Enron Fires Arthur Andersen - ABC News
Jan 16, Arthur Andersen fired its partner in charge of auditing the Enron Corporation today, partnerships that contributed to the company's collapse. Jun 24, The Andersen effect takes its name from the accounting firm Arthur in a number of accounting scandals in relation to the Enron collapse. Arthur Andersen LLP, based in Chicago, was an American holding company. Formerly one of . Following the scandal in which energy giant Enron was found to have reported $bn in revenue through institutional and systematic accounting . "Arthur Andersen's Fall from Grace Is a Sad Tale of Greed and Miscues".
The two were decent golfers but better fundraisers in the last several years as they co-chaired the Open Heart Open, a Houston golf tournament that benefited the American Heart Association, one of the pet charities of Enron Chairman Kenneth Lay. Although the event featured no celebrities, it consistently sold out, according to Duncan's former executive assistant, Shannon Adlong.
The event was popular because people in Houston were eager to network with Enron employees and maybe get a job there. But even as its hometown was toasting Enron, the company's finances were raising eyebrows. Well before its most notorious deals were struck, the perils of Enron's use of off-balance-sheet partnerships and the coziness between auditor and client were lampooned by an Andersen partner in its Houston office.
James Hecker didn't work on the Enron account but was close friends with many people on the Enron engagement team and heard their complaints about Enron's aggressive ways. One autumn afternoon seven years ago, he sat at his computer and tapped out a parody of Enron to the tune of the Eagles ' "Hotel California. The lyrics mocked Andersen's willingness to sign off on Enron's hundreds of partnerships called special purpose entities.
Years later, investigators would allege that Enron used those partnerships to hide debt and inflate profits. In the process, several Enron executives profited handsomely, including Michael Kopper, who last month pleaded guilty to wire fraud and money-laundering charges related to one of the partnerships.
The conference calls would stretch for hours, with the Andersen staffers flipping through financial documents and policy statements, finding ways to appease Enron. The marathon sessions would pressure Andersen auditors to view accounting issues Enron's way--if only to get home.
White and his co-workers knew what Enron wanted and usually sought to give it to them. When Enron didn't like the advice it got from Andersen, the company would press to get the answer it wanted.
Ties to Enron blinded Andersen - Chicago Tribune
Patricia Grutzmacher, a former senior manager at Andersen who worked on the Enron account, testified about such "push back" at Andersen's criminal trial. The more money involved, the stronger the push back, which would force her to work as late as one or two in the morning.
Sometimes, Enron would go over her head, insisting that Andersen senior partners overrule her. Routinely, her superiors at Andersen would reach the conclusion Enron wanted. One such deal that kept Grutzmacher up late was Merlin, the code name for a transaction that involved Enron Chief Financial Officer Andrew Fastow and a partnership he controlled.
Now a crucial part of government investigations into Enron's finances, such deals allowed Enron to pass unwanted assets onto Fastow's partnerships, which dealt in everything from power plants to stock investments. Merlin was one of hundreds of off-balance-sheet partnerships Enron used. They are by no means unusual, as executives look for innovative ways to raise cash and paint the best possible picture of their debts.
What was jarring at Enron was the sheer scale, frequency and complexity of the deals that it struck in its attempts to hide the true state of its finances.
Within two years, Merlin got into financial trouble, prompting Enron to buy back the declining assets and take the hit. Fastow and his partners lost nothing. Enron's willingness to cover the losses of a supposedly independent party, Grutzmacher noted in her trial testimony, may have violated a cardinal rule of accounting.
If a business deal of this type does not include some element of risk, it is sham. Grutzmacher testified that she complained to an Enron executive. She contended that Enron should have to restate its earnings to reflect Merlin's losses. The Enron executive would hear none of it. One of their least favorite people at the firm was Carl Bass. He was a member of Andersen's Professional Standards Group, its once-influential unit of accounting experts. For decades, the group's word was accepted as law at Andersen.
Auditors perplexed by an accounting problem would consult with the group, which was based in the Chicago headquarters. Bass was one of the only members of the standards group who worked outside of headquarters, a nod to his desire to live in his native Texas. Like some other members of the standards group, Bass lacked the bedside manner that elevated the careers of partners such as Duncan. But it wasn't just the style of Bass' advice that irritated Enron executives.
Inhe began to complain about questionable business practices at the energy trader. In one memo to his Andersen colleagues describing one of Fastow's partnerships, he wrote "this whole deal looks like there is no substance.
