Andersen scandal triggers California reform legislation

By Don Thompson The Associated Press
Monday April 15, 2002

Proposed legislation would require corporations to change auditing firms every four years 


SACRAMENTO – Corporations would be required to change auditing firms every four years, under legislation to be proposed Monday by key California lawmakers in response to the Enron and Arthur Andersen accounting scandals. 

The measures also would restrict consulting work by auditing firms. Critics say the firms’ dual role as consultants can create conflicts of interest for auditors who are supposed to maintain their objectivity. 

Lawmakers touted their bills as consumer protection legislation needed to restore investor confidence. They said California investors need better information and protections to make wise decisions. 

“Our goal is very simple: re-establish credibility to the auditing process,” said Assemblyman Lou Correa, D-Anaheim, chairman of the Business and Professions Committee. “We’re talking about the credibility of our financial system.” 

There’s no doubt the profession’s credibility is in question, agreed Mike Ueltzen, past president of the California Society of Certified Public Accountants. But Ueltzen, who chairs CalCPA’s government affairs committee, said corporations, stock analysts and regulators also are to blame. 

Most of the proposed bills are unnecessary or should be handled nationally instead of creating piecemeal regulations in 50 states, Ueltzen said. 

Correa said California can be a national leader while state and federal regulators spend their time “pointing fingers everywhere as to where the problem lies.” It’s not uncommon for businesses to face both state and federal rules, he said. 

“We can’t count on the federal government to do anything,” said Dan Jacobson, legislative advocate for CalPIRG, the California Public Interest Research Group. CalPIRG backed the legislation with eight pages of recommendations, concluding that “the lack of auditor independence can lead to catastrophic consequences for investors and the markets.” 

Correa and Senate Business and Professions Committee Chair Liz Figueroa, D-Fremont, are among lawmakers who plan to introduce the legislative package Monday, Tax Day. 

Figueroa’s bill would also give the state’s Board of Accountancy new monitoring and enforcement powers. “We have to make sure we don’t have accountants who take advantage of us,” she said, though she said that appears to be rare. 

Accountants support peer review to prevent abuses, said Ueltzen. They oppose the four-year limit and consulting bans as unnecessary because auditors don’t uniformly have conflicts of interest. Accounting firms, should, however, be barred from auditing their own consulting work, he said. 

Enron employed many former Andersen accountants, CalPIRG noted, and paid Andersen more for its consulting services than it did for its audits. 

Other proposed legislation would require accountants to keep audit working papers for seven years, and bar accountants from taking jobs with former clients for two years after leaving their accounting firms. The restrictions would apply only to auditors registered in California, which Ueltzen said creates jurisdictional problems. 

Enron filed for bankruptcy in December amid an accounting scandal that undermined stockholder confidence. Enron and its auditor, Arthur Andersen, face myriad lawsuits and investigations that endanger the companies’ futures.