Former Chairman of the University Board of Trustees Roy Vagelos has been appointed as one of three members of the oversight board charged with overhauling accounting firm Arthur Andersen.
The 1950 College graduate and former chairman and chief executive officer of the pharmaceutical firm Merck and Company will be responsible for helping to rebuild the credibility of Enron's former accounting consultant.
Since Enron's collapse in January, Andersen has faced mounting lawsuits due to its alleged mishandling of the company's funds and involvement with the energy giant's cascade into bankruptcy.
In order to remedy the firm's current situation and reform its long-term practices, the oversight board was created to implement a number of improvements for Andersen.
Vagelos, who's appointment was announced last week, will work alongside Paul Volcker, former Federal Reserve chairman, and Charles Bowsher, chairman of the Public Oversight Board, which oversees accounting firms nationwide.
"What should come out of our recommendations are a series of changes in the procedures and the running rules of Arthur Andersen, which should improve the practices of internal auditing," Vagelos said. "We want to make sure that the talent, resources and people at Arthur Andersen are the highest quality and carry out all the policies and procedures we think are important."
The board will initially look into procedures that Andersen employs for resolving both routine and complex accounting issues. Additionally, it will focus on the enforcement of various restrictions of auditors working for Andersen's clients and review how the firm's partners are compensated.
"We would like to see an extensive review of the auditors every year that is carried out by Andersen," Vagelos said. "And we would also like to have a very clear mechanism for review of the client retention by the senior partners of Andersen."
The board will ultimately work toward developing policies for the firm that will decrease the chance of future problems.
"All of these things are aimed at not having any potential for conflict of interest," Vagelos said. "The whole issue is building trust between the client and the auditor."
"It's the usual kind of challenge of being fair, considering all the facts and trying to build trust in an organization by giving them procedures that are completely transparent and easy to understand," he added.
Vagelos said that he, Volcker and Bowsher will bring in a wide range of knowledge that will be applied to making these reforms.
"Clearly, Paul is from the position of having been the chairman of the Federal Reserve, so he is well acquainted with accounting problems," Vagelos said. "And Charles Bowsher is a real expert in accounting issues."
While Vagelos' business background differs from Volcker's and Bowsher's more formal training, the former chemistry major and Columbia University School of Medicine graduate noted that his work at Merck and as director of the Prudential Insurance Company of America would prove to be an asset to the board.
"I personally am not an expert in accounting or auditing, but I have learned them both on the job at Merck and Prudential," Vagelos said. "What I bring is a business perspective."
Volcker, Bowsher and Vagelos will be backed by a panel that will serve as advisors to the oversight board. Coordinated by Russell Palmer, former Wharton School dean and chairman and chief executive of the human resources firm Palmer Group, the members of this committee will include several others with extensive experience in accounting and finance.
Currently, Andersen is negotiating to reach settlements with several parties, including the federal government, plaintiffs and Enron and its creditors.
Additionally, with the recent completion of last year's financial statements, many public companies will choose auditors for this year within the next month. Understandably, Andersen would like to have its reputation cleared before this point.
Vagelos himself is optimistic about Andersen's future because the board's recommendations are guaranteed to be enforced.
"We have an understanding from the firm that they will carry out the recommendations of the board," Vagelos said. "We've been assured that, so we will look to introducing very strong control procedures."
Moreover, Vagelos noted that Andersen's reputation as an accounting firm will probably remain more stable than the reputations of its competitors in the long run.
"A number of clients have stopped their use of Arthur Andersen, and I think that's too bad because [it] is probably going to be the safest place to have auditing done after [our] recommendations have been undertaken," he said.
