E nro n Pre se nta tio n Outline E a rly L ife o f Arthur Ande - - PDF document
1/10/2019 E nro n Pre se nta tio n Outline E a rly L ife o f Arthur Ande rse n E nro nT he Gre a te st Co mpa ny in the Wo rld T he F a ll o f Arthur Ande rse n Addre ss Ca se Que stio ns Additio na l Ac a de mic
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E
a rly L ife o f Arthur Ande rse n
E
nro n—T he Gre a te st Co mpa ny in the Wo rld
T
he F a ll o f Arthur Ande rse n
Addre ss Ca se Que stio ns Additio na l Ac a de mic So urc e s—L
uc c i, Co pe la nd
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F
Jo hn a nd Ma ry Ande rso n
Pla no , I
llino is
Also kno wn a s No rwa y, I
llino is
Arthur wa s b o rn in 1885
F
a sc ina te d b y numb e rs a t a yo ung a g e
Disc ipline , ho ne sty, a nd a stro ng wo rk e thic
K
e ys tra its tha t Jo hn a nd Ma ry Ande rso n instille d in Arthur
Arthur wa s o rpha ne d a t a yo ung a g e Hig h Sc ho o l Ca re e r
Wo rke d a full time jo b a nd a tte nde d e ve ning c la sse s
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Co lle g e Ca re e r a t Unive rsity o f I
llino is
Wo rke d a s a c c o unta nt fo r Allis-Cha lme rs while a tte nding c la ss
Ac c e pte d e ntry le ve l jo b a t Pric e Wa te rho use
F
irm wa s first o rg a nize d in Gre a t Brita in
Yo ung e st CPA in the sta te o f I
llino is
At the a g e o f 23
E
sta b lishe d pa rtne rship to pro vide a c c o unting , a uditing , e tc .
Ande rso n, De la ny & Co mpa ny
De la ny le ft to g o his o wn wa y
Ar
thur Ander sen & Company was established 1915- Arthur fa c e d his first pro fe ssio na l dile mma
“Sub se q ue nt e ve nt” – disc lo se d in fo o tno te s o f the F
S
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Dile mma with DuPo nt two de c a de s la te r fro m first dile mma
Dismisse d a s the ir a udito r fo r no t a g re e ing with DuPo nt
Ande rso n wa s o pinio na te d, stub b o rn, a nd “diffic ult”
“T
hink stra ig ht, ta lk stra ig ht”
Critic s a dmitte d tha t Ande rso n wa s po int-b la nk ho ne st
100% inte g rity o r b e fire d b y Ande rso n
Arthur c re a te d a nic he fo r firm
Va rio us e ne rg y industrie s
E
a rly 1930’ s, firm wa s a thriving pra c tic e
L
e a ding re g io na l firm in the Midwe st
Gre a t De pre ssio n hit ha rd o n Arthur’ s c lie nts
Arthur Ande rso n c o nvinc e d b a nks to ke e p funding his strug g ling e ne rg y
c lie nts
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Arthur Ande rse n g a ine d re spe c t fro m le a ding fina nc ia l e xe c utive s
I
nc re a se d re fe rra l o f c lie nts o utside o f Midwe st
Arthur wa s a spo ke spe rso n fo r his disc ipline
L
) re q uire me nt
Arthur die d in 1947
L
e ft b e hind a firm tha t e mplo ye d 1,000 plus a c c o unta nts
L
e o na rd Spa c e wa s the suc c e sso r o f Arthur
E
a rne d a re puta tio n a s a no -no nse nse pro fe ssio na l
Ope nly c ritic ize d the pro fe ssio n fo r slo ppy sta nda rds
Ac c o unting Princ iple s Bo a rd (APB) e sta b lishe d in 1950
Re pla c e d with F
ina nc ia l Ac c o unting Sta nda rds Bo a rd (F ASB) Arthur Ande rso n & Co . e sta b lishe d wo rld’ s la rg e st priva te unive rsity Arthur Ande rso n & Co . Ce nte r fo r Pro fe ssio na l E
duc a tio n
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L
e o na rd Spa c e 's stro ng le a de rship a nd b usine ss skills
Re tire d in 1973- a rg ua b ly the mo st re spe c ta b le firm in wo rld
T
hre e de c a de s la te r Arthur Ande rso n & Co mpa ny:
E
mplo ye d 80,000 pro fe ssio na ls
Offic e s in 80 plus c o untrie s Annua l re ve nue wa s $10 b illio n
I
n la te 2001
F
a c e d the b ig g e st c risis in firm’ s histo ry
No rthe rn Na tura l Ga s Co mpa ny
F
Princ iple inve sto r
I
nc lude d a T e xa s-b a se d c o mpa ny, L
No rthe rn strug g le d with g a ining c usto me rs
Ho me “e xplo sio ns” c a use d b y na tura l g a s dro ve a wa y c usto me rs
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During De pre ssio n No rthe rn g a ine d c usto me rs
“Co ld stric ke n a nd sha llo w-po c ke te d”
E xpe rie nc e d unlimite d so urc e o f c he a p la b o r during De pre ssio n
Allo we d No rthe rn to de ve lo p pipe line g rid in Midwe st
Co mpa ny b e c a me liste d o n Ne w Yo rk Sto c k E
xc ha ng e in 1947
He lpe d with me e ting c a pita l re q uire me nts
During 1970, No rthe rn b e c a me princ iple inve sto r in Ala ska n pipe line
T
a p into Ca na da ’ s na tura l g a s re se rve s
I
n 1980, No rthe rn c ha ng e d its na me to I nte rNo rth, I nc .
