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Thursday, 2 May, 2002, 15:12 GMT 16:12 UK
Audit giants called to account
Enron Andersen
Andersen: caught up in the Enron scandal
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By James Arnold
BBC News Online business reporter

Buying shares in a company, just like most other transactions, has a lot to do with trust.

Because we don't necessarily know the people who run the firm, however, shares come packaged with a form of guarantee - albeit one hedged about with much legal back-covering.

To calm investors' fears, company reports are rigorously audited, capped with the soothing statement that they "represent fairly, in all material aspects, the financial position of X Corp and subidiaries".

But the dramatic collapse of Enron has called into question the validity of such assurances.

The good name of the accountancy industry has been besmirched.

For Andersen, the firm whose Houston office audited Enron's dodgy books, the future is uncertain indeed.

Andersen under attack

Enron's failure has already spawned a string of official investigations, as well as civil litigation.

It's not hard to see why.

Just months after Andersen signed off on Enron's last annual report in the traditional manner, the firm admitted that its accounts for that year, and for the three previous years, had been more or less fictional - an admission that culminated in the firm's messy bankruptcy in December.

At best, Andersen's critics say, the auditors were incompetent; at worst, they deliberately overlooked irregularities at Enron in order not to lose the lucrative stream of consulting and other work it provided.

Some have alleged that Andersen lawyers last October destroyed crucial documents relating to Enron, in the hope of avoiding implication in any investigation.

Serial offender

What makes Andersen an even tastier target is the fact that this is not the first time.

Indeed, while all big accounting companies have suffered some sort of embarrassment in the past few years, Andersen seems to be permanently red-faced.

A few small cases have been blown out of proportion by the media

Andersen ex-employee

Last year, the firm was hit with a $7m fine for "improper professional conduct", the first successful case against an auditor launched by the US Securities & Exchange Commission in more than 20 years.

The fine related to auditing work for rubbish-processing firm Waste Management in the mid-1990s, including some $1.4bn in overstated earnings.

The Waste Management case followed Andersen's decision to pay $110m to settle a lawsuit on audits at Sunbeam, another US client found to have less than reliable accounts.

Unlucky, or unwise?

Andersen's track record may be more the result of bad luck than bad judgement.

"A few small cases have been blown out of proportion by the media - after all, a successful, trouble-free audit is not exactly news," one former Andersen employee told BBC News Online.

But as the smallest of the so-called Big Five audit firms (the others are PricewaterhouseCoopers, Deloitte & Touche, KPMG and Ernst & Young), Andersen could not afford to pass up business.

Since the bulk of its lucrative consultancy business - Andersen Consulting, now known as Accenture - has been spun off over the past few years, Andersen is forced to squeeze as much revenue out of its clients as possible.

Facing the abyss

Whether or not Andersen stumbles at this latest hurdle, the consequences for the wider accounting business are likely to be serious.

US lawmakers are looking at ways of tightening regulation of the accounting industry; potential measures could include forbidding auditors from providing consulting services, or shifting the US to international accounting standards (and hence cutting off a lucrative source of business for accountants).

When Andersen came under fire, its four rivals scented an opportunity, hoping to snap up pieces of the company for a song.

Andersen's international operations have indeed crumbled, with individual country units cutting merger agreements with rival firms.

Bitter medicine

But if regulators zero in on the industry's wider woes, rather than simply Andersen's alleged transgressions, all five firms will suffer.

A little suffering may, however, be the necessary medicine.

The most serious consequence of the Enron fiasco has been a collapse in public and corporate trust in the Big Five.

Andersen has been hardest hit by client defections, but all the big firms have lost business to smaller rivals in the past few months.

See also:

02 May 02 | Business
Andersen lawsuit talks collapse
19 Apr 02 | Business
Arthur Andersen to face trial
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