Enron's auditor admits accounting error

Arthur Andersen LLP, Enron Corp.'s auditor, admitted an error in judgment in 1997 was responsible for 20% of Enron's restated earnings, but Anderson executives claimed the oversight wasn't the cause of the Houston energy giant's downfall. An Andersen executive said the mistake involved the independent outside equity ownership of the off-balance sheet special purpose entity transactions.

by the OGJ Online Staff

HOUSTON, Dec. 18 -- Arthur Andersen LLP, Enron Corp.'s auditor, admitted an error in judgment in 1997 was responsible for 20% of Enron's restated earnings, but Anderson executives claimed the oversight wasn't the cause of the Houston energy giant's downfall.

C. E. Andrews, managing partner of the Arthur Andersen's Global Audit Practice, testified Tuesday before the Senate Commerce Committee on Enron' collapse.

"We made an error in judgment that accounted for 20% of the restatement. This did not cause Enron's collapse," said Andrews. Enron restated 5 years of earnings in November.

He said the mistake involved the independent outside equity ownership of the off-balance sheet special purpose entity (SPE) transactions. SPE's must have an outside equity investment equal to 3% of the value of the entity. All debt is then required to be off the parent company's books.

"In October, we found we had made an error when information was reviewed in 1997," said Andrews. Sen. Ron Wyden, (D-Ore.) asked why the mistake had not been caught in subsequent years. "Why was the mistake caught 5 years later?" he asked.

Andrews said his company was stepping forth to acknowledge any errors and restore public confidence in the firm. "The firm must restore public trust and Andersen will have to change to restore that confidence. The accounting profession will also have to change as well as the analysts," he said.

Andrews claimed 80% of the restatement of earnings came from another SPE that Andersen did not have information about. "Information came to us in early November. A special committee of Enron's board came to us with a packet of information," he said. "It was crystal clear that the accounting had been incorrect. We took that within 24 hours to the audit committee of Enron."

Andrews said he did not know why Enron did not provide information about that SPE. "But we don't know if that was illegal or not," he said.

Wyden questioned what Arthur Andersen was doing all that time that Enron was forming hundreds of SPEs and keeping millions of dollars of debt off its books. Andrews said according to customary accounting principles, they did not audit all the transactions.

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