Andersen's Future at Stake After Enron

Reuters ^ | Friday, January 11, 2002 | Deepa Babington

[Dog Gone]

NEW YORK (Reuters) - Andersen, once the creme de la creme of accounting firms, has been knocked to its knees after a series of revelations about its audit of bankrupt energy trader Enron Corp.

After the No. 5 accounting firm's startling admission on Thursday that it destroyed a number of Enron documents, Andersen faces legal wrangles and a desperate race to restore its once pristine credibility, say experts.

The beleaguered accounting firm, already sullied by other accounting snafus, earlier admitted it erred in its audit of Enron off-balance sheet partnerships. The murky deals led investors to dump Enron stock, which led to its collapse.

``It's an extremely serious situation for Andersen,'' said Jerry Bernstein, a former federal prosecutor who heads up the white collar crime and corporate compliance unit in New York at law firm Holland & Knight. ``First of all you have the potential for a criminal violation, then you have a huge civil liability exposure from shareholders who are looking for deep pockets to compensate them.''

Few would have imagined Andersen's fall from grace a few years ago. The company stood tall above its accounting peers with the prized Arthur Andersen name and a clientele that boasted of some of the biggest blue-chip public companies.

That has since changed. Andersen's record has been marred by its role in several high-profile accounting scandals including Sunbeam and Waste Management and a bitter separation from its consulting arm that toppled it to No. 5 from the top spot among accounting firms.

In recent months, the Big Five firm, now known only as Andersen, had been facing mounting criticism from lawmakers and investors alike for blessing Enron's books.

But its startling revelation on Thursday runs the risk of being the final straw that breaks the camel's back, some said.

``Andersen is a strong firm and we expect to be around for a long time,'' said Andersen spokesman Patrick Dorton. ``As our CEO said, we will acknowledge our mistakes and do the right thing in this matter.''

In a terse statement on Thursday, the company said its employees had disposed of or deleted a significant but unknown number of documents related to Enron in recent months.

Meanwhile, the House of Representatives Energy and Commerce Committee on Friday sent a letter to Andersen demanding it turn over ``additional records relevant to the committee's far-reaching probe into Enron's financial collapse.''

VIOLATED TENETS

The latest disclosure stunned industry experts, who questioned how accountants -- known for their love of record keeping -- could have destroyed documents.

The firm violated one of the accounting profession's basic auditing standards by destroying documents, said Itzhak Sharav, a professor and accounting educator at Columbia University.

``You can't just have papers disappear,'' said Sharav. ``It's well established that you don't destroy working papers supporting an audit for three to four years. Even if it were a former client, you don't destroy them.''

Questions remain about the destroyed documents, including who shredded them, when, and most importantly, why. What is clear, however, is that Andersen's most valuable possession -- its reputation -- is now tainted.

Its shattered credibility may discourage prospective clients and even drive away existing ones, said Sharav.

``Probably all the goodwill and reputation that Andersen had carefully built up all these years are being sacrificed at the altar of Enron,'' Bob Willens, accounting analyst at Lehman Brothers, said on Thursday. ``They were the gold standard those days. Now, whenever you mention Andersen, you think of Enron.''

EXACERBATED WOES

Andersen's latest admission will only worsen its woes, legal experts said. The firm has already been named as a defendant in several Enron-related class-action lawsuits, which could cost it millions.

The company could also face criminal proceedings depending on when the documents were destroyed, which Andersen said occurred before it was subpoenaed by the Securities and Exchange Commission in early November.

But some legal experts say that irrespective of when the subpoena was issued, Andersen was obliged to retain all documents as soon as it was clear there were questions surrounding its audit of Enron.

``The ramifications could be huge. You can just imagine the litigation industry lining up to feast on Andersen's bones,'' Arthur Bowman, editor of the widely read industry newsletter Bowman's Accounting Report, said on Thursday.

UNCLEAR ACTION FROM REGULATORS

The company could also face some tough decisions from regulators given the magnitude of the Enron saga that Andersen is now mired in, say experts.

