Accountants, Texas board still at odds over Enron

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December 24, 2010 6:41:53 AM PST
To many in the accounting world, Carl Bass is a hero. Long before Enron became a worldwide symbol of scandal, Bass told his supervisors at Arthur Andersen LLP that something was amiss with the Houston energy giant.

But the Texas state board that licenses accountants sees Bass differently -- as unfit to continue in his profession.

Nearly a decade after Enron collapsed and took Arthur Andersen with it, the work of Bass and another former Andersen partner, Thomas Bauer, as Enron auditors is still being debated in a highly contentious and costly proceeding.

The Texas State Board of Public Accountancy has stripped Bass and Bauer of their CPA licenses after determining they violated professional standards in their audits. But the pair has pushed back with a legal challenge that led a judge to rule that the license revocations should be voided because the board violated the Texas Open Meetings Act.

The revocations remain in effect while the matter is under appeal, which could take at least a year.

The upshot is a standoff playing out after most of the figures in the Enron scandal have had their days in court and raising questions about a little-known state agency that doesn't rely on the Legislature for funding.

William Treacy, the board's executive director, said it's in the public interest for Bass and Bauer to be barred from working as CPAs. He cited the depth of the Enron scandal, which led to more than $60 million in lost company stock value and more than $2 billion in losses from employee pension plans.

"There's a lot more than two licenses at stake," Treacy said. "Let's not forget the thousands of people who lost their life savings, their jobs and their pensions."

The board argues that Bass and Bauer should have their licenses revoked because they failed to follow accepted accounting practices in conducting Enron audits in 1997 and 1998.

But some observers believe the case is more one of overzealousness by the agency than insufficient audits.

Wayne Shaw, a professor of corporate governance at SMU's Cox School of Business in Dallas, said it's unusual to see licenses revoked over flawed audits unless the accountants were complicit or showed total disregard for accepted procedures. That's particularly true for audits like those involved with Enron, he said.

"I don't think people comprehend how complex Enron was, the mathematics behind some of these transactions," Shaw said.

Some experts contacted by The Associated Press were stunned to learn that the state was taking such drastic action against Bass. Documents released by a U.S. House committee in 2002 showed that he challenged Enron's accounting practices as early as 1999 and was later removed from Andersen's Professional Standards Group because of complaints from Enron over his criticism.

"Instead of punishing Carl Bass, he should be given a medal," said Bob Jensen, a former accounting professor at Trinity University in San Antonio.

Jensen said the Texas accounting board has gained a reputation as "Big Brother."

"What's happening (with Bass and Bauer) strikes me as absolutely absurd, but it doesn't surprise me," he said.

The two former accountants, both of whom still live in the Houston area, declined interview requests through their attorneys.

The state board voted to revoke the licenses in June 2008 even after a panel of administrative law judges recommended that the accountants merely be fined and admonished. But State District Judge Rhonda Hurley kept the issue alive in April when she agreed with Bass, Bauer and another plaintiff that the board engaged in a "charade of deliberation" when it went into executive session four times while considering the panel's recommendations.

The board contends that it went into executive session only to discuss potential litigation with its attorney, a scenario that would make the meetings legal.

Arthur Andersen, once one of the so-called "Big Five" accounting firms, was found guilty of obstructing justice in 2002 for the shredding of Enron-related documents. Although the conviction was reversed by the U.S. Supreme Court, the damage to the Chicago-based firm's reputation was enough to put it out of business.

The document destruction occurred in the Houston office, where both Bass and Bauer worked, but neither one was involved.

Records obtained by the AP show that the Texas board has spent $3.1 million over the last eight years to investigate and prosecute Bass, Bauer and five other former Andersen employees for their work on Enron audits related to the company's now-famous spinoffs with Star Wars-inspired names, Chewco and Jedi.

Documents that came to light when Enron filed for bankruptcy showed Andersen auditors failed to uncover that the company was using the entities to hide its debt illegally.

Bauer was barred from practicing before the Securities and Exchange Commission for three years because he didn't exercise due professional care despite "numerous red flags" associated with the transactions. Bass wasn't disciplined by the SEC.

Treacy said the expenditures aren't out of line because the board is one of Texas' seven self-directed, semi-independent regulatory agencies. That means its funding comes strictly from fees, fines and other revenue it generates.

"We're not subsidized by the state of Texas, and the (accounting) profession wants it that way," he said. "If we need to raise our license fees to prosecute cases, the profession supports us."


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