of that size. I'm also reluctant to see a pattern in the fact that Andersen was also the auditor for Sunbeam and Waste Management. Furthermore, I'm very reluctant to rush to judgment about an auditing crisis-either at Andersen specifically or within the auditing profession generally.

Gary Illiano, CPA, is a partner and northeast regional director of professional standards at Grant Thornton and editor of The CPA Journal's "SEC Advisor" department.

NO TIME FOR SPECULATING

The Enron case is so complex that, rather than speculating about the implications for auditing, we should wait for the investigation and the testimony to unfold. I think it is a serious mistake for so much of this case to be played out in the media. Based on what I've seen in the press, this will probably be a major learning experience for everyone interested in corporate governance issues, including the regulatory agencies. If I were playing a role in the investigation, I would be fearful that the staggering dollar amounts being discussed would make the participants protective and very reluctant to cooperate.

The individuals that will do the investigative work-the SEC, the Justice Department, and the plaintiffs' bar-are all very smart people. Even so, building a good understanding of the fundamentals of the case could take as long as a year. …

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