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How far will the stain spread into Andersen? 30/1/02
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?
(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
Do you not accept what Andersen
did in its relationship is crucial to
your firm's credibility?
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
But you were their consultants, you
were their auditors and you make it
sound as if you had nothing it do with it!
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.
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
The answer I think is frankly
information is needed on that.
There are enormous enquiries¿
You don't know.
The answer is no-one knows and
we're not the people to provide the
But you are the accountants. You
must have known.
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
So you wouldn't necessarily, as
Enron's accountants have known
what was going on in Enron's books?
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
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
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
But you were there and you are
supposed to know about this stuff!
There are many others who were there,
there were people who were who
were investment analysts reporting on
But you were there!
Of course we were.
So why don't you know?
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.
But why don't you know?
Because the information is not
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?
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
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?
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¿
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?
But Enron is based in the US.
It says "One team, one voice" in your
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
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
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.
So off-balance sheet financing isn't a
problem per se?
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.
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
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.
Leaving Enron out of this, I'm talking
about the principle of doing consultancy
work and auditing?
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
Why did Ernst & Young split into two
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.
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
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
You don't think these practices should
end? You think firms can do both.
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
Does your company have political
leanings towards Labour?
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?
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
Was it your intention to get Government
work by cosying up to Labour?
Hardly when it's gained by competitive
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
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