Enron, Auditors and Enrolled Actuaries

[Andy Lang]

So here are two ideas for helping correct the massive conflicts of interest that both auditor accountants have and Enrolled Actuaries do too.

It comes from the real estate world.

They have had for years now the 'buyers' agent.

This was because the usual RE agent represented the seller and therefore there was an inherent conflict of interest.

So why not force a public corporation to have a second auditor--the shareholders auditor, whose job it would be to check the auditors work and ask all the right questions and have all of this made public knowledge--like through the internet--and if this second auditor found anything that was either improper or got an answer that was not satisfactory he would say so.

He would be paid by the public taxes of course, and the entity in the feds responsible for oversight would then bill that company for reimbursement.

For actuaries there would be a similar federal entity and and another actuary would represent the plan participants--and oversee the EA's work--and do the same thing.

He would be paid the same as the auditor and the feds would then bill directly the Pension Trust fund--just like most EA actuaries are.

So what do you think?

[aNoNo]

AL - might be OK. How much additional expense would be added to the audits?

Another approach would be to require that public corporations be required to change public audit firms and enrolled actuaries every 5 or 7 years. When the new auditor or EA came on board, they would really scrub the books to make sure responsibility for any funny stuff was clearly placed on the preceding actuary/EA.

Also if public auditors and EA's knew they were going to lose the business in 5 to 7 years, they would have more spine to stand up to pressure from the corporate management to take creative accounting approaches.

This would be so simple to implement.

[Lee Mellon]

Simple (HA!), I'm not even sure it's a good idea. Induces expensive transitions and allows the company to hide things all over again. How happily do you change auto insurers? There is value in long term relationships. What is lacking is honor and fortitude. Few have the cojones to "do the right thing." Who can blame. The croooks get called back at full salary to unwind the mess, the upright are sent packing as "not team players."

[monkey grass]

There already are entities in place to monitor the work of EA's. Its called the PBGC and the IRS.

<font size=-1>[ This Message was edited by: d*mn Exams on 2002-01-22 19:41 ]</font>

[Andy Lang]

Tell me wha they have done in the CB crisis please?

Seriously, while i think you do need government oversight, the best way to do this thing with conflicts is to make sure that professionals live up to their public reponsibilities--and I am trying to find a way to also provide good jobs for actuaries that believe in the public interest first na foremost.

(A similar thing could be done by setting up something like 'actuaries without borders'--whose function is to help nations put real DB pension systems in for their SS systems, instead of the absurd PayGo DB systems or the terrible privatization schemes of the Cato Institute and Treasury Secretary O'Neil (who I think is not long for the Bush Administartion as a result of the Enron stuff and his foot in mouth disease he has.).

But first let's deal with the home front problems.

[Guerilla poster]

O'Neil is great. he tells it like it is and is not a hostage to politics. if anything that will get him axed, unfortunately.

[Jack]

Arthur Levitt is probably the the most moral person who has ever worked in government. He truly seems to have the best interests of the American people in mind with whatever he did.

Levitt tried to forbid auditors from providing consulting services to companies they audit. He received telephone calls from 11 (greater than 10%) senators threatening to shut him down He has yet to name those senators.

Does anyone think Wendy Gramm will serve any jail time? She should but I'm guessing she'll get off scot free.

[Guerilla poster]

She knew nothing according to Phil Gramm and lost $600,000 in compensation. Also, Phil and her never discussed the Enron business situation so he never knew they were failing, yeah i believe that.

Levitt for President- we need someone to clean up Washington. The accounting firms are one of the biggest contributors. Arthur Andersen gave more to Bush than Enron.

<font size=-1>[ This Message was edited by: guerilla poster on 2002-01-23 13:31 ]</font>

[Double High C]

On 2002-01-23 13:29, Guerilla poster wrote:

Levitt for President

<font size=-1>[ This Message was edited by: guerilla poster on 2002-01-23 13:31 ]</font>


Levitt - Gergen in 2004? 2008?

[acct]

I agree with aNoNo. Mandatory rotation of auditors after some period (maybe 5 years) is the way to go. It is already used in some foreign countries. Auditors have long claimed that one point of independence was "even the loss of a big client wouldn't ruin the firm". My answer was "Maybe not, but it would ruin the partner in charge of the audit engagement, and that's what counts." Note that due to extremely high turnover among the staff in accounting firms (traditionally, half are gone in 2 to 3 years), very few of the original staff on the audit would be there in 5 years anyway--while the partner will still be there. So the "training and experience with your business & books" (which is admittedly worthwhile) of most of the audit team disappears anyway in 5 years--only the bigwigs are still around, getting overly cozy with management.

[Exam Slave]

Anyone know how the Enron partnerships/subsidiaries lost money? What was their business? Chewbacca Industries(?), for example.

It's not in my Newsweek, and there doesn't seem to be any other public information about them.
All that's known is that Enron guaranteed some loans from banks, the partnerships lost money, and Enron had to fork over money that it didn't have.
The banks get to share blame. They assumed that Enron was a legitimate guarantee-er of loans. Whether Enron fooled them or the banks didn't look closer is an issue of some kind.

[Andy Lang]

Many of the things proposed by Levitt
for accountants apply to actuaries--and even more is needed--like making sure that annual actuarial pension val report is made public and all key actuarial assumptions the actuary uses have an explanation attched to them by the EA and getting rid of 5 of the 6 permitted actuarial cost methods--retaining the one that makes the most sense--EANC--and also fixing the PVABP in ERISA, and then telling the FASB to rethink FAS 87 and 88, hintying to them strongly that the EANC method was appropraite now that the PVABP has been fixed.

And when all this is done you move on to the vast simplifitaton of ERISA that can be done for DB pension plans, since you have now protected the early leavers by giving them accrued benefits whose value is equal to the EANC Actuarial Liability and then converted to the accrued benefit--ie the deferred annuity at retirement--that's both normal and early--and of course poring through ERISA to remove all other loopholes too--like forbidding lump sums in DB plans, for example.

And of course we need to make actuaries work for the plan particicpants and not the employer and the assets of the DB plans owned by the participants too--in a kind of republican (small 'r')form of democracy.

Any questions, my little Chicadees?

Have I missed anything my loves?

[Harpo]

Ok Andy, just to be the devils advocate, lets say you could wave a wand and all non-governmental and not for profit DB plans had to use EAN beginning January 1, 2005.

What would happen?

1. Pension actuaries would make a lot of money (in the short run) projecting the cost impact of such a change (and restructing and/or terminating plans, see #2).

2. Many employers, as they realized the impact on required contributions (typically going up) would:
a) scale back benefits,
b) freeze their DB plan or
c) termimate their DB plan and/or
d) put in a 401k plan

3. For those plans that were not terminated, lets assume the employer had the objective of keeping costs reasonable level (with pre-EAN levels); benefits would be redistributed so more of the dollars would go to short service employees that left and took their EAN AL with them. Of course, they stand a good chance of going to an employer with no DB plan, since it was terminated (see 2b).

How could such a change be implemented so that it would ulimately benefit everyone, not just the short service employees that happened to work for employers that didn't terminate (or curtail) their plans?

[aNoNo]

Harpo knows his stuff.

AL - how about a straight response to Harpo's questions? Please leave out any stuff about RCC and Mormons.