ACCOUNTING: The chairman of the US Securities and Exchange Commission (SEC) yesterday proposed a new private sector board "with real teeth" to oversee the accounting industry in an effort to restore shattered investor confidence in the wake of the Enron debacle.
The shake-up for accounting firms comes amid an avalanche of new revelations in the Enron affair, including reports that the now bankrupt Houston-based energy firm avoided paying tax in four of the past five years, and that its accountants, Arthur Andersen, knew of questionable practices to conceal debt 10 months before the energy company went under.
Reacting to the furore over what he called the "tragic and unprecedented" collapse of Enron, SEC chairman Mr Harvey Pitt said anyone in the accountancy profession guilty of wrongdoing would be dealt with effectively by the SEC, a federal agency responsible for protecting investors against market malpractices.
"The potential loss of confidence in accountancy firms and the auditing process is a burden our capitalist markets cannot and should not bear," he said.
Mr Pitt deflected questions about calls to remove himself from the SEC investigation into the biggest ever US bankruptcy because he previously represented Arthur Andersen and other "Big Five" accounting firms, as a partner in a New York law firm. As SEC chairman he did not manage investigations, he said.
Until his appointment last year, Mr Pitt aggressively helped the accountancy profession to head off regulation and to thwart proposed SEC rules that would have barred accountancy firms from doing consulting work for companies whose books they audit.
Andersen's reluctance to challenge Enron's accounting practices has been blamed on the fact that it also relied on lucrative consultancy work for the firm, taking in $27 million (€30.6 million) for consultancy from Enron last year compared to $25 million for its audit.
New details are emerging daily about how Enron managed its accounts. In order to avoid tax, the company created 881 subsidiaries abroad - far more than most other US corporations - including 692 in the Cayman Islands and 119 in the Turks and Caicos, according to the New York Times. It avoided US tax by recording profits going to partners in tax havens.
Despite massive profits, Enron paid tax for only one of the past five years. Deductions for stock options enabled the company to get a refund of $278 million from the government instead of paying $112 million in tax in the year 2000.
A personal letter written in August to Enron chief executive Mr Kenneth Lay by an employee referred to entities - unknown until this week - financed with Enron stock, raising the prospect that Enron's losses were $1.3 billion more than already known.
It also emerged yesterday that Andersen knew of the letter and its damning indictment of Enron's accounting. Struggling to maintain credibility, Andersen yesterday confirmed a Wall Street Journal report that on February 5th last its executives discussed Enron's questionable accounting methods.
An internal memo drafted by an Andersen auditor said the meeting also discussed whether to retain Enron as a client.
Mr David Duncan, the head of the Enron account who was dismissed on Tuesday, reportedly told Congress officials on Wednesday that he destroyed documents following the advice of Andersen lawyers. He had called the February 5th meeting because he perceived "significant risk" in the Enron account.