Instead of standing up to the client, Andersen senior partners went along. Early inthey removed him from day-to-day troubleshooting on the account. In court testimony, Duncan explained how he felt compelled to ask Enron's Causey whether Bass could remain part of Andersen's team. Causey and see if there were some movement there," Duncan testified. But he eventually told Bass that Causey would not back down. The idea that Enron could shove aside someone from the standards group made a tremendous impression on Andersen's Houston auditors.
The Enron account had become so lucrative for Andersen that the firm was unwilling to step away, even when it determined the engagement was one of its most risky--part of a firm-wide assessment of clients begun years earlier in the wake of litigation. The question came up during the firm's annual review of the Enron account in Februarywhen Houston partners briefed their Chicago headquarters in a conference call. Andersen partners described Enron's accounting for trades as "intelligent gambling.
But Andersen's leaders decided to retain Enron as a client and determined the size of fees was not an issue. Andersen auditors weren't the only ones raising concerns about Enron's books. By July of last year, a growing number of Enron executives were starting to question their employer's finances as well. One of them was Margaret Ceconi, who negotiated deals for Enron Energy Services, which promised locked-in prices to big users of power and other commodities in return for long-term contracts.
Many of the people she worked with at EES didn't have the accounting background to ask tough questions about the division's deals. When they did, Ceconi said, Enron's finance people had the same answer: Ceconi, though, had a degree in accounting and experience as a banker and became suspicious after Enron announced its second-quarter results. She knew that many EES deals were losing big money, partly because customers were balking at paying high prices that had dropped since the deals had been signed.
In one such case, Enron recently sued Tribune Co. But EES' financial woes weren't reflected in Enron's second-quarter numbers. The word around Enron was that the losses at EES had simply been shifted to Enron North America, the company's profitable energy-trading arm. Not wanting to identify her company, she used a hypothetical example: Say you have a food company that makes both hot dogs and ice cream.
If the hot dog stand is making money, and the ice cream stand is losing money, can the company put the ice cream losses on the profitable hot dog books since they both have the same owner?
Two days later, a woman from the SEC contacted her and said the answer was clear: Such accounting would misrepresent the performance of each of the food stands. Armed with the information, Ceconi began to try to find documentation.
But before she could, Ceconi was laid off Aug. Less than two weeks later, Enron Chief Executive Jeff Skilling stepped down, citing a desire to spend more time with his family. Skilling's speedy exit--he had only taken the job earlier that year--got Wall Street analysts talking.
Until then, Enron was a star performer. The month before his departure, all but one of 16 major analysts covering the company were urging investors to buy it. The company's stock had soared 89 percent the year before, on top of a 58 percent gain in Although the company continued to report rising profits, its stock had fallen nearly 50 percent by mid, along with the market's other boom-time favorites such as high-tech stocks. Although the Supreme Court reversed the firm's conviction, the impact of the scandal combined with the findings of criminal complicity ultimately destroyed the firm.
Nancy Temple in the firm's legal department and David Duncan lead partner for the Enron account were cited as the responsible managers in this scandal because they ordered subordinates to shred relevant documents. Securities and Exchange Commission will not accept audits from convicted felons, the firm agreed to surrender its CPA licenses and its right to practice before the SEC on August 31, —effectively putting the firm out of business.
It had already started winding down its American operations after the indictment, and many of its accountants joined other firms. The damage to Andersen's reputation also destroyed the firm's international practices. Most of them were taken over by the local firms of the other major international accounting firms. The indictment also put a spotlight on the firm's faulty audits of other companies, most notably Waste ManagementSunbeamthe Baptist Foundation of Arizona and WorldCom. The subsequent bankruptcy of WorldCom, which quickly surpassed Enron as the biggest bankruptcy in history and has since been passed by the bankruptcies of Lehman Brothers and WaMu in the financial crisis led to a domino effect of accounting and corporate scandals.
United Statesthe Supreme Court of the United States unanimously reversed Andersen's conviction because of serious errors in the trial judge's jury instructions. The court found that the instructions were worded in such a way that Andersen could have been convicted without any proof that the firm knew it had broken the law or that there had been a link to any official proceeding that prohibited the destruction of documents. The opinion, written by Chief Justice William Rehnquistalso expressed skepticism of the government's concept of "corrupt persuasion"—persuading someone to engage in an act with an improper purpose without knowing that the act is unlawful.
Demise[ edit ] Following the reversal, an analyst quoted by NPR observed that a retrial was unlikely: Ownership of the partnership has been ceded to four limited liability corporations named Omega Management I through IV.
