Posted on 03/01/2002 8:57:15 PM PST by stilts
NEW YORK: Pharmaceutical giant Merck & Co. dumped Andersen as its auditor after a 30-year association on Friday, as the beleaguered accounting firm agreed to pay $217 million to settle a malpractice suit.
The settlement, the second-largest by a Big Five accounting firm, averted a trial set to begin Monday in an Arizona superior court over allegations Andersen failed to disclose financial wrongdoing by former managers of a trust for the bankrupt Baptist Foundation of America.
The foundation alleged Andersen was negligent, even after a series of whistleblowers alerted the firm to the fraud.
Andersen admitted no wrongdoing and said it settled the case to avoid the cost of protracted litigation. "This settlement is an important step in building confidence in our firm," it said in a statement.
The company has lost two big clients, Merck and SunTrust Banks Inc., since it came under investigation in the collapse of Enron Corp. It is now fighting for survival as it faces lawsuits from investors.
Izthak Sharav, an accounting professor at Columbia University, called Merck's dropping of Andersen "bad news" and questioned its viability going forward.
"It's sort of devastating for Andersen because Merck is not the only one. Several companies have already defected. And there will probably be additional defections."
Merck, the first blue-chip company to replace Andersen in the wake of the Enron scandal, said its board dropped Andersen after "careful consideration." It said it hired No. 1 accounting firm PricewaterhouseCoopers as its outside auditor for this year, subject to shareholder approval.
"This appointment concludes a rigorous selection process that was part of Merck's annual formal review of auditing services," Merck said in a statement. "Arthur Andersen has provided excellent auditing services to Merck since 1971 and Merck has valued its relationship with the firm."
The announcement comes two days after Paul Volcker, the former U.S. Federal Reserve chairman, named former Merck Chairman and Chief Executive P. Roy Vagelos to a special board charged with overhauling Andersen's procedures. Volcker was named chairman of that panel early last month.
In 2000, Merck paid Andersen $4.2 million in auditing fees, and $2.1 million for other services, according to Merck's most recent proxy filing.
A spokesman for New Jersey-based Merck said no decision has been made about whether the drugmaker will keep using Andersen for consulting or other work.
In the settlement, Andersen said other entities, including the state of Arizona, the foundation's law firm and the Arizona Southern Baptist Convention were warned of possible irregularities at the fund-raising group and failed to warn it.
The Chicago-based accounting firm recently acknowledged it was losing clients due to fallout from Enron. Smaller companies that have severed relationships include power and gas utility MDU Resources Group Inc. and educational company Corinthian Colleges Inc.
"There is a big question mark over the future of Arthur Andersen," Sharav said. "Normally there is a certain turnover which is to be expected. But here, it might end up being a one-way street with companies leaving but not being replaced by others."
. . .only thing that separates the 'frat boyz/girls' from the 'rank and file' in a Partnership is timing and talent; and hard work. . .
. . .not quite as easy to apply the class warfare 'principles' here; you can try of course. . .
I disagree. When negotiating an engagement, the resumes of the top ranking auditors will be considered, not the low ranking "rank-and-file." If an honest company desires to hire an honest audit firm, it is unlikely to want a former Andersen person in a high ranking role.
The rank-and-file Andersen people should have little trouble signing on with other audit firms. The top people ("partners") may have a much tougher time finding equivalent positions. This is as it should be.
I hope you are right, and the rank-and-file find suitable opportunities. I'm a rank-and-file who just got a job after 8 months of being laid off during this recession and before 9/11.
In my corporate era, I used Andersen Consulting. They were imposed upon me. They were of a culture which looked down on us in-house staff/manager types.
For the rank-and-file to easily get jobs, they will need a degree of down to earth professionalism, in demeanor and technical knowledge. On the other hand, if they come across with an air of superiority, I wouldn't hire them.
Most audit staffers will leave without making manager or partner, for good positions inside the firms they have audited. I'll bet they are actively searching, as Andersen is forced to cut back, due to declining workload.
I would offer that the because of the 'politics' of a few in Andersen, that legions of employees including Management and Partners, have had their jobs compromised, their reputations tarnished because of the bad choices of a few at Andersen.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.