WASHINGTON - The Enron Corp. debacle and the recent grand jury indictment of its auditor, Arthur Andersen, are having some spillover effects in the municipal market.
Temporary rules issued late Monday by the Securities and Exchange Commission that ease filing requirements for Anderson's corporate clients also urge bondholders in the municipal market to give certain issuer- and borrower-clients of Andersen an extra 60 days in which to file audited financial statements. The rules, however, encourage muni issuers to continue to meet their self-imposed secondary-market disclosure deadlines for filing unaudited financial information.
At the same time, several bond lawyers in the municipal market are suggesting Andersen's muni issuer clients should include, in their secondary-market disclosure filings, the same assurances from Andersen that the SEC is requiring from corporate issuers. The temporary rules state that the SEC will only accept audited financial statements signed by Andersen after March 14 for corporate issuers if the filings contain Andersen's assurances that it conducted the audit in accordance with generally accepted auditing standards and applicable professional and firm accounting standards.
Meanwhile, the Governmental Accounting Standards Board is surveying municipal market participants, particularly those on the buy side, to try to determine if there are any Enron-like questions that need to be addressed.
"We've put a general call out to our constituents asking if there are Enron-like issues in the municipal world," David Bean, GASB's director of research, said yesterday. "What we have found is that you don't have as many off-balance sheet transactions on the municipal side," he said. "And our financial reporting entity concept is broader than in the private sector."
In the corporate arena, a corporation does not report assets unless it controls them, so financial issues revolve around control issues, Bean said. But in the municipal market, an auditor looks at the issuer's financial accountability, regardless of whether it controls the assets. If a municipality, for example, sets up a bond-issuing authority, it is responsible for those assets from an accounting standpoint even though it does not control the bonds, he explained.
Martha Mahan Haines, chief of the SEC's Office of Municipal Securities, said yesterday that the temporary filing rules the SEC issued Monday for Andersen clients contain a section on municipal securities because "we just wanted to make it really clear that Rule 15c2-12 obligations were covered by this relief."
The temporary rules are designed to avoid disruptions in the disclosure filings of issuers who cannot obtain, or no longer want to obtain, signed reports from Andersen on audits that are currently underway. The rule requires such corporate issuers to meet their deadlines for filing unaudited financial information, but gives them 60 days to amend the filings to include audited financial statements.
The SEC has no authority to require disclosure information from municipal issuers and instead regulates the secondary market disclosure process through the dealers in the municipal market. Rule 15c2-12 says that issuers must contractually commit to filing annual financial information and periodic notices of material events in order for issuers to be able to underwrite their bonds. Typically, issuers include continuing disclosure agreements in their official statements that spell out their self-imposed disclosure requirements and deadlines. Thus, the issuer makes its disclosure commitments to its bondholders.
In its temporary rules, the SEC urged muni bondholders not to accuse muni issuers or conduit borrowers of breaching their secondary market disclosure obligations if they are Andersen clients, have fiscal years ending between Sept. 15, 2001 and April 15, 2002, and need an extra 60 days to file audited financial statements. "This interpretation would be appropriate, however, only if the issuer or conduit borrower files unaudited financial statements with the appropriate repositories by the contractual deadline," the rules stated.
Haines said the temporary rules are consistent with muni disclosure guidance the SEC sent the National Association of Bond Lawyers in 1995. The SEC told NABL that issuers and borrowers could file audited financial statements later if they were not available by the time the unaudited financial information was to be filed.
Peter Bianchini, chairman of the National Federation of Municipal Analysts, said yesterday that investors and analysts "understand when there are delays for legitimate reasons." The 60-day delay should "not ... be a huge problem" unless it is for an issuer or borrower that is financially distressed, he said.
Because of the recent grand jury indictment against Andersen for obstruction of justice in connection with its destruction of auditing documents during the SEC's investigation, the commission does not have to accept financial statements audited by Andersen. However, in order to avoid any disruptions in corporate filings, the SEC's temporary rules set forth the conditions under which it will continue to accept Andersen audits. The main requirement is for corporate clients with audits signed by Andersen after March 14 to include assurances from Anderson that the audits meet all applicable standards.
This has led to a debate among lawyers in the municipal market about whether municipal issuers, conduit borrowers, and dealers should obtain similar representations from Andersen for audits included in secondary market disclosure filings.
Haines said yesterday that the temporary rules' requirement for such assurances applies only to corporate issuers and not to municipal issuers or borrowers. "It seems like it ought to be a prudent practice that municipal issuers might want to consider," she said. "But it's not required."
Fredric Weber, a partner at Fulbright & Jaworski in Houston, said muni issuers and dealers might want to obtain such assurances from Anderson. "The written representations seem to be designed to confirm that the audits being filed were properly performed," he said. "Municipal market participants who would like to rely on Anderson's audit reports should have the same interests in confirming that. If they fail to ask for such assurances, they may leave room for people to second guess whether their reliance was reasonable."
John McNally, a partner at Hawkins, Delafield & Wood here, agreed. "As a matter of normal prudence for the underwriter, if the issuer has Arthur Andersen as an auditor, the underwriter is going to want to request from the issuer whether it has received similar representations."
Neither the NFMA's Bianchini nor GASB's Bean had heard of any investors raising concerns about this issue.
