UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev | Next
Author: kh Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1933  
Subject: Re: Enron Date: 1/18/2002 10:26 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
Stockpicking opportunity:

From an investing viewpoint, I imagine that Arthur Andersen are toast. The audit reports I see are signed "Arthur Andersen LLP" the "P" in LLP meaning "partners", and make heavy use of the word "we" to refer to the auditors. I see no indication that the responsibility for AA's audits is transferred to so-and-so at the someplace office.

Moreover, with $27M in auditing fees AA had sufficient money to dot all the I's and cross the T's; $27M pays for about a 200 person operation on a full time basis. Nothing that Enron accounting did should have been unseen. That AA failed calls into question their methods.

That suggests some possible future underpricing of AA audited companies. The challenge will be to find the ones which get unfairly discounted by association, yet do not suffer from faulty auditing.

I see no indication that the responsibility for AA's audits is transferred to so-and-so at the someplace office.


From a legal liability standpoint, you're right. The entire firm, not just the Houston partner who signed the auditor's report, takes responsibility for the Enron audit from a legal point of view.

AA's Managing Partner Berardino has, through his press releases, tried to put some distance between the firm and the Houston office. If he can show the problem was confined to Houston, there's a chance the rest of the firm can be saved. It's a legal strategy, sure, and a pretty blatant one.

But for our purposes (as stock pickers), he does have a point. Legal stuff aside, it does look to me like the problem is pretty much confined to the Houston office. (First it was Houston-based Waste Management, now Enron….hmm, do I see a pattern here?) So far, I don't see any evidence of widespread problems throughout the firm.

My guess is that 95%+ of the Enron job was handled by the Houston office. Sure, there may have been some consultation with firm headquarters about some of the technical accounting issues. But no doubt almost all the work was done in Houston.

So I guess I would caution against any stock picking strategy that rests on choosing a stock just because the company was an AA client. Its a big firm--with 389 other offices besides Houston--staffed by mostly competent professionals.

But would a Auditing Bureau be so bad?

As devastating as the Enron failure has been, I don't think the public would be willing to foot the expense of federalizing the audit function.

For starters, to create a new government agency to audit publicly-traded companies would probably require a staff of 100,000 or more. And where exactly would these people come from? From AA, of course, and other Big 5 firms, the same folks who were doing the audits in the first place! Then there's the cost of training the auditors, and the cost of setting up offices nationwide, so as to be close to the companies being audited.

I don't think the public is willing to pay for all this.

Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (11) | Ignore Thread Prev | Next

Announcements

What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement