Arthur Anderson Drama Adding To Enron Woes

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KATHLEEN HAYS, CNNFN ANCHOR, MARKETS IMPACT: The Enron (URL: http://www.enron.com/ ) debacle has so many aspects. Another key aspect of that of course, the Arthur Andersen drama. Senator Joseph Lieberman says the accounting firm could face criminal indictment for destroying Enron related documents.

BRUCE FRANCIS, CNNFN, MARKETS IMPACT: For a look at how an indictment could affect this business and its future we're joined by Edward Ketz, he's Professor of accounting at Penn State University. Professor thanks for joining us.

EDWARD KETZ, PROFESSOR OF ACCOUNTING AT PENN STATE UNIVERSITY: Thank you.

FRANCIS: What, give me a since of perspective on this. Have we ever seen anything quite like this? I mean this isn't the first time that Andersen has been kind of caught and been reprimanded but have we seen anything with this depth or this import in terms of a failure of the accounting system?

KETZ: There have been accounting failures for many years and they have been around I guess ever since the 1930s when things got started. The thing that makes this thing different is how big it is. So it's just incredible in size.

HAYS: So, in other words you're saying that this is something that has happen many times over on a small scale but this one getting more attention because it is very large?

KETZ: Yes that's one thing I'm saying. The second thing I'm saying is that the frequency of the audit failures has been increasing over the past 10 or 20 years. Previously we would have some problems but not as many. In the past few years we've had several dozen firms that have problems with they're auditing and with they're accounting.

FRANCIS: It's clear this business or maybe I should ask that. Is it clear that this business needs some fundamental changes about what is ethical and what is not?

KETZ: Well we need some systematic changes because the problem fundamentally is not simply someone going out and doing something wrong the problem is, is that we have some conflicts of interest filled into the system. What we have is a firm that hires and fires its auditors and so it has enormous powers over the auditors. And I know that there are many auditors out there who have some high ethical standards but the problem is they face incredible pressures from the firms themselves.

HAYS: And yet when Arthur Levit (ph) the former head of the Securities & Exchange Commission tried to crack down on this he didn't get to far. Recently I believe Harvey Pitt the current SEC Chairman said he didn't seem to think this was much of a problem. In fact he's been on record favoring more self-policing by the accounting industry. Do you think that's an answer?

KETZ: I think that the current chairman is looking in the wrong direction. I think the op-ed piece that he had in the Wall Street Journal basically was disappointing because he was saying that or was implying that this was one of the very few problems. The situation that we have is that there are lots of problems. We've had a number of cases come out and we need to take a look and get some fundamental changes.

FRANCIS: Has an accounting firm ever failed because of the kind that improprieties that are either implied or have actually happen at Arthur Andersen?

KETZ: Lethenthaul (ph) and Horwith (ph) basically went into bankruptcy in 1990 and they went into bankruptcy because they suffered a variety of audit failures. They had several liabilities and the liabilities basically overwhelmed they're assets so they declared bankruptcy in 1990. So we have had this problem before. This one however maybe much bigger.

HAYS: Professor Ketz for the people this country who invest in stocks and presumably rely on accounting audits to guarantee that what they read in a firm's statement is accurate what kind of implication should they drop in this? Should they be more careful about investing in stocks?

KETZ: Well there are several things that they have to consider here. One is they have to be very careful in taking a look at the analysis. They have to be very careful in what they are examining. Looking at simply earnings is not sufficient. They need to look at the cash flow statement as well get the quality of earnings down. In addition they need to diversify. When you put all of your eggs in one basket then you have some difficulties if that one firm goes bankrupt. One of the things that we do need to take a look at are the 401K plans. Because in this case especially the Enron employees they were stuck with a portfolio that was not very diversified and they had problems there.

FRANCIS: Will Andersen fail? Can they recover?

KETZ: That's a good question. I'm not sure. I think that we're taking a look at a situation that will have lawsuits in the billions of dollar and it depends on how well Arthur Andersen can defend itself. It'll also depend on whether they settle out of court and for how much.

HAYS: Dr. Ketz thank you so much. Sounds like the lawyers are going to make a lot of money on this one.

KETZ: Yes they will.

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REPORTERS & EDITORS: For more information, please contact Wyatt DuBois in the Smeal College of Business Media Relations Office at 814-863-3798 or wed112@psu.edu .

Penn State's Smeal College of Business offers highly ranked undergraduate, MBA, executive MBA, Ph.D., and executive education opportunities to more than 5,500 students at all levels. Featuring academic departments of accounting, finance, marketing, insurance and real estate, management, and supply chain and information systems, the college is also home to major research centers such as the Center for Supply Chain Research, the Institute for the Study of Business Markets, the eBusiness Research Center, the Farrell Center for Corporate Innovation and Entrepreneurship, the Center for Global Business Studies, and the Center for the Management of Technological and Organizational Change.

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