E
xpa nde d sc o pe to o il e xplo ra tio n, c he mic a ls, a nd c o a l mining
I
n 1985, I nte rNo rth purc ha se d Ho usto n Na tura l Ga s Co mpa ny
$2.3 b illio n a nd a c q uire d 40,000 mile s o f pipe line s
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I
n 1986, I nte rNo rth c ha ng e d its na me to E
nr
K
e nne th L a y wa s c ho se n a s CE O
F
L
a y a do pte d a g g re ssive g ro wth stra te g y
Hire d Je ffe ry Skilling a s to p sub o rdina te s
During the 1990s, Skilling c re a te d a pla n to tra nsfo rm E
nro n
E
ne rg y-tra ding c o mpa ny
I
n e a rly 2001, Skilling b e c a me CE O
L
a y re ta ine d the title o f c ha irma n o f the b o a rd
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E
nro n’ s 2000 a nnua l re po rt
60 pe rc e nt inc re a se in tra nsa c tio n vo lume
I
nc re a se fue le d b y E nro nOnline
B2B (b usine ss to b usine ss) e le c tro nic ma rke t pla c e fo r e ne rg y industrie s
E
nro nOnline pro c e sse d mo re tha n $335 b illio n o f tra nsa c tio ns
L
a rg e st e -c o mme rc e c o mpa ny in the wo rld
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Ja nua ry 2001
L
a y’ s ultima te g o a l fo r E nro n wa s to b e “ T he Wo rld’ s Gre a te st Co mpa ny”
June 2001
Skilling wa s sing le d o ut a s “the No .1 CE
O in the e ntire c o untry”
E
nro n wa s ha ile d a s “Ame ric a ’ s mo st inno va tive c o mpa ny”
Skilling wa s kno wn fo r b ra ssy, if no t ta c ky c o mme nts.
T
hro ug ho ut 2001, E nro n’ s sto c k pric e drifte d lo we r
Sto c k pric e we nt fro m $80 to mid-$30
T
hird q ua rte r fo r E nro n
Myste rio us $1.2 b illio n re duc tio n in o wne r’ s e q uity
Re ve rsa l tra nsa c tio n
No te s Re c e iva b le s sho uldn’ t ha ve b e e n re c o rde d a s a sse ts, b ut a s a
re duc tio n o f o wne r’ s e q uity.
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Oc to b e r 16, 2001 pre ss re le a se
Wipe d o ut $600 millio n o f pro fits. Sto c k pric e plumme te d.
De c e mb e r 2, 2001
Pre ssure fro m c re dito rs, pe nding litig a tio n, a nd inve stig a tio ns fo rc e d E
nro n to file b a nkruptc y.
L
a rg e st c o rpo ra te b a nkruptc y a t the time (Wo rldCo m- $100 Billio n)
$60 b illio n lo ss to sha re ho lde rs
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Je ffre y Skilling sudde n a nd une xpe c te d re sig na tio n a s CE
O
Suspic io us
Suspic io n pro mpte d She rro n Wa tkins(VP) to write a le tte r
Addre sse d to K
e nne th L a y
Aske d q ue stio ns re g a rding the a c c o unting de c isio ns
L
e tte r ma de pub lic
Ho w did the y hide so muc h lo ss?
Use o f c o mple x tra nsa c tio ns
E
nro n c re a te d do ze ns o f limite d pa rtne rships
Ca lle d SPE
’ s o r spe c ia l purpo se e ntitie s
Cre a tive na me s o f the se e ntitie s
Bra ve he a rt, Ra whide , Ra pto r, Co ndo r, a nd T
a lo n
CF
O na me d a fe w o f the se e ntitie s a fte r his c hildre n
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Wha t wa s the mo tiva tio n b e hind c re a ting a n SPE
?
