Andersen Could Face SEC Sanction, Suits Over Enron Accounting Error

Arthur Andersen may face U.S. Securities and Exchange Commission sanction and shareholder lawsuits because it certified Enron Corp. financial reports that the company disavowed last week as inaccurate, legal and accounting experts said.

Andersen, the world’s fifth-largest accounting firm, served as Enron’s outside auditor for more than a decade. Last week, the company reported that it overstated earnings by $586 million over 41/2 years, inflated shareholder equity by $1.2 billion because of an “accounting error,” and failed to consolidate results of three affiliated partnerships into its balance sheet.

Enron restated its financial reports as the company suffered a cash crisis triggered by disclosure of the cut in shareholder equity and the start of an SEC investigation.

“I’d be very surprised if the SEC didn’t go after Arthur Andersen,” said Alan Bromberg, securities law professor at Southern Methodist University.

Andersen partner David Tabolt has said the firm is cooperating with a special committee of Enron’s board of directors appointed to investigate the accounting problems.

Lynn Turner, who was the SEC’s chief accountant for three years until he resigned in August, said Enron and Andersen ignored a basic accounting rule when they overstated shareholder equity.

Explaining the equity reduction last week, Enron said it had given common stock to companies created by Enron’s former chief financial officer in exchange for notes receivable, and then improperly increased shareholder equity on its balance sheet by the value of the notes.

“What we teach in college is that you don’t record equity until you get cash for it, and a note is not cash,” said Turner, who is now director of the Center for Quality Financial Reporting at Colorado State University.

“It’s a mystery how both the company would violate, and the auditors would miss, such a basic accounting rule, when the number is $1 billion.”