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December 5, 2001
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Gaps in accounting system delayed detection of Enron troubles: Anderson CEO

T V Parasuram in Washington

The ailing health of Enron went unnoticed by the energy major's auditors and consultants due to drawbacks in the prevailing financial reporting system which is unfit to deal with the complex modern day business structures, an expert has said.

Enron's collapse, like the dot.com meltdown, "is a reminder that our financial reporting model, with its emphasis on historical information and a single earnings-per-share number is out of date and unresponsive to today's new business models, complex financial structures and associated risks," said Joe Berardino, CEO of Andersen, which raked in millions of dollars as Enron's consultant and auditor.

"Enron disclosed reams of information in its 2000 annual report."

"Some analysts studied these, sold short and made profits. Other sophisticated analysts and fund managers have said that although they were confused, they bought and lost money," he said.

"Neither the auditors nor shareholders understood what was happening and continued to certify to the good health of the company," he added.

Like many companies today, he said, Enron used sophisticated financing vehicles known as Special Purpose Entities and other off-balance sheet structures. Such vehicles permit companies to increase leverage without having to report debt on their balance sheet.

"Wall Street has helped companies raise billions with these structured financings, which are well known to analysts and investors," he pointed out.

Meanwhile, on the New York stock exchange on Tuesday, Enron shares surged after the company got a $1.5 billion cash infusion to continue operations.

The shares more than doubled in value to close at 86 cents after being beaten down to nearly worthless levels last week.

ALSO READ:
The Enron Saga

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