Auditing

Six Years Later, Andersen Partners Settle Enron Charges

Four former auditors who worked on the Enron account are barred from appearing or practicing before the SEC.
Stephen TaubJanuary 28, 2008

Almost six years after Arthur Andersen went out of business in the wake of the Enron collapse, the Securities and Exchange Commission has finally settled charges against four former partners of the accounting firm in connection with the audits of the energy company’s financial statements.

David Duncan, who was global engagement partner for the Enron account, consented to a civil injunctive action charging him with violating the antifraud provisions of the federal securities laws, and to a related administrative proceeding permanently suspending him from appearing or practicing before the commission. He settled without admitting or denying the allegations or findings.

Three other Andersen partners — Thomas Bauer, Michael Lowther and Michael Odom — settled charges that they had engaged in improper professional conduct in connection with their Enron work. They, too, are now denied the privilege of appearing or practicing before the SEC.

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The commission alleged that from 1998 through 2000, Duncan was reckless in not knowing that the unqualified audit reports he signed on behalf of Andersen were materially false and misleading.

The complaint also alleged that the Fraud Risk Assessment questionnaires prepared by the engagement team and reviewed by Duncan documented that Enron used “highly aggressive” accounting practices and entered into unusual year-end transactions that posed difficult “substance over form” questions.

The SEC noted that an internal Andersen document prepared each year by Duncan and others on the engagement team noted that Enron’s use of complex “form over substance” and related party transactions created an “extreme” or “very significant” financial reporting risk.

“Despite these risks, Duncan failed to exercise due professional care and the necessary skepticism required under Generally Accepted Auditing Standards,” the SEC stated.

For example, according to the complaint, Duncan failed to ensure that the engagement team audited certain transactions known as the “Prepays,” “Nahanni” and the “Raptors” in accordance with GAAS and failed to ensure that Enron properly presented and disclosed the transactions in its financial statements.

The regulator noted that as the global engagement partner for the Enron audits, Duncan was ultimately responsible for determining whether an unqualified opinion should be issued within the auditors’ report.

So, when he issued unqualified audit opinions indicating Andersen’s audits of Enron’s financial statements for 1998 through 2000 were conducted in accordance with GAAS, and that Enron’s financial statements were presented in accordance with GAAP, he made material misstatements or omissions in auditors’ reports filed with Enron’s 1998, 1999, and 2000 annual reports, according to the SEC.

Back in April 2002, Duncan had pleaded to a criminal charge — one count of obstruction of justice — for his part in shredding Enron-related documents. He was allowed to withdraw his plea after the Supreme Court overturned Andersen’s jury conviction. Prosecutors agreed in 2005 not to retry him.