Big Five firm Andersen's CEO, Joseph Berardino, spoke to the House Committee on Financial Services Tuesday, further explaining his firm's role in the restatements of Enron's financial statements and describing his vision of the direction accounting should take in the future.
Mr. Berardino listed four steps that Andersen will implement immediately.
- "Andersen will work with the management and audit committee of each publicly traded US audit client to establish a formal process for determining the company's acceptable scope and level of fees for those non-audit services that we continue to provide."
- "Andersen will establish a new Office of Audit Quality comprised of senior specialists with the sole mission of driving audit quality. This new office will be responsible for developing expertise, guidance, and review programs to assure quality, completeness, and transparency of financial statements audited by Arthur Andersen LLP."
- "Andersen will create a new independent Office of Ethics and Compliance to investigate, on a confidential basis, any concerns of Arthur Andersen partners, employees or individual from outside the firm relating to issues of audit or auditor quality, integrity, independence and compliance."
- "Andersen will report to audit committees more comprehensively than currently required and include quality of results, industry comparisons and performance indicators."
Mr. Berardino briefly addressed the committee's concerns about the Big Five firm's role in the Enron situation by describing an agreement between JEDI and Chewco, two special purpose entities (SPEs) indirectly controlled by Enron through which debt was passed and omitted from the Enron balance sheet. Mr. Berardino referred to a separate agreement between JEDI and Chewco dated December 30, 1997, "which was not provided to our team in 1997 (sic) when we asked for all Enron and JEDI documents." He said Andersen is still investigating the accounting implications of various Enron activities.
Mr. Berardino devoted most of his testimony to explaining his vision for a new structure for accounting rules and for "how auditors communicate the work they perform and the conclusions the reach." This new structure would feature several changes to the way in which auditing is performed and reports are generated.
The new structure described by Mr. Berardino encompasses several major points which are summarized in Andersen's press release:
- Modernize the Auditors' Communications with the Public
- Modernize the Financial Reporting Model on a System-Wide Basis
- Strengthen the Role of Audit Committees and Assuring the Integrity of Audit Information
- Insure (sic) that Auditors Get Full and Accurate Information
- Reform the Accounting Profession's Regulatory Model
- Improve Accountability Across our Capital Markets System
Details of these suggested reforms are available in the transcript of Mr. Berardino's testimony. Mr. Berardino indicated that such massive reforms are necessary because the "fundamental problem facing the accounting profession today lies in the role of the auditor and the nature of the service that auditors offer." He also warned that "SPEs are the issue of the day. We can change accounting rules to address them. But that will not avoid future controversies. FASB will labor for two years to reform one accounting rule; clever investment bankers, lawyers - and, yes, clever accountants - will find a way to circumvent the new rule in two days."
Mr. Berardino emphasized that Enron's Special Investigative Committee, which last Saturday issued a report about the decisions that led Enron to its collapse, did not speak to Andersen personnel as part of the process of compiling this report. "Although the report suggests that we did not cooperate with the investigation, nothing could be further from the truth."
Minnesota Takes Strong Action Against Accounting Firms
In the aftermath of the Enron collapse and Andersen's association with the energy company as both auditor and consultant, Minnesota Attorney General Mike Hatch has announced that a bill will be introduced into the state legislature later this week that will prohibit accounting firms licensed in Minnesota from auditing publicly traded companies while also providing consulting services to them.
The bill, which is similar to federal reforms under consideration, will include a minimum level of acceptable consulting compensation for accounting forms that perform such audits.
Former Enron Chief Faces Subpoenas
Former Enron chairman Kenneth L. Lay, who refused to testify before House and Senate committees on Tuesday, will be subpoenaed to appear before the Senate Commerce Committee. The committee voted unanimously to issue the subpoena. It is expected that Mr. Lay will testify next week.
The House Financial Services Committee is also expected to subpoena Mr. Lay.