Andersen reportedly missed $644 million error in NASA audit
By Patty Reinhert
Houston Chronicle Washington Bureau
January 30, 2002

WASHINGTON -- Arthur Andersen, the auditor that has come under fire for
failing to catch bankrupt Enron Corp.'s questionable accounting practices,
overlooked a $644 million accounting error on a 1999 NASA audit, according
to a federal report.

The report, released by the General Accounting Office last March, blamed
Andersen for "excessive reliance on representations by NASA management" and
said the firm did not do adequate auditing work to justify signing off on
the space agency's books.

"Their work did not meet professional standards," Gregory Kutz, who wrote
the report, said Tuesday. "Auditing is really about independently validating
the numbers, not just saying, `Management told us, and therefore it is so.'"

Andersen spokesman Patrick Dorton criticized the report, saying, "We
strongly disagreed with the conclusions of the GAO report when it was issued
and still disagree today."

The report resurfaced this week as Andersen is being scrutinized for
auditing Enron's books at a time when the Houston energy trader was
overstating its profits by hundreds of millions of dollars.

Several congressional committees are investigating the scandal, as are the
Securities and Exchange Commission, the Labor Department and the Justice
Department. The White House, which has sought to distance itself from
Enron's massive campaign contributions to President Bush, last week ordered
the General Services Administration to determine whether Andersen and Enron
should be allowed to work for the federal government.

Kutz, director of the GAO's financial management and assurance division,
said the NASA accounting error was so obvious that a staff member on the
House Subcommittee on Space and Aeronautics caught it by flipping through
the National Aeronautics and Space Administration's 1999 annual report and
comparing it with the president's 2000 budget.

The space agency had reported that it had $686 million left over from
contracts in the previous fiscal year, up from zero the year before.

"They called NASA up and said, `How could this be right?' and NASA said,
`Oops, you're right. Our audited financial statements are incorrect,' " Kutz
said.

NASA said the actual amount was $42 million.

Kutz said the error appeared to be a genuine accounting mistake rather than
some attempt to disguise or misrepresent the numbers. The real problem, he
said, was that Andersen auditors did not understand the process NASA used to
compile the accounting data, and they didn't catch the error. Andersen also
could not produce the paperwork to show that it had conducted a proper
audit, he said.

In an e-mail to the Houston Chronicle and other media, Andersen's Dorton
wrote that the report's conclusions "have no basis and are not supported by
the facts." The GAO's conclusion that Andersen's work was inadequate, Dorton
said, was "fundamentally incorrect."

Dorton attached a statement from Andersen that essentially repeats the
firm's explanation to the GAO last year. The statement said the reporting
error was not the product of shoddy auditing but rather "NASA's good-faith
misinterpretation" of guidance it received from the Office of Management and
Budget on how to fill out a new budgeting statement that Andersen said has
been the subject of "enormous confusion" since its inception in 1998.

NASA's Inspector General's Office, which had a $3.3 million contract with
Andersen to conduct its annual audits from fiscal years 1996 through 2000,
sided with Andersen against the GAO.

But Kutz dismissed the explanation for the error. He also noted that
Andersen is no longer serving as NASA's auditor.

NASA spokesman Bob Jacobs said NASA officials had been aware of the
accounting error and were working to correct it when the House committee
flagged the discrepancy.

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