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January 17, 2002 Mr. Robert D. Neary Chair Quality Control Inquiry Committee c/o Ernst & Young LLP 1300 Huntington Building 925 Euclid Avenue Cleveland, Ohio 44115-1405 |
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| Dear Mr. Neary: The Quality Control Inquiry Committee (“QCIC”) of the American Institute of Certified Public Accountants (“AICPA”) is a critical part of the accounting profession’s self-regulatory program and a vital complement to the peer review process. We recognize that the QCIC will be reviewing Arthur Andersen’s quality control system as a result of pending litigation alleging deficiencies in Andersen’s audit of the financial statements of Enron Corporation. The review should cover Andersen’s audits of Enron for the year 2000 and relevant prior years to determine whether the alleged audit deficiencies indicate a need for corrective measures by Andersen in its system of quality controls and whether restrictions should be placed on Enron engagement personnel pursuant to the QCIC’s recently adopted disciplinary process (beyond those recently taken by Andersen). As you know, the recent Enron collapse has created deep concern among Congressional Committees and regulators and has been the subject of continuing media coverage. The scope of these inquiries is evolving, but certainly is focusing on: what happened, how did it happen, why did it happen so quickly, and what can and should be done to avoid similar events in the future. Given the Public Oversight Board’s oversight authority with respect to the QCIC, and as part of the POB’s mission to act in the public interest, we believe that protecting investors and maintaining confidence in our capital markets is essential. In this spirit, the POB requests that the QCIC look into the performance of Andersen, the audit partners and the other senior members of the audit engagement team in Enron as soon as possible to determine whether the facts indicate deficiencies in Andersen’s system of quality controls and whether the audit engagement team complied with professional standards, relating to, for example, disclosure standards, special purpose entities, contingent liabilities, issuance of equity securities, energy trading contracts, waived adjustments, and related party transactions. Particular focus should be on off-balance sheet financing. The POB also would appreciate it if the QCIC would look into discussions between Andersen and Enron’s audit committee concerning Andersen’s evaluation of the critical accounting policies used in Enron’s financial statements. Enron’s collapse has focused on the relationship between the auditors and the company’s audit committee with respect to discussions relating to independence as set forth in Independence Standard Board No.1 (“ISB No.1”). In view of that, the POB requests that the QCIC look into whether the discussions between the auditor and the audit committee required under ISB No.1 included a discussion of non-audit services provided by Andersen to Enron when bearing upon independence. Also, please determine if Andersen reported to Enron’s audit committee Andersen’s views on the quality of financial reporting by Enron as required by Statement on Auditing Standards No.61 (Communications with Audit Committees) and if the audit committee discussed those views and communicated them to the full board. In addition, the QCIC should determine if there are profession-wide issues that need to be addressed. If there are, please identify such issues and refer the matter to the SEC Practice Section (“SECPS”), the Auditing Standards Board (“ASB”), the Financial Accounting Standards Boards (“FASB”), or other standard-setting bodies for consideration and appropriate action. We are sending a copy of this letter to a number of interested parties, including the SECPS, the ASB, the FASB, the SEC, the AICPA and the Big 5 accounting firms that have taken initiatives in these areas, and the Peer Review Committee. We also are sending copies to the House Congressional Committees that have oversight and legislative responsibilities and have contacted us previously on this subject. |
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Sincerely, Charles A. Bowsher |
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| cc: | The Honorable W. J.
“Billy” Tauzin, Chair Committee on Energy and Commerce The Honorable John D. Dingell, Ranking Member Committee on Energy and Commerce The Honorable Cliff Stearns, Chair Subcommittee on Commerce, Trade, and Consumer Protection Committee on Energy and Commerce The Honorable Edolphus Towns, Ranking Member Subcommittee on Commerce, Trade, and Consumer Protection Committee on Energy and Commerce The Honorable Michael G. Oxley, Chair Committee on Financial Services The Honorable John J. LaFalce, Ranking Member Committee on Financial Services The Honorable Richard H. Baker, Chair Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises Committee on Financial Services The Honorable Paul E. Kanjorski, Ranking Member Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises Committee on Financial Services The Honorable Harvey Pitt, Chair United States Securities and Exchange Commission The Honorable David M. Walker, Comptroller General United States General Accounting Office Edmund L. Jenkins, Chair Financial Accounting Standards Board Joseph F. Berardino, Managing Partner-Chief Executive Arthur Andersen LLP Stephen G. Butler, Chair KPMG LLP James E. Copeland, Jr., Chief Executive Officer Deloitte & Touche LLP Samuel A. DiPiazza, Chair and Senior Partner, US Firm PricewaterhouseCoopers LLP James S. Turley, Chair Ernst & Young LLP Robert J. Kueppers, Chair SECPS Executive Committee Barry C. Melancon, President and Chief Executive Officer American Institute of Certified Public Accountants Richard L. Miller, Chair Peer Review Committee |
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