Audit chief examines EU policy to prevent Enron-style collapse

Date: 24/01/02

By Peter Chapman

THE European Commission's senior audit expert says his team is examining the collapse of US energy giant Enron to make sure EU policy will guard against similar calamities.

This follows the revelation that executives at accounting firm Andersen's Chicago headquarters had discussed destroying documents with their local auditors in Houston, who worked with Enron, before thousands of key papers were shredded.

'We are also looking at what happened and have not come yet to final conclusions,' said head of accounting and financial reporting policy Karel Van-Hulle. 'The destruction of audit files would of course also be clearly unlawful in Europe.'

But Van-Hulle said the EU already had a raft of policy measures either already adopted or close to approval that would make it difficult for European-listed firms or their auditors to get away with similar behaviour. He said the EU's decision to shift to international accounting standards 'was certainly the right move' because the norms - set by the International Accounting Standards Board - are based on key 'principles' to which accountants must adhere, rather than an exhaustive 'cookbook' of strict rules that were easier to get around.

'IAS are principle-based standards. They look at the substance rather than the form,' explained Van-Hulle, adding that the US's Financial Accounting Standards Board was now aware of the dangers of a tightly defined rules-based approach.

'It has just announced that in the future they will also go for principle-based standards rather than the cookbook approach which they followed in the past and which allowed companies to get around the rules rather easily.

'The Commission has always insisted with the international standards that they should remain on a principle-based standard setting course,' added Van-Hulle, a member of the single market directorate headed by Frits Bolkestein.

He said an upcoming recommendation on auditor independence deals with some of the issues raised by the Enron case, such as the intersection of auditing and consulting functions and the possibility for employees of an audit firm to become executives in the audit client.

'On the first matter, we propose ways and means on how to deal with this. On the second matter, we propose a cooling-off period,' said Van-Hulle, adding it was too early to say 'what exactly went wrong there'.

Van-Hulle emphasised that last year's Commission recommendation on audit quality assurance should add extra safeguards because it proposes the establishment in all member states of a system of peer review or monitoring.

'This audit quality assurance system should allow those who supervise the profession to pick up any irregularities. These would have to be reported and disciplinary and other measures would have to be taken. What is interesting is that the quality assurance system requires public oversight,' he added.

The industry peer review system currently in place in the US has been criticised in the wake of the Enron collapse.

The European Commission's senior audit expert says his team is examining the collapse of US energy giant Enron to make sure EU policy will guard against similar calamities.