How far will the stain spread into Andersen? 30/1/02

JEREMY VINE:
We can now hear from John Ormerod, who runs Andersen in the UK, both about the points in Martha's piece and in Paul Mason's as well. Firstly, what happens to Enron was a spectacular disaster. Did Andersen not see it coming?

JOHN ORMEROD
(Managing Partner, Andersen UK):
Enron is a case of a business that failed. Clearly, we're all concerned and shocked, but fundamentally, Enron was a fast-moving, aggressive, dynamic business working and extending its business into commodity trading and new ventures in a highly leveraged way. The people who set up and policed that structure, who reported its financial performance, were the directors of Enron. That is not the auditor's job and the failure has to be an issue for the directors of Enron.

VINE:
Do you not accept what Andersen did in its relationship is crucial to your firm's credibility?

ORMEROD:
The Enron issue, as it has now become, has raised questions that I think frankly are reverberating in many markets around the world, but the questions are ones that have to be answered over a long time. The answer to the reasons why Enron failed will not be found in the next week or fortnight. Some questions that can be answered around what are the lessons to be learned for Enron, for the financial community, for analysts, for the professionals involved, including accountants. That is where the real focus ought to be.

VINE:
But you were their consultants, you were their auditors and you make it sound as if you had nothing it do with it!

ORMEROD:
The talk about consulting fees is one of those things that tends to get misdescribed. The work that we did, which you've reported as consulting fees, about 70% of that was actually audit extension related regulatory reporting, things that auditors naturally and probably are almost the only people to do as an extension of their audit work.

VINE:
It's the case, isn't it, that the only defence you have against the accusation that Andersen were part of cooking the books inside Enron, is that you didn't know what was going on?

ORMEROD:
The answer I think is frankly information is needed on that. There are enormous enquiries¿

VINE:
You don't know.

ORMEROD:
The answer is no-one knows and we're not the people to provide the primary answers.

VINE:
But you are the accountants. You must have known.

ORMEROD:
Yes. We are the accountants, we are not the directors. As I've already made clear, the directors of a company have primary responsibility, not only for running it, but reporting its financial performance. Auditors play an important role, but not the primary role.

VINE:
So you wouldn't necessarily, as Enron's accountants have known what was going on in Enron's books?

ORMEROD:
Forgive me, we weren't Enron's accountants, we were their auditors. There is a big difference. Accountants are the people who are within the company, keeping the records. That doesn't make - that is different from auditors.

VINE:
It is incredible, isn't it? Here you are, an accountancy firm, at the scene of the biggest corporate collapse in American history, and you have no explanation at all, not even for your existing clients.

ORMEROD:
The questions are very complex. This is the largest corporate collapse in the United States and lots of people were there at the time beyond auditors. There were rating agencies who were reporting up to a very short time before the collapse of Enron.

VINE:
But you were there and you are supposed to know about this stuff!

ORMEROD:
There are many others who were there, there were people who were who were investment analysts reporting on its performance¿

VINE:
But you were there!

ORMEROD:
Of course we were.

VINE:
So why don't you know?

ORMEROD:
We are one of the few organisations who are actually co-operating. It's Andersen people appearing before Congress. You tell me who else is. We are co-operating and fully co-operating to try to provide the information that will help.

VINE:
But why don't you know?

ORMEROD:
Because the information is not available.

VINE:
It may take ten years for this to go through the courts. So, in that time, your clients in Britain and the US, will have to wait for answers about the role that Andersen played. Is that acceptable to them, do you think?

ORMEROD:
I think the answers we can give now, and I think it's a much wider community that can focus on this, is what are the lessons out of Enron? Enron's a tragedy for a large number of people. I think there's an obligation on professionals, the regulators, politicians and so on, to learn the lessons and share that now.

VINE:
But since you don't know what happened, you claim - you weren't there, didn't see anything or hear anything - you can't draw any lessons from it at all, is can you?

ORMEROD:
First of all, this is an event that's happened in North America. I'm responsible for Andersen in the UK. I don't have the detailed knowledge, but importantly, the people who can answer these questions are the directors and managers of Enron. They were there every day, dealing with this, and the people to answer the questions¿

VINE:
I've got your prospectus here, it says, "One team, one voice. It's a one firm global operating approach", and you're telling us now that because you're the head in the UK, you don't know what's going on in the US?

