Perhaps the most controversial aspect of the Enron meltdown revolves around questions about the extent to which independence played a role in the events leading up to Enron’s restatement and subsequent bankruptcy.
Consumer advocates have hammered away at Andersen’s consulting revenues as evidence of a potential conflict of interests that may have “led the firm to overlook the bookkeeping irregularities that helped bring the company to bankruptcy.” (source: Accounting for Disaster, Common Cause, January 16, 2002.) “In November 2001,” says Common Cause, “when Enron reported it had overstated its net income dating back to 1997 by $586 million, that admission started the chain of events that led to the company’s bankruptcy.” At the same time, in a letter to the editor of the New York Times published on January 17, 2002, former SEC Chairman Arthur Levitt, who tried unsuccessfully to impose limits on accounting firms performing auditing and consulting for the same client, went so far as to say, “Maybe we should reconsider those limits.”
Others have argued the real problem was the audit committee’s lack of independence. In this regard, Mr. Levitt suggested that stock exchanges require at least half the directors of a company to be independent in the sense they would not be allowed to take consulting fees, use corporate aircraft without reimbursement or receive benefits like corporate support for their favorite charities. “In Enron’s case,” says Mr. Levitt, “at least three board members would have been disqualified under a strict test of independence.”
How big a problem were these perceived independence problems? At last, Andersen Chief Executive Joseph Berardino speaks out and publicly puts the questions about “cooked books” in perspective. Speaking on NBC’s “Meet the press” current affairs program on January 20, 2002. Mr. Berardino said, “This is a company whose business model failed. The accounting reflects the results of business activities. And the way these events were being accounted for [was] clear to management and to the board.”
Referring specifically to the questions about auditor independence that have arisen due to the fact that Enron represented $100 million a year in consulting fees, Mr. Berardino replied, “That’s a lot of money, we understand that. But we’re also a $10 billion organization. This client was a fraction of 1 percent of our fees.”
Lastly, Mr. Berardino set the record straight with respect to any alleged accounting irregularities. “Everybody wants to talk about the off-balance sheet liabilities,” he said. “But those liabilities also were countered by off-balance sheet assets. The key here is that those assets lost value very quickly.” He added, “The work we had done for Enron, under any scenario, [was] appropriate and [was] disclosed to the board and to the shareholders.”