From where he sits: Congressman Brad Sherman takes on Enron from a CPA's vantage point.

• Author: McCrary, Deanna
• Position: Q & A - Interview

Congressman Brad Sherman enjoys a bird's eye view of the Enron hearings. As the sole CPA on the House Committee on Financial Services, Sherman, a Democrat from Southern California, serves as a key player in the investigation into Enron's bankruptcy and the role of its external auditor, Arthur Andersen.

In a recent interview, Sherman, who was licensed as a California CPA in 1975, explained why more fingers should be pointed at Wall Street analysts and why he thinks the SEC turned a blind eye.

A former member of California's State Board of Equalization, Sherman shared his thoughts on the true role of the technical review department and offers opinions on GAAP, GAAS and auditor independence.

* What allowed Enron to happen?

One thing that's important in the structure of an auditing firm is that the technical review department--Andersen called it "Chicago"--needs to have the mandate to get all the close questions and the authority to make the final decisions. The structure should have been that Chicago--not Houston--made the decisions. My preliminary information is that the way Andersen was structured, Houston was allowed not only to make the decisions, but to decide which matters even came to Chicago's attention.

The CPAs in technical review need to have the final say. That's not just good for the markets and country, but that's good for the poor Arthur Andersen partners in California. The California partners had some knowledge about whether or not the technical review people in Chicago knew what they were talking about and were careful--but they had no control over Houston at all. And here they are, going down because of Houston.

* Did accounting standards fail us?

There were problems with GAAP, GAAS and the AICPA's take on ethics and independence. In GAAP, the rules were vague and loose enough to allow smart CPAs with the big firms to look at what Enron was doing and say "If you look at it from this vantage point, it works."

I'm looking forward to the GAAP that makes it very clear that if you've lost a billion dollars you can't hide it with $30 million. GAAP has to be clear on special purpose entities, derivatives, transactions involving the company's own stock and in situations in which the company has insured its insurer.

Second, we've got to look at GAAS. Are we as auditors finding out about all of the complicated contractual relationships, or are they showing us some of the contracts but not others? Do we have a system of sending out...