“de b t a vo ida nc e ”
T
hro ug ho ut the 1990’ s
Co mpa nie s to o k a dva nta g e o f SPE
’ s minima l le g a l a nd a c c o unting g uide line s
Dive rte d ma ssive a mo unts o f the ir lia b ilitie s to o ff-b a la nc e she e t
e ntitie s
So ld a sse ts a t g ro ssly infla te d pric e s to the ir SPE
s
Allo we d la rg e r “pa pe r” g a ins
Pro fits infla te d b y unre a lize d g a ins o n inc re a se s in the ma rke t va lue
Prima ry mo tiva tio n fo r e xte nsive SPE
use
Gro wing ne e d fo r c a pita l during the 1990s F
ina nc ing c o mpa ny tra nsfo rma tio n
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Ne e d to susta in E
nro n’ s sto c k pric e a t hig h le ve l
SPE
s inc lude d “lo a n trig g e rs”
Re q uire d to pro vide a dditio na l sto c k, c a sh pa yme nts o r re struc ture prio r
tra nsa c tio ns
Wo rst-c a se sc e na rio
Disso lve SPE
, me rg e a sse ts a nd lia b ilitie s into c o nso lida te d fina nc ia l sta te me nts
SPE
s ha d la rg e lo sse s o n a sse ts purc ha se d fro m E nro n
F
s
Se lf-de a ling b y E
nro n o ffic ia ls in o pe ra tio n o f SPE s
F
a sto w re a lize d $30 millio n in pro fits while CF O
Se ve ra l frie nds e a rne d $1 millio n in pro fit fro m inve stme nt o f $5,800 in a s
little a s 60 da ys
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Oc to b e r 2001, Ma na g e me nt a ssume d c o ntro l o f tro ub le d SPE
s
I
nc o rpo ra te d fina nc ia l sta te me nt da ta into E nro n’ s c o nso lida te d fina nc ia l sta te me nts
Ne w fina nc ia l sta te me nts, ne w o utc o me
L
a rg e lo ss re po rte d b y E nro n in F a ll 2001
Re sta te d c o mpa ny’ s e a rning s fo r pre vio us 5 ye a rs
De c e mb e r 2001, E
nro n file d b a nkruptc y
Pub lic fire sto rm o f a ng e r a nd c ritic ism
Co rpo ra te c ulture o f rule -b re a king , a rro g a nc e , a nd intimida tio n
F
ifth a me ndme nt rig ht o f se lf-inc rimina tio n
I
nvo ke d b y K e nne th L a y a nd Andre w F a sto w
“I
a m no t a n a c c o unta nt”
Je ffre y Skilling ’ s de fe nse a g a inst q ue stio na b le a c c o unting ta c tic s
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Nume ro us E
nro n Offic ia ls fa c e d c rimina l indic tme nts
Andre w F
a sto w, Je ffre y Skilling , a nd K e nne th L a y
Andre w F
a sto w ple a de d g uilty to c o nspira c y to c o mmit se c uritie s fra ud a nd o the r c ha rg e s
10-ye a r priso n te rm—sho rte ne d to 6 ye a rs a fte r te stifying a g a inst Skilling
a nd L a y
Re q uire d to fo rfe it $25 millio n o f pe rso na l a sse ts a c c umula te d while a t
E nro n
Skilling a nd L
a y c o nvic te d o n multiple c o unts o f fra ud a nd c o nspira c y in Ma y 2006
Je ffre y Skilling se nte nc e d to 24 ye a rs in priso n
Sho rte ne d to 14 ye a rs in 2013
K
e nne th L a y die d o f a ma ssive he a rt a tta c k in June 2006
F
e de ra l judg e o ve rturne d c o nvic tio n
L
a y no lo ng e r a b le to a ppe a l
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L
a c k o f a nswe rs fro m E nro n le a ds to Arthur Ande rse n disma y
Why ha d a udits fa ile d to re sult in mo re re lia b le fina nc ia l sta te me nts?
Unq ua lifie d o pinio ns issue d
Ho w c o uld this ha ppe n o n fa ulty fina nc ia l sta te me nts?
