After Enron: A profession responds

Note: The Maryland Association of CPAs is committed to its core value of protecting, and responding to, the public interest. We also recognize our responsibility to provide public information on developments and issues related to our profession. The recent collapse of Enron Corp. has understandably generated a flurry of commentary, much of it reflecting concern about standards and methodologies within the CPA profession. The following addresses issues that might be of concern to professionals, their clients and the general public, from the perspective of Maryland's largest professional association for CPAs.

Q: What exactly happened in the Enron disaster?

A: Enron is a Houston-based energy trading company whose recent bankruptcy filing was reportedly the largest of all time. As such, even the most basic facts about Enron are complex, and the full details will only emerge after comprehensive investigations that are now under way. Capitalizing on a deregulated energy industry, Enron rapidly cornered the market with innovative products and aggressive marketing: its valuations and stock price had soared astronomically by 2001. But as competitors cut into its market share, Enron plunged into new industries (optical fiber, broadband, metals, water, and weather analysis), racking up significant debt at high risk. Facing mounting debt and erosion of investor confidence, the company declared bankruptcy on Dec. 2, 2001. Enron's failure spelled financial disaster for investors, partners, creditors and, most tragically, company employees, who lost not only their jobs but also their retirement "nest eggs."

Q: Who is responsible for the collapse of Enron?

A: The Enron collapse is enormously complex, involving a wide range of financial, economic and legal factors. Commentators have identified lapses on the part of Enron management, bankers, analysts, business partners, auditors and regulators. The Justice Department, five congressional committees and three federal agencies are launching intensive investigations into the Enron collapse. Harvey L. Pitt, chairman of the Securities and Exchange Commission, has cautioned that, "Until all the facts are known, there is nothing that can or should be said about who may be responsible for this terrible failure." MACPA agrees that that we should not rush to judgment, but support efforts to analyze and resolve the Enron disaster and to develop measures to prevent this from happening again.

Q: What role did Enron's CPA firm and auditors play in this situation?

A: Arthur Andersen, one of the Big Five accounting and consulting firms, has been Enron's auditor of record. At one point Andersen was enlisted to restate the company's financial records for recent years, with substantial reduction in earnings. Many acknowledge that Enron's unique business model, the novelty and complexity of its business transactions, and the unusual pressures of the business environment were factors in this disaster. The House Financial Services Committee and the Securities and Exchange Commission will be investigating the role of the auditor in the Enron collapse, as well as audit and accounting practices in general. The results of this investigation can only benefit auditors and their clients in pinpointing areas that require redefinition or refinement.

Q: Does the Enron collapse reflect serious problems with auditors and audit practices?

A: By all authoritative accounts, audit practices and procedures remain sound. A comprehensive August 2000 report from The Panel on Audit Effectiveness, created by the Public Oversight Board at the request of the SEC, found no evidence that "audits are being conducted in an ineffective manner." According to the American Institute of Certified Public Accountants, of more than 16,000 audits are completed annually before the SEC for public filings."99.9 percent are high quality." As strong as the audit process is, no system is fail-safe. Enron's model by its very nature — high in risk and extreme in complexity — presented a unique challenge for our reporting system.

The need to restate Enron's financial statements, the possible lack of clarity of the company's footnote disclosure about its complex transactions, the complex accounting standards which the company had to follow or its auditors not detecting the items causing the restatement during that year's audit — none of these directly caused Enron's failure. While these items may have caused further reductions of confidence in Enron and its business, Enron's was a business failure.

The challenge to the CPA profession is to strengthen and revivify an already rigorous process of auditing standards and methodologies, peer review, and commitment to protect and respond to the public interest. As we work through this process, CPAs will be mindful of the five core values in which our profession is rooted: objectivity, integrity, continued education and lifelong learning, staying attuned to broad business issues, and competence. These values are the foundation of upon which every CPA builds his or her business — and reputation.

Q: What can be done to prevent future Enrons?

A: Chairman Pitt of the SEC has emphasized that private and public sectors must work cooperatively to develop new measures and to strengthen current ones to protect the public interest. Some specific recommendations have ranged from a more timely and evaluative disclosure of financial data by companies to more proactive oversight by audit committees. The profession continuously reviews auditing standards, reporting standards and auditor oversight to identify ways to better protect the public and ensure that our standards and oversight are appropriate for changes in today's environment. The Enron situation will provide lessons and information to allow the profession to make better changes to protect the public.

Q: What are the implications of the Enron collapse for Maryland businesses?

A: While the collapse of Enron is a tragedy for all those associated with the company, its wider economic repercussions could be relatively mild. The markets have performed well in the weeks since the bankruptcy filing was announced. A recent article in the Wall Street Journal went so far as to label Enron's failure a "success story," in that the competitive American market has continued to show stability and has worked "pretty much as expected." This echoes a positive comment from former SEC Chair Arthur Levitt, who said, "Today, America's capital markets are the envy of the world. Our efficiency, liquidity and resiliency stand second to none. That hasn't happened by accident. For a good part of this century, our system of financial reporting has come to be characterized by its high quality and transparency. This has instilled an unparalleled degree of confidence and trust." Maryland businesses, like businesses around the country, are the beneficiaries of a sound economic system that has weathered all sorts of shocks recently. Maryland businesses might benefit from a redoubled effort by the public and private sectors to enhance the financial reporting process.

Q: What is the Big Five's response to Enron's collapse?

A: Leaders with the Big Five accounting firms have issued a joint statement related to Enron's collapse, saying they plan to recommend to the SEC improved disclosure rules for the kind of partnerships that Enron used. Click here to read the complete statement.

Q: What is the AICPA's response to Enron's collapse?

A: The AICPA also has released a statement in which Chair James G. Castellano and President Barry Melancon commend the Big Five's statement and put forth their own action plan for evaluating and improving the profession's financial reporting and auditing systems.

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