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CNN Live At Daybreak

Who Can You Trust? Auditors Struggle to Rebuild Reputations

Aired February 27, 2002 - 05:45   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
CAROL COSTELLO, CNN ANCHOR: Turning now to our series, "Who Can You Trust?" It focuses on fallout from the Enron collapse.

This morning, we look at auditors, the people who inspect corporate books. Enron's auditor, Arthur Andersen, failed to raise the red flag, as the company spiraled towards bankruptcy.

As CNN Financial News Correspondent Allan Chernoff reports, the accounting industry is struggling to restore its reputation.

(BEGIN VIDEOTAPE)

ALLAN CHERNOFF, CNN SR. CORRESPONDENT (voice-over): When Andersen approved Enron's financials, it provided a seal of good bookkeeping. Enron's collapse broke that seal and triggered a loss of confidence in the integrity of corporate America's auditors.

PROF. SEYMORE JONES, STERNS SCHOOL OF BUSINESS NEW YORK UNIVERSITY: Some of the gray hair that ought to be there in judgment about what's going on in the financial world is not what it should be.

CHERNOFF: At a Senate Banking Committee hearing Tuesday, prominent accountants criticized the financial statements auditors approved.

WALTER SCHUETZE, FMR. CHIEF ACCOUNTANT, SEC: Earnings management abounds. Earnings management is like dirt -- it is everywhere.

CHERNOFF: They called for auditors to limit apparent conflicts of interest.

LYNN TURNER, FMR. CHIEF ACCOUNTANT, SEC: There should be a ban on anything but other audit -- other than audit services being provided to the audit clients.

CHERNOFF: Already, major accounting firms have promised to limit technology consulting services they offer to clients. And the profession is trying to win back its reputation. The American Institute of Certified Public Accounts on Thursday plans to unveil for public comment new fraud detection standards. They'll encourage auditors to speak with management about where fraud might occur. Have auditors test for management overrides of company policies and procedures, and provide detailed guidance on responding to a discovery of fraud. JIM CASTELLANO, CHAIRMAN AICPA: As individuals, we may not be perfect. But as a profession, I assure you, we are perfectionists in our commitment to ethics and excellence.

CHERNOFF: The Financial Accounting Standards Board, Wednesday, will discuss a plan to tighten rules on special purpose entities, which include the partnerships that former Enron Chief Financial Officer, Andrew Fastow, ran. And Andersen is in the middle of an overhaul. Former Federal Reserve Chair Paul Volcker, leading a new, independent oversight board with authority to change the firm.

PAUL VOLCKER, CHAIRMAN, ANDERSEN IND. OVERSIGHT BOARD: The evidence indicates we haven't been living up in practice to all that we have thought the accounting and auditing profession was doing.

CHERNOFF (on camera): The effort to restore faith in the auditors seal of good bookkeeping is critical. Investors need to trust auditors so they'll have confidence in corporate America's financial statements, so they'll feel secure enough to buy shares in the nation's companies.

Allan Chernoff, CNN Financial News, New York.

(END VIDEOTAPE)

COSTELLO: And tonight's Enron series focuses on analysts. You can watch that on CNN's "MONEYLINE WITH LOU DOBBS" at 6:00 PM Eastern, 3:00 Pacific time, right here on CNN. And we'll replay it for you tomorrow during the 5:00 AM hour, in case you can't see it then.

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