Following the collapse of Enron in October, scores of lawmakers and regulators started looking into the tangled relationship between Enron and the company's lead audit team from accountancy Arthur Andersen. In a number of cases, the inquiries have focused on Andersen's role as both independent auditor for Enron and a provider of consulting services to the Houston trading company. The premise of some of the inquiries: Andersen auditors may not have been overly eager to put the kibosh on fee-generating deals proposed by Andersen consultants.
The $62 billion bankruptcy in Texas has led many legislators to call for new rules prohibiting corporations from buying consulting services from their independent audit firms. But in the rush to wall off accountants from consultants, lawmakers and regulators appear to be ignoring another possible conflict of interest between auditors and their customers. The conflict? Auditors sometimes find themselves working with clients who used to work for them.
CFOs know the scenario only too well. A management team hires an independent audit firm. Over the course of a year, that audit team works closely with members of the company's management team, going over the books and such. In turn, the company's management team gets to know — and feel comfortable with — members of that audit team. Eventually, the company's management offers a member of that audit team a job — usually on the company's finance staff. Often, the original accounting firm stays on as the company's independent auditor. Says Ed Durkin, director of specialty programs at the United Brotherhood of Carpenters and Joiners of America, "It's very common to have senior people within the corporations who were formerly employed at the audit firms that the companies still use."
This cozy relationship, critics charge, can lead to trouble. Case in point: Richard Causey, former chief accounting officer at Enron, who joined the company after working as a senior manager at Arthur Andersen in Houston. While at Andersen, Causey worked on the Enron account.
Admittedly, it's difficult to assess what role (if any) Causey played in Enron's descent into bankruptcy. He was, however, chief accounting officer at the company, and as such, was probably responsible for keeping close track of Enron's books. In that job, it seems likely he would have worked with Andersen employees in developing and implementing accounting procedures, policies and strategies at Enron. But in a report released in February, a special investigative committee of Enron's board of directors seemed less than thrilled with some of Causey's decisions: "[Causey] presided over and participated in a series of accounting judgements that, based on the accounting advice we have received, went well beyond the aggressive."
The chief accounting officer's connection to Enron's auditor was not lost on members of the committee. In its report, the committee noted, "The fact that these judgements were, in most if not all cases, made with the concurrence of Andersen is a significant, though not entirely exonerating, fact."
Take My Auditor, Please!
While cause-and-effect is hard to prove, it's easy to see how an audit team might be less than objective when dealing with a colleague-turned-client.
Roger Barton, a partner at Barton Barton & Plotkin, believes even the best financial processes can be circumvented when corporate managers have close ties to their auditors. He says his law firm has recently taken on a rash of cases that involve allegations of embezzlement by CFOs and controllers. "Even if the company has the internal controls that it should have," he says, "the auditing firm doesn't pick up on the defalcations or improper acts. And most times, the reason for that is that there is a cozy relationship between the controller or the CFO and the outside auditing firm."
The relationship gets even cozier when a company's management continually hires finance employees from its audit firm. Until 1997, for example, every CFO and chief accounting officer hired by Waste Management worked previously at Arthur Andersen — Waste Management's independent auditor. All told, 14 former Andersen employees went to work for the Houston-based waste treatment and disposal company during the '90s. According to the SEC, most of the former Andersen auditors took jobs in key financial and accounting positions at the waste treatment and disposal company.
Last week, the SEC filed a lawsuit against five former managers at Waste Management, claiming the executives perpetrated "an egregious accounting fraud." Three of the five executives named in the suit worked in Waste Management's finance department (one was the company CFO). In a statement, the SEC was also highly critical of Waste Management's auditor Andersen. The commission noted that the "defendants were aided in their fraud by the company's long-time auditor Arthur Andersen LLP, which repeatedly issued unqualified audit reports on the company's materially false and misleading annual financial statements." The previous employer of the three former executives named in the SEC suit? Andersen. According to the SEC, two of the finance staffers listed in the suit worked on the Waste Management account while at Andersen.
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