Charles, Illinoisuntil day-to-day management was turned over to Dolce Hotels and Resorts inbut Andersen retains ownership. They are no longer auditing or consulting. Anderson was the major accounting influence in this incident, however they were not the main player. Enron became more and more arrogant as time passed. Most of the debts and tangible assets of the company were on the balance sheets of partnerships that were run by high-ranking officials within the corporation Zellner.
With this kind of strategy for business the company quickly began to falter. Finally on December 2, Enron filed for bankruptcy Zellner. In the end Enron fared no better than other companies that perpetrate this kind of activity.
This description is what really happened, but how these events were displayed to the public is a different story.
Enron Fires Arthur Andersen
In early Jim Chanos, the person who runs Kynikos Associates, was the first to say what everyone can now see -- Enron had absolutely no way to earn money. The parent company had become nothing but a hedging entity for all of its subsidiaries and affiliates. This kind of a decrease in one year is unheard of in the utilities industry. Chanos went on to point out how Enron was still aggressively selling stock, even though management understood that there was very little to back up the shares that they were selling.
Chanos was also the first person to take notice of and publicly identify the partnerships where Enron was hiding some of its debt McLean.
Thanks to Jim Chanos the public was made aware of what was going on, and actions have been taken to implement changes to prevent a similar instance in the future. Changes Since these events have taken place, see exhibit 1, many changes have come about within the accounting industry.
Still other changes have come from the government and government agencies or have just naturally evolved with time. SAS 96 became effective January of and dealt with the record retention policies of accounting firms. Also several new regulations were added.
SAS 96 contains a list of factors that auditors should consider when attempting to determine the nature and extent of documentation for a particular audit area and procedure. It also requires auditors to document all decisions or judgments that are of a significant degree SAS For example, a decision of a significant degree would be an auditor approving a client not using GAAP for a portion of their financial statements.
These changes appear to be a direct result of the paper shredding that went on at Arthur Andersen immediately after the Enron bankruptcy. SAS 98 makes a lot of revisions and amendments to previous statements. All of these changes would appear to be related to problems that were discovered in the Andersen audit of Enron.
Many accounting firms and independent CPAs reacted to these events and implemented changes in procedure voluntarily. These four companies decided to break all ties with Andersen in an attempt to avoid being dragged down with the selling controversy surrounding the Enron scandal. This distancing was also due to the major changes mandated to Andersen as a way to get back on their feet after the scandal broke, and the other firms were afraid that these changes would be forced on them as well Schroeder.
This scandal also caused many major companies who had used Andersen as their auditor in past years to hire auditors to go over past years audits double checking all of the audit work that could be double checked.
This cloud of doubt also extended to companies that Andersen gave qualified audit reports or consulting advice to. Leaders of many blue-chip firms were very concerned by this scandal, and they met to discuss plans for future changes. At the end of these meetings, it was decided that a new oversight committee should be proposed and that these companies were the people to propose such an idea. This idea would set up a committee sponsored completely by the SEC.
The members of this committee were to be completely independent of the public accounting firms Bryan-Low. The oversight committee mentioned was never instated because the current public oversight committee dissolved itself only a short time after this proposal was made, as they felt they had let down the community and the industry. The government reacted aggressively when they became aware of the Enron scandal, and a flurry of legislation and proposals emanated from Congress and the SEC about how best to deal with this situation.
President Bush even announced one post-Enron plan. This plan would also include higher levels of financial responsibility for CEOs and accountants. By far the biggest change brought about is the Sarbanes-Oxley Act Ditman. Sarbanes-Oxley also brought with it new requirements for disclosures. These requirements included reporting of transactions called reportable transactions.
These transactions are broken down into several categories, which impact every aspect of a business. One of these categories is listed transactions-which are by far the worst. They are transactions that are actually written out in a list, each one pertaining to one specific situation. Another is transactions with a book-to-tax difference of more than ten million dollars.
There are several others, however these two will have the greatest effect. Accompanying these requirements are strict penalties if these transactions are not reported and discovered later. This act will mean significant additional work for accountants over the next several years. One such meeting had David Walker, Comptroller of the United States, discussing his beliefs as to where serious problems existed. The four major areas outlined in his discussion were corporate governance, independent audit of financial statements, oversight of the accounting profession, and accounting and financial reporting issues GAOT.
This discussion sparked the bringing several GAO accountants and heads of business into Congress committees for advice and to get feedback for proposed ideas. The other large meeting was held to discuss the Sarbanes-Oxley act that was put before Congress.