Enron

[aNoNo]

Andersen, an Enron Auditor, Asks
Deloitte to Expand Its Peer Review


Trying to shore up public confidence in its auditing
work following the collapse of Enron Corp., Arthur
Andersen LLP said it has asked Deloitte & Touche
LLP to expand a review it is conducting of
Andersen's quality controls.

In a prepared statement Friday, Andersen said the
scope of Deloitte's "peer review" would be
expanded to include, among other things, reviews of
the controls and procedures at Andersen's Houston
office, which was responsible for Enron's audits.

"In light of recent developments, we believe that
extending the peer review to include work done in
other offices, including Houston, and other procedures that Deloitte & Touche deems appropriate and
necessary, is the right thing to do," said Andersen's chief executive and managing partner, Joseph F.
Berardino. Friday's statement marked Mr. Berardino's first public comments since Enron's financial
crisis began unfolding in October.

Deloitte's peer review of Andersen, which had been proceeding for the past eight months, is scheduled
to be completed by year's end. The peer review is separate from the investigation that Deloitte is
conducting into Enron's accounting practices for a special committee established by Enron's board.

As part of the accounting profession's self-regulatory structure, major accounting firms hire each other
every three years to conduct assessments of their accounting and audit practices. That review process
has come under increasing public scrutiny in recent weeks, particularly from U.S. Rep. John Dingell of
Michigan, the leading Democrat on the House Commerce Committee.

In a Nov. 16 letter to the Public Oversight Board, which oversees the peer-review process, Mr. Dingell
complained that since the process was implemented in 1978, "there has never been a qualified report
issued by one Big Five accounting firm against another at the end of any peer review." In light of that,
Mr. Dingell said Deloitte's dual roles in reviewing both Andersen's audit procedures and Enron's
accounting practices created the appearance of conflicting interests. Specifically, Mr. Dingell questioned
whether Deloitte would "whitewash or reconcile" any problems it found at Enron "in order to be able to
issue a clean peer-review report."

A Deloitte spokeswoman declined to comment on Mr. Dingell's comments or Andersen's Friday
announcement. The oversight board has said it won't conduct a separate investigation into Andersen's
audits of Enron, as Mr. Dingell had requested, saying that is up to the Securities and Exchange
Commission.

The SEC is conducting a formal investigation of Enron, the scope of which includes Andersen's audit
work for the Houston-based energy trader.

Separately, Andersen has been named a defendant in at least three shareholder lawsuits, including one
in Houston that also names six Houston-based Andersen partners as defendants. Among those
defendants is David Duncan, the Andersen engagement partner in charge of Enron's audit. Mr. Duncan
didn't return phone messages left at his office and home. Andersen spokesman David Tabolt said he
couldn't comment on pending litigation.



<font size=-1>[ This Message was edited by: aNoNo on 2001-12-03 08:47 ]</font>

[aNoNo]

Follow up question - Anyone ever hear of an actuarial consulting firm hiring another actuarial consulting firm to do a "peer" audit?

I have heard of clients hiring a second firm to do a peer audit, but I have never heard of an actuarial firm voluntarily hiring another actuarial firm to do a peer audit.

[Andy Lang]

"The peer review is separate from the investigation that Deloitte is
conducting into Enron's accounting practices for a special committee established by Enron's board"

I think they are doing a CYA audit.

Regarding the question on actuarial audits, it is unheard of in part because no actuarial firm wants anyone to examine what they are doing, and in part because no actuarial form I am aware of has ever been hit with such a major lawsuit.

But here is one that occurs all the time for the larger firms.

A takeover of Client A by Client B (or Division A by Division B in the same firm), with A having an enrolled actuary in the same firm as B--and B asking for a peer review by the Actuary B of A's work.

Keep in mind there are only a handfull of major firms in the actuarial business and they have 95% of the major accounts.

Generally speaking if there are different actuarial firms they do a good job of criticizing (albeit even here, watch out for folks ripe to lower costs by using improper assumptions, and thus get the account*), but in the same major management consulting firm--no way Jose'.

Of course, any Board that is so stupid to allow that to happen deserves what they get.

What they shoukd do is hire a third firm to review both actuaries work.

* I recall vividly one major client at Towers that had an outsider come in and tell the Board that he could reduce their pension costs by raising the interest assumption up to a much higher level. This particular company was in huge trouble financially BTW.

When the actuary for Towers could not accept the recommendatios of this other person--which hcame through the Board of his client--he is the enrolled actuary, not the other fellow, Towers board dd the right thing, and stood by their actuary--but the client left anyway. Wehn you lose a clinet of this side it is a BIG deal at Towers.

This episode created an internal review committee whose purpose was to support their own actuaries in any other cases that might develop similar to that, and also led to major peer review system work--all internally of all actuaries work, as well as other consultants.

This was case of Towers doing the right thing.

Towers is NOT a publically held firm.

Are all of the public accounting audit firms publically held--or at least must they disclose what their peer review practices are--or is that an outcome of the Levitt-driven SEC breakup of the audit function from the management consulting functions?

I'm wondering if something like that would be valuable to do with Enrolled actuaries?

Maybe separate the Enrolled Actuary function from other functions, make the ownership of the Enrolled Actuary spinoff owned by the actuaries only and perhaps force them all to be public firms, or at least disclose a great deal of their practices that affect the public interest so much.

[Ms. Re]

to me it's now apparent an Arthur Andersen signature on an audit conducted by its Houston office is important only to serve as proof that its audit bill has been paid!

[acct]

Andy, you said "Anyone ever hear of an actuarial consulting firm hiring another actuarial consulting firm to do a "peer" audit?" I'd say no, but at one point it was contemplated in the proposed UVS life insurance reserving system that the commissioner might hire a consulting actuary to do a very similar thing regarding the UVS procedures of the valuation actuary. (Reserves under UVS being so dependent on the cash-flow testing results of the actuary).

You said "I think they are doing a CYA audit." Which are you referring to, the D&T review of Enron or the D&T review of AA? Periodic peer reviews are required by the AICPA (in this case, by its SEC Practice Section, although there is a similar program for auditors of private companies), and the review of AA was scheduled long before Enron fell apart. Granted, D&T has some conflict between its two roles. If it gives a glowing peer review of AA it must also find that Enron was incredibly clever in hiding its problems from AA.

You asked "Are all of the public accounting audit firms publically held". None of them are, in large part because of state laws and AICPA Bylaws that wanted all true "owners" of the firm to be duly licensed CPAs (something that became one of the early wedges between the Audit and Consulting arms of the firms. That's a separate wedge from the inherent conflict of interest-that's been elevated to a break-up issue-between offering auditing and consulting services to the same company).

You asked "or at least must they disclose what their peer review practices are". They are subject to the AICPA's "Standards for Performing and Reporting on Peer Reviews". Those standards are published in the book "AICPA Professional Standards", and you can order it from the AICPA for $145 at http://www.CPA2Biz.com if you're really a glutton for punishment.