Effects of Enron collapse, accounting tricks trickle down locally and to CPAs

The Portland office of Arthur Andersen & Co. is 2,300 miles removed from the Houston epicenter of Enron Corp.'s accounting scandal, but it can't escape the ripple effects. Investigations are under way into the accounting firm's role in the company's meltdown.

Portland General Electric, an Enron subsidiary, may be forced to drop Andersen following the Enron board's decision last week to fire the Big 5 accounting firm as its auditor. Enron executives will decide within the next week if the action applies to all its subsidiaries, said PGE spokesman Kregg Arntson.

'We'll take the appropriate action,' he said, even though Andersen, which has worked on PGE's internal and external audits for 90 years, 'has always done a great job for us.' Moreover, Enron agreed in December to sell PGE in a $2.98 billion stock-security deal to Northwest Natural Gas Co. that is dependent upon Enron's bankruptcy proceedings.

Andersen's own jumbled relationship with the highly leveraged energy trading company Ñ particularly its shredding of Enron documents Ñ has left some local executives and shareholders uneasy. And local accounting students are balking at internships with the troubled accounting firm as well.

'Certainly there are numerous questions and discussions that have been raised among senior management and the board,' said Maria Pope, chief financial officer at Pope & Talbot, one of Andersen's Portland clients. 'However, the level of service and expertise provided by our audit partner and his staff in the Portland office has been unchanged and remains high quality.'

Thus far, no Portland client has dropped Andersen, the dominant accounting firm in Portland, with a staff of 250. 'But it must be devastating to them because of their stellar reputation,' said an accountant at a competing firm.

'Naturally our clients are concerned,' said Jack Wilborn, managing partner of the Portland office since 1991. 'We've got great relationships with universities and faculty and we'll be discussing this. What we're doing is maintaining our high level of integrity and communicating with those who want to know about our situation.'

Revision of audit rules

The entire accounting profession will pay dearly for Andersen's role in the Enron implosion, said Cheryl Langley, president of the Oregon Society of CPAs. Congress and the Securities and Exchange Commission are looking at tightening the rules for audits of publicly held companies in order to bolster confidence in the integrity of the public markets. President Bush, a recipient of Enron campaign funds, is now pushing for expanded corporate disclosure of finances.

'It's a crisis,' Langley said. 'The accounting profession is being painted as a partner in this collapse. It's ugly. It's obviously a profession that has guarded its independence, objectivity and integrity. That's the hallmark of the audit. The rules governing the profession are under severe scrutiny. We're monitoring it, we're concerned and this is something that affects the image of all CPAs.'

The larger question is, What will happen nationally to Andersen? Congressional investigators subpoenaed several of its executives to appear at Enron-related hearings on Capitol Hill.

Andersen also faces obstruction of justice charges and millions in legal fees for shareholder lawsuits.

To survive, the firm reportedly is considering a merger with one of its Big 5 competitors. Since Andersen's $9 billion in total sales last year dwarfed the $100 million a year it derived from Enron billings, Andersen doesn't appear to be in any danger of going under, accounting professionals say.

In the past, the firm's Portland office, whose clients include PGE, Roseburg Forest Products and Columbia Forest Products, has resigned accounts in situations where there was risk from the actions of the client, Wilborn said.

Nationally, Andersen's reputation has been tainted, said Harry Demorest, former managing partner at Andersen and now chief executive officer at Columbia Forest Products. The shredding of documents 'appears to be the one mistake that has caught the media's and public's attention,' Demorest said. 'Whether you're talking about (former National Security Council staff member) Ollie North or any other issue of destroying records comes out, it looks bad.'

A consulting conflict?

Investigators have been most critical of the estimated $25 million in consulting work Enron steered toward Andersen last year. The conflict of accounting and consulting work long has been a subject of disagreement in the profession. Ernst & Young split off its consulting division over conflicts of interest.

The Financial Executives Institute favors hiring auditors as consultants, and Portland State University accounting professor Ray Johnson agrees.

Auditors 'do a better job auditing when they understand the businesses' risks and problems,' he said. 'When the consulting fees get to be as large as auditing fees, they must exercise some oversight.'

Demorest said he didn't see a conflict between the two areas because much of the consulting work performed for Enron was tax work.

'If you peel away some of the onion, a large deal of the consulting services were what you'd expect an accountant to do,' he said. 'The only way to avoid that was to have government do the audits.'

If any accounting rules should change, it would be the off-balance-sheet partnerships that Enron executives were able to invest in, Demorest said. 'There are a lot of businesses out there with special purpose entities,' he said. 'That's an accounting rule that has to be looked at, including special purpose entities on the accounting sheet.'

To mend its reputation, Andersen fired the Houston partner in charge of the Enron account and put three partners on leave. Chief Executive Officer Joseph Berardino appeared before a congressional committee to testify about the Enron debacle. Demorest said the firm has been upfront in explaining what happened.

'When the story finally comes out years from now Andersen may not be culpable,' he said.

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