Andersen's future in doubt as Enron scandal unravels

Auditing standards and practices across the board have been called into question following the world's biggest bankruptcy

By Nigel Cope,City Editor
Tuesday 15 January 2002 01:00

There is growing speculation that the accountancy firm Andersen may be forced into a merger with one of its rivals as a result of its disastrous involvement with Enron, the energy trading group that collapsed last month.

Accountancy experts say Andersen may have to consider a merger with one of the other Big Five firms – Ernst & Young, KPMG Peat Marwick, Deloitte & Touche and PricewaterhouseCoopers. However, others say these firms might baulk at the prospect of taking on the potential liabilities of Andersen, which could face possibly ruinous legal action following the collapse of Enron, where it was the group's auditor.

As well as an expected avalanche of writs, Andersen is already facing a congressional investigation in the US and a federal criminal enquiry. One senior accountant warned yesterday: "They [the rival firms] could be taking on something with a huge black hole inside it."

The final straw came last week when Andersen admitted that it had shredded vital Enron documents in the run-up to the group's $70bn (£49bn) collapse. This came after criticism about the cosy relationship between the two firms. For example, several senior financial staff at Enron joined the company from Anderson including Jeffrey McMahon, the finance director, and Richard Causey, the chief accounting officer, who were both recruited from Andersen's Houston office. Joseph Berardino, Andersen's chief executive, has admitted to the US congress that it made an "error of judgement" in allowing Enron to use a partnership run by its former chief financial officer to move debt off its balance sheet.

Andersen, the new name for the former Arthur Andersen which separated from the Accenture management consultancy operation in 2000, would not comment further yesterday on whether it would seek a rescue deal. And Andersen's Big Five rivals closed ranks, apparently unwilling to throw mud at a rival.

Andersen's close relationship with Enron, which was chaired by Kenneth Lay, poses wider questions than whether it will be able to survive. Some accountants say the shredding of audit documents is not uncommon in accountancy firms. This is mainly done for security reasons and keeping confidential material out of the wrong hands.

In the UK, the regulations overseen by the Institute of Chartered Accountants for England and Wales demand that any material related to a statutory audit must be kept for six years. Other material is not covered however. And the regulations in the US are even less stringent.

The UK accounting standards have rule FRS5, under which companies are required to consolidate into the group accounts the liabilities of companies that are, in effect, controlled by them. This would have prevented the off-balance sheet manoeuvre, behind which lay Enron's huge debts.

And rule FRS8 demands the disclosure of related party transactions. Again, the US regulations are less strict.

Indeed, the big firms have been pushing for the US requirements on the keeping of audit records to be reduced on they grounds that they can't be sued for something when the records have been destroyed.

In the UK, the ICA echoed that view. Tony Bromell, the ICA's head of professional standards policy, said: "It is not the first collapse and I fear it will not be the last. At this stage we don't know how culpable the auditors may or may not have been and people always want to go after the people with deep pockets. But there will be questions about the level of independence."

Senior accountants say three main changes may be thrust upon the accountancy profession as a result of the Enron scandal. First there will be a tightening up of accountancy standards and more attempts made to harmonise them internationally. Second, audit firms could be forced to divest their management consultancy arms completely. This would avoid the potential conflicts of interest that emerge when a firm undertakes often relatively poorly paid audit work in order to secure lucrative consultancy fees. Enron paid Andersen $25m in audit fees last year and a further $27m for consulting.

Thirdly, rules could be introduced which would cover members of audit teams taking executive positions at client companies. This is also common practice in the UK where large companies regularly recruit the head of their audit team as their finance director and retain the same accountancy firm. But all this will have to wait until all details are known .

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