Enron Corp. - University of California | Office of The President

in order for the financial statements to not be misleading. However, Enron told Andersen it did not
want to make the adjustments, because the adjustments would dramatically reduce the $105 million
in the net income figure Enron management was going to report to the public. As alleged above,
because Enron was such a lucrative client, Andersen partners associated with the engagement
acquiesced to Enron management and did not insist that the adjustments be made. In failing to do
so, Andersen abandoned its role as the public watchdog and violated GAAS. However, due to the
sheer size of the collective adjustments – almost 50% of Enron's net income, Andersen could not
simply waive the adjustments in its workpapers without concocting some sort of justification.
Andersen's obfuscation was as follows: In calculating whether $51 million in adjustments were
material to the financial statements, it was obvious to Andersen that if it calculated the needed
adjustment as a percentage of net income, as auditors universally do, the resulting answer of 50%
of net income was clearly material. To divert attention from this reality, Andersen calculated the $51
million as a percentage of a contrived figure Andersen called "normalized earnings" instead of net
income. By cooking up this supposed measure of materiality, Andersen improperly declared that
because the $51 million adjustment was only 8% of "normalized earnings" (instead of a whopping
50% of net income) it was somehow immaterial and therefore no adjustment was necessary. By
concocting a justification for waiving these necessary adjustments, Andersen demonstrated the
depths it would sink to in order to please Enron management. In doing so, Andersen improperly
allowed Enron to overstate income in 97 by $51 million.
956. Enron has now restated its financial statements for 97 through 00 and Andersen has
stated that the audit reports covering the year-end financial statements for 97 through 00 "should not
be relied upon." Unfortunately for the thousands of investors who had already relied upon
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