In a corner: Enron's Collapse has left the profession's reputation hanging in the balance.

• Author: Armstrong, Mary Beth
• Position: A Perspective

"There is a crisis of confidence in my profession," testified Joseph Berardino, Andersen CEO. He was speaking before a congressional panel last December regarding the fall of Enron and the role his firm played. But Andersen is not the only firm likely to suffer repercussions from Enron's collapse--the whole profession is on the line.

Enron is just the latest and largest in a series of accounting-related crises at public companies, including Waste Management, Lucent Technologies, Sunbeam, Xerox and more.

Lynn Turner, former SEC chief accountant, told the New York Times that this rash of accounting-related crises is a "tsunami that's going to destroy public confidence."

Clearly, the profession as a whole must respond to this crisis of confidence. At a minimum, we need to address the following: consulting for audit clients, a rules-based mind-set, risky clients, firm reward structures and peer review.

WHAT THE HECK HAPPENED?

On Nov. 8, 2001, investors learned that Enron was restating its earnings for the past four years for three reasons:

* Three unconsolidated special purpose entities (SPEs) should have been consolidated according to GAAP;

* Audit adjustments passed in 1997 because they were deemed to be immaterial at the time; and

* A reduction in assets and stockholders equity due to reclassifying receivables from stock subscriptions to comply with GAAP.

By Dec. 2, Enron filed for bankruptcy after Dynegy abandoned a bailout of the cash-poor company.

According to Berardino, the restatements of prior information were required because Enron officials had withheld information about one SPE. With the information, the auditors would have required the SPE's consolidation--including its massive liabilities--with Enron's financial statements. Without that information the SPE was not consolidated because it fell below the 3-percent rule.

Berardino also acknowledged that another cause of the SPE restatements was an "error in judgment" by Andersen's own auditors.

Technical reasons for the restatements are often confusing to non-accountants and they can be impatient with the explanations, whether warranted or not. Representative John D. Dingell (D-Mich.), the ranking Democratic member of the Energy and Commerce Committee, told the New York Times, "[Andersen] was either corrupt or incompetent. It's possible they were both."

Unfortunately, a large segment of the public may share Congressman Dingell's sentiments.

CONSULTING FOR AUDIT CLIENTS

Turner also told the New York Times that "Accounting firms have become too dependent on consulting fees from the companies they audit and are unwilling to risk those fees by challenging corporate managers who stretch accounting...