Arthur Andersen LLP, the auditing firm for Enron Corp., has been dogged by questions about its accounting work since the troubled energy-trading giant announced in November it would restate its financial reports. The questions have grown in the wake of Enron's Dec. 2 filing for Chapter 11 bankruptcy reorganization. Like Enron, Andersen has become the target of a flurry of class actions, and its work for Enron is being reviewed by regulators.
This isn't the first time that Andersen has been enmeshed in its clients' troubles. It was the auditor for Sunbeam and Waste Management, two outfits that ran into financial disaster in the last few years. Sunbeam wound up in bankruptcy court, Waste Management was sold -- and Andersen paid hefty settlements to resolve shareholder class actions. In May, 2001, it agreed to pay $110 million to Sunbeam shareholders, after having agreed in late 1988 to shoulder part of a $220 million Waste Management settlement. Moreover, the firm agreed to accept -- without admitting or denying responsibility -- an antifraud injunction from the federal Securities & Exchange Commission, a censure, and a $7 million fine.
Joseph F. Berardino, chief executive officer of Arthur Andersen, testified on Dec. 12 on Capitol Hill about his firm's role in the Enron case. A copy of his testimony is available on his firm's Web site. The night before he testified, he spoke with BusinessWeek's Chicago Bureau Chief Joseph Weber. Here are edited excerpts from that conversation:
Q: Can you tell me what you're doing to find out what went awry with the auditing of Enron?
A:Well, we've done a number of things. We have a senior team on the ground -- from outside the Houston team -- analyzing what happened. We asked Deloitte & Touche for the peer review, which they had just finished. Every three years firms come in to audit our quality control of our audit practice. I asked them to come in right before Thanksgiving because I wanted to make sure I knew what was going on. And I want to make sure that the public had confidence in our firm as a result of their peer review, so they are supplementing their procedures. They'll be reporting to us right after the first of the year.
We've been down in Washington, briefing members of Congress and their staffs, so they have some context...[to] do their own investigation. We've briefed business groups. I met with the Financial Executives Institute, last week, for example. And we're meeting and working with the rest of the Big Five to address the public's concerns.
Rather than hiding underneath our desks waiting for this to blow over, we really believe our best posture is to provide our views, to provide testimony, to help all of us learn what happened, why it happened, and how our system can be improved for the public's benefit.
Q: If I can play devil's advocate for a minute, it's very risky to take a stance of fairly open public disclosure. You've got a lot of plaintiffs' lawyers out there that see you as the deep pockets in this case. Doesn't that worry you?
A:We're a stand-up firm. This is the right thing to do. This is the biggest thing that has ever hit.... The chips will fall where they'll fall. We're obviously confident about our firm and its quality. A lot of people are ready to write our obituary. I think they'll find in due course that reports of our demise are greatly exaggerated. We've met adversity before, and every time we've learned from it and gotten stronger and better. And I'm going to prove that to you again.
Q: Have you undertaken or considered undertaking any disciplinary action against any of the partners involved in this -- the folks in Houston or elsewhere?
A:We're still in the process of getting the facts. There's so much we don't know. I just can't offer you any more than that right now.
Q: Are you concerned that this dustup follows Sunbeam and Waste Management? How do you respond to folks who say, "three such strikes and you're out"?
A:Well, we're obviously concerned about that, and it's understandable. Our reputation is on the line. Our people hate reading the paper every day and reading about our firm being criticized and accused without facts. I frankly take the fact that people are concerned as a healthy thing. Our people really care about our firm and our reputation for doing things right.
We've been around for 88 years. We've gone through wars, depressions, good times, bad -- all this year! And we'll do close to $10 billion worth of business this year, in 84 countries. There's no question our reputation has taken a hit. But we'll be here next week. We'll be here next year. And I hope to get to know you real well.
Q: You haven't been losing any clients over this?
Q: Are staff leaving?
Q: If we can go beyond the immediate issues: What changes should this lead to in the practice of accounting?
A:That's hell of a good question. And we're giving that a lot of thought. As I look at this, there needs to be some changes, no question. The marketplace has taken a severe psychological blow, not to mention the financial blow. I think as a profession, we have taken a hit.
And so I think we're prepared to think very boldly about change. I'd suggest to you that I've got two factors that I will consider in suggesting or accepting change. No. 1: Will this change -- whatever it might be -- significantly help us in improving the public's perception and trust in our profession? Secondly, will it really make a difference in terms of helping us improve our practice? And I'd also suggest that the capital market needs to look at itself and say whether or not everything performed as well as it could have.
Q: I don't quite understand what specific change you'd like to see. Some people have said the auditing ought to be much more tightly regulated, somehow divorced from the firms...that the government ought to handle or oversee it. And consulting and auditing certainly ought to be separated. Do you think such dramatic changes are necessary?
A:I hear the same things, too.... As each day goes on, we all are learning something new. And people are having a broader perspective on what happened. And I'm not saying this should take forever, but let's give us a little more time to stand back...before we rush to solve the problems of the world.
Q: May I ask one quick question specific to Enron? Where does the fault here lie -- with you, with them, with the press, the marketplace?
A:I think we're all in the fact-gathering stage, and the thing that I've been encouraged by, walking around Capitol Hill today, is our lawmakers are in a fact-gathering stage. Let's just let this play out a little bit.
Edited by Patricia O'Connell