Ande rse n kne w a b o ut Wa tkins c o mpla int
Be g a n to re vie w pre vio us de c isio ns ma de b y E
nro n
Awa re o f E
nro n’ s ra pidly de te rio ra ting fina nc ia l c o nditio n
Hig hly invo lve d in re struc turing c e rta in SPE
s to q ua lify a s unc o nso lida te d e ntitie s
Ma de a n e rro r o n SPE
tra nsa c tio n
Pro mptly no tifie d E
nro n to c o rre c t it
20% o f $600 millio n re sta te me nt wa s due to this ite m
One -ha lf o f SPE
minimum 3% e xte rna l e q uity c o ntrib ute d b y E nro n
Do e s no t q ua lify fo r SPE
tre a tme nt
80% o f $600 millio n re sta te me nt wa s due to this ite m
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Jo se ph Be ra rdino , CE
O, rig ht b e fo re firm swa mpe d b y c ritic ism
I
mplie d E nro n’ s la c k o f ho ne sty o n SPE e xe mpte d Ande rse n o f re spo nsib ility fo r a c c o unting a nd fina nc ia l re po rting e rro rs
Only minima lly invo lve d in tra nsa c tio ns
Re sulte d in $1.2 b illio n re duc tio n o f o wne r’ s e q uity
2001 fina nc ia l sta te me nts ha d no t b e e n a udite d ye t
Do no t a udit q ua rte rly fina nc ia l sta te me nts—no t re q uire d
F
irst so urc e o f Critic ism: Sc o pe o f Se rvic e s
Offe ring a la rg e pro duc t line o f se rvic e s to a udit c lie nt
E
a rne d $52 millio n in fe e s fro m E nro n
Only $25 millio n re sulting in a udit fe e s
Je o pa rdize s inde pe nde nc e
Re c e iving $1 millio n/ we e k—o b je c tivity disa ppe a rs
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Se c o nd so urc e o f c ritic ism: SPE
Hig hly invo lve d in a g g re ssive a c c o unting a nd fina nc ia l re po rting
T
hird so urc e o f c ritic ism: Shre dding o f E nro n a udit do c ume nts
Ho usto n o ffic e de stro ye d a sig nific a nt a mo unt Ob struc tio n o f Justic e —inc rimina ting e vide nc e o f ro le
Critic ism b y E
nro n to p ma na g e me nt
Disc ha rg e d Ande rse n a s inde pe nde nt a udit firm Justifie d de c isio n b y re fe rring to de struc tio n o f do c ume nts
Be ra rdino insiste d po o r b usine ss de c isio ns we re re sult o f E
nro n’ s do wnfa ll
Re sig ne d in Ma rc h 2002 a fte r fa iling to ne g o tia te me rg e r with Big F
ive firm.
Do ze ns o f c lie nts dro ppe d Ande rse n a s inde pe nde nt a udit firm
Mid-April 2002—la id o ff mo re tha n 25% o f wo rk-fo rc e
Da vid Dunc a n—E
nro n Audit Pa rtne r, ple a de d g uilty to o b struc tio n
T
e stifie d a g a inst Ande rso n
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June 2002, F
e de ra l Jury fo und firm g uilty o f o b struc tio n o f justic e
F
T
hre e ye a rs la te r, Supre me Co urt o ve rturne d de c isio n—little to o la te
T
a inte d a nd e mb a rra sse d e ve ry a c c o unta nt
Pub lic o utc ry to stre ng the n inde pe nde nt a udit func tio n I
mpro ve a c c o unting a nd fina nc ia l re po rting pra c tic e s
F
ASB impo se d stric te r a c c o unting a nd fina nc ia l re po rting g uide line s
s
Re q uire mo st c o mpa nie s to inc lude fina nc ia l da ta in the ir c o nso lida te d
fina nc ia l sta te me nts
Sa rb a ne s-Oxle y Ac t o f 2002
Stre ng the n fina nc ia l re po rting fo r pub lic c o mpa nie s I
mpro ving rig o r a nd q ua lity o f inde pe nde nt a udits
L
imits type s o f c o nsulting se rvic e s a udito rs c a n pro vide to c lie nts
Pub lic Co mpa ny Ac c o unting Ove rsig ht Bo a rd (PCAOB)
Ove rse e inde pe nde nt a udit func tio n fo r SE
C re g istra nts
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T
he par ties most r esponsible for E nr
isis
T
he Bo a rd o f Dire c to rs in E nro n
K
e nne th L a y, Andre w F a sto w a nd Je ffre y Skilling
Use d a g g re ssive g ro wth stra te g y F
nro n’ s o pe ra ting re sult
I
g no re d the wa rning fro m She rro n Wa tkins
T
he c o nflic ts b e twe e n e xe c utive s g o a ls a nd sto c kho lde rs inte re sts
I
nte rna l Audit Co mmitte e in E nro n
Use d SPE
s to ma inta in the ir pa pe r wo rk he a lthy E
xte rna l Audito r, Arthur Ande rso n & Co .
