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Andersen's 'wake-up call'
graphic January 17, 2002: 8:32 p.m. ET

Andersen CEO says Enron crisis is chance to improve firm, financial reporting.
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  • Enron lawyers dismissed concerns -- Jan. 16, 2002
  • Andersen CEO speaks on Enron scandal - Jan. 17, 2002
  • Warburg pays nothing for Enron trading unit -- Jan. 15, 2002
  • Andersen dismisses lead Enron auditor - Jan. 15, 2002
  • SEC Chair calls for accounting reform - Jan. 17, 2002
    NEW YORK (CNN/Money) - The chief executive of auditor Arthur Andersen on Thursday called the collapse of Enron Corp. "a wake-up call" to assess the entire financial reporting process.

    Andersen CEO and Managing Partner Joseph Berardino told Lou Dobbs Moneyline his company will take a lead in improving the accounting profession and promised that people will see "the real Andersen," which is "brutally honest" about ways the company can do its job better.

    "This Enron crisis is on a scale we have never seen and, God help us, we never see again," Berardino said. "And what it does is put us all on heightened alert as to some of the fundamental issues we need to address in our profession and frankly that I need to address in my firm."

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      graphic Arthur Andersen CEO Joseph Berardino spoke with CNN's Lou Dobbs about his company's role in the collapse of Enron and Andersen's future going forward.

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    Earlier Thursday SEC Chairman Harvey Pitt called for reform of the way accounting firms are monitored and regulated in the United States

    "It would be a shame to let the crisis pass without making the accounting profession better," Berardino said. "We welcome that debate."

    Moments before Berardino appeared on Moneyline, Enron announced it had fired Andersen as its accounting firm.

    Enron's board of directors voted to discharge Andersen and is now looking for a new auditor. The board has convened a special committee to look into accounting and other issues relating to certain transactions, Enron Chairman and CEO Ken Lay said.

    "While we had been willing to give Andersen the benefit of the doubt until the completion of that investigation, we can't afford to wait any longer in light of recent events, including the reported destruction of documents by Andersen personnel and the disciplinary actions taken against several of Andersen's partners working in its Houston office," Lay said in a statement.

    Andersen on Jan. 10 admitted its staff destroyed documents related to the probe of the bankrupt energy trader. Andersen then fired lead partner David Duncan earlier this week.

    Berardino told Moneyline that the accounting firm had technically been discharged when Enron filed for bankruptcy protection in December. "Obviously, Enron has not rehired us," Berardino said.

    Andersen knew of Enron risks

    A Feb. 6 e-mail to partner Duncan from Andersen top executives indicates that the global accounting firm questioned early last year whether to keep Enron as a client, documents obtained by CNN/Money revealed Thursday.

    The e-mail mentioned many of the alleged problems faced later by Enron, including transactions with LJM (one of the several partnerships Enron kept off its balance sheet), the materiality of such amounts to Enron's income statement and the amount kept off the books. The memo also discusses the conflict of interest poised by former Chief Financial Officer Andrew Fastow, who was the LJM fund manager.

    Andersen typically holds a yearly meeting to discuss the retention of clients, Berardino told Moneyline. The CEO said he was not aware of the results of that meeting, though Enron is one of Andersen's largest audit clients. "All those involved [in the meeting] understood the risk and issues and decided we should go forth," he said.

    At one point, the execs called some of Enron's earnings "intelligent gambling," the e-mail said. In a statement, Andersen itself said its reference to "intelligent gambling" refers to accounting based on sophisticated gambling models that use assumptions about events likely to occur in the future. Use of such accounting is widely accepted, the firm said.

    Andersen did not become aware that individuals within Enron believed there could be accounting improprieties until whistleblower Sherron Watkins, an Enron Global Finance vice president, wrote in August to Andersen -- months before Enron's stunning collapse - of a series of questionable accounting practices at the energy company.

    Houston-based Enron (ENE: Research, Estimates) collapsed as debts hidden in off-the-books partnership took their toll and forced the company to reduce reported earnings by about $600 million in recent years. The company has been one of the biggest contributors to President Bush and other politicians, and its executives sold about $1.1 billion of stock in 2000 and last year, even as the company's troubles were mounting.

    On Dec. 2, Enron filed the largest bankruptcy in United States history. Andersen fired Duncan after it was revealed that he called a meeting in October to organize the disposal of Enron documents after receiving a request from the Securities and Exchange Committee, the firm said.

    Enron is being investigated by the Justice Department, the Securities and Exchange Commission and several panels in Congress after it filed for bankruptcy last month.

    Thousands of Enron employees lost their jobs and many more lost much of their life savings as Enron stock in their 401(k) plans became nearly worthless.

    Fees could reach $100M

    In February, Andersen decided to keep Enron as a client, saying in the e-mail that it had the appropriate people and processes in place. A primary consideration was the $100 million in fees Andersen could receive by continuing services to the energy trader, the e-mail said.

    Separately, another press report detailed how Enron paid no income taxes in four out of the past five years.

    Enron used almost 900 subsidiaries in tax-haven countries to avoid paying taxes, the New York Times said.

    While the use of overseas tax havens by U.S. companies is not unusual, the newspaper, citing tax experts, said Enron made use of the technique far more often than other companies.

    The report noted that two Enron subsidiaries have been accused by a group of insurers of engaging in fake transactions in a tax haven, according to filings with the federal bankruptcy court in New York.

    Berardino told Moneyline that "abilities to do things offshore is well known and not illegal," he said.

    "I don't have any knowledge what Enron did," Berardino added. graphic


    Enron lawyers dismissed concerns -- Jan. 16, 2002

    Andersen CEO speaks on Enron scandal - Jan. 17, 2002

    Warburg pays nothing for Enron trading unit -- Jan. 15, 2002

    Andersen dismisses lead Enron auditor - Jan. 15, 2002

    SEC Chair calls for accounting reform - Jan. 17, 2002