The International Herald Tribune | www.iht.com Accounting for Enron: Global Ripple Effects Eric Pfanner International Herald Tribune Thursday, January 17, 2002
Failure Brings Call for Tougher Standards LONDON The collapse of Enron, the giant energy trading company, has challenged the notion that U.S. companies' accounting is the most reliable and transparent in the world, some experts say, potentially taking a bit of the shine off the U.S. financial markets' appeal to international investors. While analysts question whether any rules could have prevented the failure of Enron, they say the spectacular downfall of what was once the world's seventh-most valuable company could also heighten the push for international accounting and auditing standards to replace the patchwork of country-by-country guide lines that exist today. Because of the collapse of Enron - and the seeming inability of its auditor, Arthur Andersen, to head off trouble - many international investors are taking a more critical look at other U.S. shareholdings, analysts say. One of the fundamental strengths of the U.S. stock market, even in the wake of the Sept. 11 terrorist attacks, has been the idea that American companies offer the most reliable earnings streams. But a series of accounting scandals, culminating with Enron, and the increased use of questionable ways companies report their financial results, appear to have shaken that notion somewhat. "There is no sign yet that people have lost confidence in corporate America," said David Bowers, chief investment strategist at Merrill Lynch. "But this will be something to watch. If you can't figure out what a company is earning, how can you value it?" Some analysts say international accounting and auditing standards, being put forth by several industry groups, could make that task easier, at least for cross-border investors. The new standards could also force accounting firms to more rigorously separate their auditing operations from the lucrative consulting work that they often do for the same clients. European regulators have been in the vanguard in adopting rules proposed by the London-based International Accounting Standards Board, aimed at creating uniform standards around the world. By 2005, any company whose stock is traded on a European exchange will have to adhere to this code. American regulators have been seen as more reluctant to adopt these rules, in part because of lobbying from U.S. companies that object to how stock options would have to be accounted for under those guidelines. One expert, who insisted he not be named, said the attention generated by the Enron case was likely to lead to some sort of compromise under which U.S. and international regulations would move more closely together, leading to their adoption in the United States, too. "There has been a perception for years that U.S. standards were the best in the world," said John Collier, secretary-general of the Institute of Chartered Accountants of England and Wales. "Now that notion has been at least challenged." American accounting standards have long been seen as the strictest. In part because U.S. companies face a greater threat of shareholder lawsuits, U.S. rules are more detailed than those in Europe, which are based more on broad principles than on specific guidelines. That kind of flexibility has benefits, Mr. Collier said. He said that an Enron-style disaster would have been less likely to occur in Britain, where accounting standards more closely mirror the international guidelines, because the company would have been unable to keep the special partnerships, which are the focus of the company's demise, off its balance sheet. Another expert on international accounting rules disagreed, saying that the problem with Enron was not the rules but whether they were followed properly by the company and its auditor, Andersen. Some experts predict that new international restrictions are likely to deal with what they see as inherent conflicts between auditing and consulting work. Critics contend that these arrangements - highlighted by the Enron case - lead auditors to give less careful scrutiny to company's books for fear of losing the consulting contracts. The European Commission, for example, is currently drafting new guidelines on the auditing industry, and the Enron collapse could prompt regulators to call for greater separation of consulting and auditing work, said Michael Bromwich, a professor at the London School of Economics. "There's a very strong view in Continental Europe that consulting and auditing should be separated," he said. "This will give impetus to that." Bush Advisers Reviewed Enron President George W. Bush's economic team, led by Lawrence Lindsey, a former Enron adviser, conducted an internal review of whether the company's collapse would hurt the overall economy and concluded there was little risk, Reuters reported from Washington. Mr. Lindsey and other aides were "doing their jobs" by reviewing the collapse of Enron, Mr. Bush's biggest political patron, to determine whether it could "have a broader impact on the economy," Ari Fleischer, the White House spokesman, said Wednesday. But Mr. Fleischer could not say when the review took place, whether Mr. Lindsey was aware of Enron's contacts with top cabinet officials and whether Mr. Bush knew about Mr. Lindsey's work.
