Thursday 6 December 2001

Too many publicly traded companies are manipulating their financial results, and auditors, Wall Street, and the Securities and Exchange Commission are not doing enough to stop them.

That gloomy verdict comes from Congressmen, former regulators and some investors after the bankruptcy filing of Enron, the largest corporate failure in United States history.

For years, complaints about the declining quality of corporate earnings have gone largely unheeded. But the sudden failure of Enron, which reported more than $US100 billion ($A194 billion) in sales and $US1 billion in profits last year, has generated a new wave of criticism that corporate accounting is out of control.

"We need to see to it that our securities laws and our accounting principles are properly complied with," said Representative John Dingell. "Are you going to tell me that Enron didn't get away with murder?"

Mr Dingell is the ranking Democratic member of the Energy and Commerce Committee, which plans to hold hearings in January to examine Enron's collapse.

The collapse, after questions were raised about the accuracy of Enron's financial reports, is the latest and largest in a string of accounting-related crises at public companies, including Waste Management, Cendant and Lucent Technologies. Scores of other companies, including such giants as Cisco Systems and AT&T, have taken multi-billion-dollar write-offs this year, putting their previously reported profits in doubt.

Still others, such as Computer Associates, are offering investors "pro forma" financial statements that are not prepared according to standard accounting rules. The SEC warned investors yesterday that pro forma earnings reports should be "viewed with appropriate and healthy scepticism".

Publicly traded US companies report sales and profits to investors every quarter. Once a year, they release a longer report that must be audited by an independent accounting firm, usually one of the Big Five: KPMG, Arthur Andersen, Deloitte & Touche, PricewaterhouseCoopers and Ernst & Young. The reports are filed with the SEC, which can challenge inaccuracies in them.

For two generations, the combination of independent audits and SEC oversight has been considered the best in the world at giving shareholders an accurate picture of the financial health of the companies they own. But the system is near a breaking point, says former chief accountant of the SEC, Lynn Turner.

"The average investor is going to be nervous today as to whether these numbers are good or not, and I think he should be in light of what's going on," said Mr Turner, who left the commission in July to become director of the Centre for Quality Financial Reporting at Colorado State University. "My profession has to respond to what's going on, and come back and demonstrate to investors why they should trust us again."

Wall Street analysts and money managers shared responsibility for the accounting crisis, said Neil Barsky, managing partner of Midtown Capital Management, a $US750 million hedge fund.

Investors have been too willing to buy stocks with strong reported earnings, even if they do not understand how the earnings are produced. Big mutual fund companies such as Alliance Capital, Janus Capital and Fidelity Investments, three of Enron's biggest shareholders, had been among the worst offenders, Mr Barsky said.

"There is a wilful cognitive dissonance, with investors buying Enron knowing full well that they have no idea what's behind those numbers," he said. "There's a marriage of interest."

A spokesman for Fidelity, which owned 21 million Enron shares as of September 30, said Enron "has not had a material impact on the performance of our funds". Alliance, which owned 43 million Enron shares, did not return calls for comment. A spokeswoman for Janus, which owned 41 million Enron shares, said the company "had a strong process that models companies well and has worked pretty successfully".

Since 1998, there has been a surge in the incidents of large public companies stretching accounting rules, Mr Turner says. The amount of gimmickry and outright fraud dwarfs any period since the early 1970s, when major accounting scams such as Equity Funding surfaced, and the 1920s, when rampant fraud helped cause the crash of 1929 and led to the creation of the SEC, he says.

Accounting firms have become too dependent on consulting fees from the companies they audit and are unwilling to risk those fees by challenging corporate managers who stretch accounting rules, Mr Turner says.

Enron paid Andersen, its auditor, $US27 million in fees unrelated to auditing and $US52 million in total fees last year, according to Enron's proxy statement.

Last year, Arthur Levitt, then chairman of the commission, tried to restrict the consulting work that accounting firms could do, but he backed down in the face of strong opposition from the firms. Mr Levitt, now a senior adviser at the Carlyle Group, did not return calls for comment.

At the same time, the growth in the securities markets has overwhelmed the SEC, Mr Turner says. "We only had about 20 staff in my whole office," he said.

Gregg Corso, a former senior lawyer at the SEC, said the commission had lost its focus. In 1937, William Douglas, the third chairman of the commission, said it was "the investor's advocate".

Today, the commission sees itself as answerable to many different constituencies, including companies that issue stocks and bonds, securities firms, and accounting firms, Mr Corso says. To keep those groups happy, it has allowed accounting standards to slide.