ORMEROD:
But Enron is based in the US.

VINE:
It says "One team, one voice" in your prospectus.

ORMEROD:
Yes, but Enron's accounts and records are based in Houston. That's where the accounts that were reported on, are prepared. I don't have that information in London, not everyone is involved in every company's accounts. That information is there and that's where the answers will come, from the directors and managers of Enron, when the investigation is completed.

VINE:
On a specific point about the accounting here. One of the things that happened inside Enron was that a number of companies were set up around it, in satellite if you like, and the accounting of that in some way disguised the losses. You say you can't tell us much about those particular firms, which had strange names, apparently some of them derived from Star Wars characters, but can you tell us whether it's Andersen's practice normally to set advise people to set up firms like that?

ORMEROD:
The structured financing vehicles, and off-balance sheet structures are something that the investment community has been providing to help companies finance their business for a long time. In North America many companies use those vehicles.

VINE:
So off-balance sheet financing isn't a problem per se?

ORMEROD:
It's not illegal and is used by many companies. The issue is whether that was fully understood by the financial community who were assessing Enron's performance. In North America there are very clear rules, as in fact your report talked about "tick the box" accounting in North America. That's rather different from the accounting structure we have in the UK. In North America there are detailed rules. If you fit those tests, it is not a matter of choice, you account for it this way. In the UK, we have the benefit of what we call "true and fair" accounting, in other words substance over form, and therefore companies keep their records, and must look at the substance, not just the form.

VINE:
Another point that comes out of this - your company worked for Enron as their accountants, that's partly a consultancy service and partly and auditing service. Is there not a problem with having your company going into a firm, doing consultancy, advising them on how to balance their books and then coming in through a separate door and auditing those accounts?

ORMEROD:
First of all, as I said earlier, the amounts of money are - you referred to them as consulting. We may call them non-audit fees. And of those non-audit fees, 70% of them were audit-related.

VINE:
Leaving Enron out of this, I'm talking about the principle of doing consultancy work and auditing?

ORMEROD:
Fundamentally, independence is at the heart of auditing. No-one in the auditing profession would have any doubt about that. It's important to us, our clients and capital markets.

VINE:
Why did Ernst & Young split into two companies then?

ORMEROD:
You must ask them that. The point that I was going to make was that the studies that Peter Wyman referred to in your earlier film made clear that the studies which had been carried out about business failure have not identified any links between auditors' independence and business failure.

VINE:
But it's a problem when you have a situation where you might think that the auditors from Andersen's wouldn't want to find glitches in the accounts that had been prepared under advice from Andersen's?

ORMEROD:
As I said, much of the work referred to by you as consulting fees is actually not consultancy services. In relation to Enron, the consulting fees, as you call them, were about the same size as audit fees. A guideline that's often used in the UK is a one-to-one ratio, is a normal balance between¿

VINE:
You don't think these practices should end? You think firms can do both.

ORMEROD:
I think maintaining independence and ensuring we have the confidence of people using accounts is vital to all of us. No question of that. But whether the best solution is to change the arrangements for accounts and auditing is a matter we need to debate, but not to jump to knee-jerk conclusions.

VINE:
Does your company have political leanings towards Labour?

ORMEROD:
No.

VINE:
Does it have a problem with the accusation that during the mid-'90s it sent executives to work for Labour's Treasury team when they were the Shadow Treasury team in helping them preparing their windfall tax policy?

ORMEROD:
You sensationalise it by saying it's an accusation. It's been well-known, and this is not a revelation of the day. It's well-known, and has been discussed for some time that, prior to the new Labour first election victory, we had assisted in the development of taxation proposals, and above all to help those and make them relevant and practical for business. We were paid for doing that work, it had no influence on the subsequent granting of work. Government work is done on merit, principally based by competitive tendering.

VINE:
Was it your intention to get Government work by cosying up to Labour?

ORMEROD:
Hardly when it's gained by competitive tender.

VINE:
You came out with a survey that said you can save 17% on some private-public sector projects, but when the Government is persuaded by the 17% figure to go down the private public partnership route, your firm ends up as a beneficiary of that?

ORMEROD:
It seems to be forgotten that that study was not done just by Andersen, it was done jointly with a very respected academic institution, the London School of Economics. So I think to taint the report with a lag of rigour seems to fail to recognise that there were others involved making sure it was a thorough and proper study.