Revised Earnings Statements May Mean Trouble

KNOXVILLE – The financial world was shocked to watch Enron Corp. collapse and file for bankruptcy protection during the last months of 2001, restating its earnings to reflect massive losses and taking millions of dollars of its employees’ retirement savings with it.

A University of Tennessee accounting professor says corporate restatements of profit often go hand in hand with investigations of the company’s financial books.

“Either the company itself has done the restatement and that prompts investigations,” said Dr. Joseph Carcello, “or there is an indication of problems and an investigation begins, with the company typically using an outside law firm to look at what happened, and then the financial restatement is issued.”

In its restatement, Enron announced $600 million in losses from 1997 to 2000. The Andersen accounting firm is also under fire for its audit of Enron’s books and the revelation that Andersen employees destroyed Enron-related documents.

Carcello says auditors use generally accepted accounting principles, also known as GAAP, and deficiencies in the principles may lead to deficiencies in published financial reports.

“Any system of manmade rules, for a company as large and complex as Enron, will have certain limitations,” Carcello said. “That doesn’t mean they can’t be improved, but I don’t know if we’ll ever get to the state where reporting rules are perfect.”