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Destruction of Records 'Unusual,' Experts Say

January 11, 2002|JAMES F. PELTZ | TIMES STAFF WRITER

The disclosure Thursday by Andersen, the accounting firm, that it destroyed a "significant" number of documents of client Enron Corp. in recent months came as a surprise to the accounting industry, which typically keeps such records for years even though there aren't strict rules regulating an auditor's paperwork storage.

Anderson's action "is unusual," said Jonathan Hamilton, editor of the Public Accounting Report, a trade publication. "Usually in the case of an ongoing client relationship, you find it useful" to keep nearly all documents, he said.

And if there's even a hint that the accounting firm or its client might be involved in litigation down the road, "the general rule is that you keep everything," Hamilton said.

In November, Houston-based Enron said it had inflated profits by $586 million since 1997. The energy company is operating under bankruptcy court protection and is under criminal investigation by the Justice Department, an inquiry expected to focus on possible accounting fraud.

The company also is being investigated by the Securities and Exchange Commission and several congressional committees.

The SEC's director of enforcement, Stephen Cutler, said in a statement that the destruction of Enron-related documents and electronic files by Andersen, formerly known as Arthur Andersen, are "an extremely serious matter" because documents "are an essential ingredient in our investigations."

But he didn't say whether Andersen's action was illegal, and the SEC declined further comment. Andersen said it still has "millions of documents related to Enron" but that its policy for record storage--a policy that Andersen said it has now suspended--required that some documents be destroyed.

The Financial Accounting Standards Board, which issues guidelines for how accounting firms should audit a company's books, doesn't offer set rules for saving documents, said spokeswoman Sheryl Thompson. Another trade group, the American Institute of Certified Public Accountants, recommends that accounting firms keep documents for as long as they serve the needs of the firm.

But that guideline is open to broad interpretation, and the storage of documents varies from firm to firm.

Even so, most accounting firms keep their audit records for at least three to four years, Arthur Bowman, editor of the industry newsletter Bowman's Accounting Report, told Reuters.

None of the other big accounting firms could immediately be reached for comment, but industry insiders said some firms have a standard practice of keeping records for a minimum of six years.

Hamilton said it's not the first time that an accounting firm has raised questions by destroying corporate documents.

"It's come up from time to time in the profession, especially when we had the dot-com shakeout," he said.

The collapse of many high-technology companies sparked shareholder lawsuits that led to accounting firms saying they had destroyed the auditing documents in certain cases "because they're not our client anymore," Hamilton added.

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