A spokesman for the SEC declined to comment.

During the past five years, Enron used more than a dozen partnerships, some run by its top executives, to move debt off its balance sheet and overstate its earnings by at least $US600 million. As Enron's earnings soared, the company's management discouraged analysts and investors from questioning its financial reports, which even friendly stock analysts conceded were largely impenetrable.

But after a recent series of damaging disclosures about its finances, Enron found itself unable to convince investors or its trading partners that its financial statements were accurate, even though they had been certified by Andersen. With its business and stock crashing, it was forced to file for bankruptcy on Sunday.

David Tabolt, a spokesman for Andersen, said Andersen was examining its role in Enron's failure but the company's problems were unusual. Andersen audits about 2500 public companies each year, and "the number of audits where there are questions raised is very rare," he said.

The Age

-- Anonymous, December 06, 2001

Answers

From Sunbeam to Enron, Andersen's Reputation Suffers

-- Anonymous, December 06, 2001

Enron auditor takes some blame

WASHINGTON: The head of Enron Corp.'s longtime auditing firm told US Congress the tragedy of the company's collapse shows that the accounting firm and the entire profession will have to change.

"What happened at Enron is a tragedy on many levels," Arthur Andersen LLP chief executive officer Joseph Berardino said in testimony prepared for two House Financial Services subcommittees.

"Andersen will have to change ... the accounting profession will have to reform itself. Our system of regulation and discipline will have to be improved."

Robert Herdman, chief accountant of the Securities and Exchange Commission, which is investigating Enron, said a recent spate of accounting irregularities by big corporations "may shake investors' confidence in our system of financial reporting and our capital markets," according to his prepared testimony.

Congress is investigating the failure of Enron, whose swift downfall left countless investors burned, thousands of employees out of work with decimated retirement savings and the once high-flying company in federal bankruptcy court.

At the House hearing, lawmakers called the Enron debacle the biggest corporate failure in recent history and heaped criticism on its executives for enriching themselves while running the company into the ground. Company officials were "just having too much fun," said House Representative Richard Baker, chairman of the Financial Services subcommittee on capital markets. "We must make the careful determination of whether we are dealing with a case of outright fraud and violation of existing securities laws."

The huge energy-trading company declined to send any officials to the congressional hearing. Investigators for another House committee are trying to find Enron's former chief financial officer, the lead architect of complex partnerships that are under government scrutiny.

Amid the company's strife, nearly 600 employees deemed critical to its operations received more than $US100 million ($192 million) in bonuses last month as Enron faced a merger that unravelled and then bankruptcy.

The SEC is examining Enron's use of questionable partnerships that allowed the company to keep some $US500 million in debt off its books, and has issued subpoenas to Andersen related to its auditing of Enron's accounts. Enron, which only months ago was the nation's seventh-biggest in revenue, has acknowledged that it overstated profits for four years.

Subjects being examined at the hearing included the Houston-based company's accounting practices, potential securities law violations and Enron's handling of its employees' 401(k) retirement investment plans.

Absent from the hearing was Enron chairman and chief executive Kenneth Lay, who had been asked to appear by the lawmakers.

Enron spokeswoman Karen Denne said neither Lay nor any other Enron officials were testifying because "we don't believe we would be able to adequately serve the interest of the committee while at the same time trying to serve the interest of our creditors, shareholders and our current and former employees".

Lay, who built the world's largest energy trader by buying electricity from generators and selling it to consumers, is no stranger to Washington. He is a friend of President Bush and one of his largest campaign contributors, donating $US250,000 to the Republican Party during Bush's run for president and raising at least $US100,000 for Bush from other donors.

Enron and its employees given more money to Bush's various campaigns than any other donor, according to the watchdog Centre for Public Integrity.

Lay was among the executives who met privately with Vice President Dick Cheney as his task force formulated an energy plan last spring.

Enron filed for bankruptcy protection from creditors on December 2, following a six-week downward spiral, and also filed a $US10 billion lawsuit against smaller rival Dynegy Inc. for scrapping a proposed buyout.

In addition to the SEC probe, Enron also is under investigation by the US Justice Department.

The US Labour Department is looking into Enron's handling of its employees' retirement benefit plans. Before filing its bankruptcy petition, Enron prohibited its workers for several weeks from selling stock held in voluntary retirement plans while the share price plunged.

Worth more than $US80 a year ago, Enron's stock has tumbled to less than a dollar a share.

news.com.au

-- Anonymous, December 13, 2001