Que stio ne d a b o ut the inde pe nde nc e o f the e xte rna l a udito r Sho uld’ ve no tic e d the suspic io us in the E
nro n’ s fina nc ia l re po rt
I
g no re d E nro n’ s missta te me nt in o rde r to ke e p the c lie nts
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T
hr ee types of c onsulting ser vic es that audit fir ms ar e now pr
fr
e public c ompanies
De sig n o f Ac c o unting Syste m Re vie w the F
ina nc ia l Sta te me nt
Pro vide T
a x Co nsulting Se rvic e s
Do you believe that Ander
sen’s involvement in those dec isions violated any pr
ds?
I
nde pe nde nc e
I
nte rna l Co ntro l E va lua tio n
Supe rvisio n Re po rting
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Whic h par ty “owns” audit wor k paper s: the c lient or the audit fir m?
Audit F
irm
Audit Wo rk pa pe r
Re c o rd o f the a udit pro c e dure s E
vide nc e o f the a udit pro c e dure s
Summa ry o f the a udit re se a rc h
K
e y Re q uire me nts
Must a c c o rda nc e with GAAP Must disc lo sure if the info rma tio n a re no t e no ug h Must issue a n o pinio n o r no te d in the re po rt whe n a udito rs c a n no t sta te a n
F ive r ec ommendations made to str engthen the independent audit func tion following the E nr
E
sta b lishe d the inde pe nde nc e b y the a udit firm
L
imite d the a udit firm fro m pro viding o the r no n-a udit se rvic e s
Re q uire the c o mpa ny to c ha ng e the ir inde pe nde nt a udit firm
pe rio dic a lly
Re q uire the inde pe nde nt a udito rs wo rking mo re c lo se ly with the c lie nt’ s
a udit c o mmitte e
Pro hib it c lie nt’ s e xe c utive s fro m inte rfe ring with the inde pe nde nt
a udito r’ s wo rk
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Has ther
e been a shift of “pr
so, explain how it has evolved over time.
Culture Shift
No n-disc lo sure o f ma te ria l missta te me nts—a fte r SOX no w re q uire d
Cha ng e s in Re g ula tio n
Big g e st re a so n fo r ma nda te d pro fe ssio na lism I
nde pe nde nc e with no n-c o nsulting se rvic e s ke e ps firms c o rdia l with c lie nts
What r
esponsibilities, if any, do audit fir ms have with r egar d to the quar ter ly financ ial statements of their c lients? In your
quar ter ly financ ial statements be audited?
No true re spo nsib ility unle ss c lie nt re q ue sts it I
n a n ide a l wo rld q ua rte rly fina nc ia l sta te me nts wo uld b e a udite d
Re a listic a lly—this is no t fe a sib le
Re vie ws o f q ua rte rly fina nc ia l sta te me nts mo re like ly
E
nsure fo llo wing a ppro pria te a c c o unting pro c e dure s
1/10/2019 25
No lo ng e r se lf re g ula te d
PCAOB a nd Audit Co mmitte e s
CE
O c o nfirma tio n o f F ina nc ia l Sta te me nts
6 c e rtific a tio n q ue stio ns
I
nc re a se d po we r o f the SE C
3 ma in c ha lle ng e s
Do ing wha t a udito rs do b e tte r Ma na g ing litig a tio n c o sts Attra c ting a nd re ta ining the b e st ta le nt
I
nve sto rs sho uld b e ske ptic a l
1/10/2019 26
E
nro n a g g re ssive ma na g e me nt stra te g ie s le a d to the ir do wnfa ll
Use o f SPE
s a nd q ue stio na b le a c c o unting me tho ds
Arthur Ande rse n’ s la c k o f inte g rity a nd pro fe ssio na lism le a d to the ir
disb a ndme nt
Sa rb a ne s-Oxle y wa s pa sse d in re spo nse to the issue s a t E
nro n a nd Arthur Ande rse n
Impo rta nc e o f inte rna l c o ntro l is no w se e n a s sig nific a nt fo r o pe ra tio ns Co nsulting se rvic e s limite d
PCAOB wa s c re a te d to he lp e nfo rc e ne w re g ula tio ns
1/10/2019 27
E
nro n—T he Ba nkruptc y He a rd Aro und the Wo rld a nd the I nte rna tio na l Ric o c he t o f Sa rb a ne s-Oxle y
Jo hn Pa ul L
uc c i
Po st E
nro n Cha lle ng e s fo r the Auditing Pro fe ssio n
Jim Co pe la nd