The Securities and Exchange Commission pressured accounting profession regulators for more than four years before Enron Corp's collapse to strengthen scrutiny of company audits, SEC documents show.
On at least seven occasions since 1997, officials wrote to the Public Oversight Board, an industry supervisor, faulting firms' ability to weed out improper accounting and conflicts of interest. Then-SEC Chief Accountant Lynn Turner asked why peer reviews, in which accountants judge one another's audit safeguards, gave the biggest firms good grades as the number of failed audits was growing.
"We have seen more of these in the past six months than at any time during my three years," Turner wrote in July 2001 to the oversight board chairman, Charles Bowsher. "Why is there nothing showing up in the reports from the peer reviews regarding this increasing problem?"
Harvey Pitt, the securities lawyer who heads the SEC, plans to increase regulation of auditors as the commission, the Justice Department and Congress investigate Enron's failure and the role of the energy company's auditor, Arthur Andersen LLP. Bowsher's oversight board voted to disband after being excluded from talks to develop Pitt's proposals.
Andersen, Pricewaterhouse-Coopers LLC, Ernst & Young LLP and KPMG LLP, four of the five biggest accounting firms, yesterday said they would take steps to prevent conflicts of interest by separating their auditing and consulting businesses.
Enron's stock tumbled 99 percent over seven weeks before the Houston energy trader filed for bankruptcy reorganization in December. As well as wiping out US$26 billion in market value, the collapse eliminated 5,000 jobs and erased about US$850 million in employees' 401(k) retirement investments in Enron shares.
SEC letters to the oversight board demanding improvements in the accounting industry's system of peer reviews, dated from April 1997 to July 2001, were released to Bloomberg News under the Freedom of Information Act.
"For anything to happen in government, there has to be a crisis first," former SEC accounting fellow Thomas Selling said, when asked whether the peer reviews became more rigorous under the SEC's prodding. "I don't know of any profession where peer review works."
Selling is an associate professor at Thunderbird, the American Graduate School of International Management in Glendale, Arizona.
Some audit controls, such as those that use computers to spot financial conflicts of interest with prospective clients, improved during four years of SEC prodding, Bowsher said. Other shortcomings continue because of resistance in the accounting industry, he said.
"We were pushing on some of these issues, but we were having a very difficult time having these things improved," Bowsher said in an interview.
Peer reviews and accounting oversight are in the forefront of debate about audit regulations following Enron's collapse. The energy trader blamed bookkeeping errors, in financial statements certified by Andersen, for the need to restate earnings going back to 1997.
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