RIYADH, 7 February — The Enron scandal has caught the public’s attention to such an extent that in the US it is eclipsing Afghanistan as the lead story on most news networks.
To find out how Andersen in the Middle East region has been affected, if at all, Arab News met with Fouad Alaeddin, managing partner of the company for the Middle East region, at his fourth floor office at Al-Jomaih Building on the Old Airport Road in Riyadh.
Seated behind his desk, Alaeddin gave us a welcome that was as warm as his conversation later turned out to be frank.
Yes, the media is hounding his company. “But we are 89 years old and are still going strong,” he declared.
Andersen is a $10 billion company in an enviably strong financial position. It has 85,000 employees around the globe. However, Alaeddin insists that there has been “no effect” on the company’s operations in the Middle East region. “Many of our clients have communicated their continuing support for us,” he said. “And we have won new clients, despite the media onslaught.”
Andersen has 39 partners in the Middle East with offices in 14 major cities that employ 900 people. They have a large number of Arab professionals and serve 2,000 clients, many of whom are big players in the area.
Of course, the million dollar question is why Enron went bankrupt.
“Enron diversified from an energy producer into a trader in energy, metal, coal, pulp and paper, water, bandwidth, freight capacity, credit and other derivatives,” Alaeddin said when asked for his assessment. “It was an innovative new economy business, which acknowledges making bad investments, acquiring too much debt, and losing the trust of investors and trading partners.”
It was a business failure, then, caused by aggressive investments and a crisis in confidence.
The surprising thing is that the writing was on the wall so long ago. “In hindsight, we made some very bad investments in non-core businesses,” acknowledged Kenneth Lay, chairman and CEO, Enron, on Nov. 14, 2001. “Enron now trades at roughly 55 times trailing earnings. That’s more than twice the multiple of competitors like Duke Energy, more than twice that of the S&P 500,” warned Fortune on March 5, 2001. And between the time Enron filed its annual report in early April 2001 until the company announced plans to restate its financial statements in November 2001, the value of its stock had already declined some 84 percent.
Given this history, I suggested to Alaeddin that the question thus became what Andersen, as Enron’s auditor, did to alert investors to Enron’s risks.
“The management of a company is responsible for its financial statements,” he said. “An audit provides reasonable assurance that the financial statements are presented fairly. The audited public accounts and other regulatory filings provided much detailed information on Enron’s transactions with related parties, unconsolidated investments and the importance of maintaining investment grade status. These were complex issues, but investors had the opportunity to question Enron’s business activities and financial position.”
Many independent reports have backed up this claim. “The real responsibility for accounts lies with management and directors — as every auditor’s report points out,” wrote the Financial Times on Jan. 26, 2002.
Andersen’s last audit of Enron Corp. was of the December 2000 financial statements and their report was issued on Feb. 23, 2001. Management’s Discussion & Analysis in the 2000 Annual Report was eight pages long; the financial statements had 16 pages of footnotes, including disclosure in Note 1 that it had a number of unconsolidated investments and later in the notes that it had entered into transactions with related parties. The 1999 Report had been similarly detailed.
So what was Andersen’s policy relating to the preservation of audit work papers?
“It is the usual, routine, and wholly legitimate practice of auditors to preserve their final audit work papers while disposing of drafts, personal notes, and other materials that are not necessary to support the audit report,” Alaeddin claimed. “The Andersen document retention policy provided that documents other than audit work papers ordinarily should be disposed of when no longer needed — but that such documents should be retained when litigation has commenced or is threatened.”
Regarding the question of business integrity, Andersen’s non-audit fees from Enron may, it was put to Alaeddin, have compromised the independence of its audit.
“The sums earned by Andersen from Enron for ‘consulting’ services have been misinterpreted,” he replied. “About 70 percent were for audit-related or tax services, normally provided by auditors, such as comfort letters and internal controls work. More than $4 million represented fees paid to Andersen Consulting (now Accenture) — not to Andersen, the auditing firm.”
But there is still a feeling that Andersen should be saying more about what happened.
“Andersen is working round the clock, seven days a week to understand what happened!” Alaeddin insists. “They have promised to be candid and forthcoming. And they have been. They have promised to cooperate with congressional committees and agencies investigating this. And they are. No Enron executive, or any other adviser to Enron, has yet shown the same willingness to be publicly cross-examined.”