In Washington, the SEC said it views Andersen's disclosure as an ``extremely serious matter.''

Based on its investigation of Enron, the nation's top market regulator could suspend Andersen or some of its partners from practicing before the commission, said Sharav. If it were suspended, Andersen would not be able to audit any public companies since they are registered with the SEC, he said.

In its last embarrassing brush with the SEC, the agency slapped a $7 million fine on the firm to settle charges it filed false and misleading audit reports of trash hauler Waste Management Inc. (WMI.N) in the largest-ever civil penalty against a Big Five accounting firm.

Further, the saga has the potential to bring down censure from the profession's key membership body, the American Institute of Certified Public Accountants, which sets auditing standards, Sharav said.

``The market too exacts a price which is just as potent as any regulatory actions,'' said Sharav. ``After all, the name of Andersen has been sullied, and what else does an (accounting) practitioner have apart from its credibility.''

[KQQL]

Sounds like crooks work at Andersen .

[Dog Gone]

Sounds like they're toast to me. If I'm the CEO of a company, the last name I want on my next annual report is Andersen.

Good riddance to them, too. I have had many dealings with this firm over the years and they specialize in BS.

[Vladiator]

But the managing partner of the Houston office was a huge Bush/Cheney contributor!

[doosee]

As our CEO said, we will acknowledge our mistakes and do the right thing in this matter.''

This is accounting speak for let's give huge retirement bonuses with confidentiality string agreements to the most guilty executives and then hire a PR firm to run ads about how much community service we do.

[spycatcher]

I bet the media goofs and Demonrats try to blame the collapse of Andersen on GW Bush too. Bush will be charged with personally ordering the hidden Dick Cheney to personally shred the documents in his bunker. LOL!

[Iowa Granny]

Bumping for a later read

[Lessismore]

There is a lovely broad avenue in Houston, leading from downtown to the Medical Center, where stately live oaks arch huge branches to almost meet at the center line.

You could hang Enron and Andersen executives there -- about two per block.

[independentmind]

I would like to understand in more detail exactly what records and documents were destroyed. I find it almost impossible to believe that they actually destroyed workpapers. From the article:

After the No. 5 accounting firm's startling admission on Thursday that it destroyed a number of Enron documents, Andersen faces legal wrangles and a desperate race to restore its once pristine credibility, say experts.

Let's be precise this. Did Andersen destroy Enron documents or did they destroy copies which had been provided to them in the course of their audit work? As long as client documents are copies and not an integral part of the workpapers, there is nothing inherently wrong with destroying them (although I imagine the answer would be different here if they were destroyed knowingly while under subpoena) . As a matter a fact, all sorts of copies of various records are deleted after an audit is completed. This article says NOTHING about what documents were destroyed. Without that piece of information, it tells us very little.

In a terse statement on Thursday, the company said its employees had disposed of or deleted a significant but unknown number of documents related to Enron in recent months.

Again, what KIND OF DOCUMENTS? Do most readers understand that there are many documents which are not considered necessary for inclusion in workpapers?

The firm violated one of the accounting profession's basic auditing standards by destroying documents, said Itzhak Sharav, a professor and accounting educator at Columbia University.

``You can't just have papers disappear,'' said Sharav. ``It's well established that you don't destroy working papers supporting an audit for three to four years. Even if it were a former client, you don't destroy them.''

Sure you can. Papers disappear all of the time. As long as they aren't part of the workpapers (and what is considered necessary documentation for workpapers is spelled out by Generally Accepted Auditing Standards as well as by individual firm policy) many documents (COPIES, not ORIGINALS) can be, and are, destroyed in the course of an audit.

IF, and I say IF, Andersen actually destroyed completed workpapers, I will be absolutely stunned.

[Southack]

What the article gets wrong is that they think that Andersen had a good reputation up until now. They just haven't been paying attention. Andersen loves to tag team deals with its sister company Accenture so that it gets huge tech-side consulting fees while its audits are being performed. That's always been out-of-bounds as far as my ethics are concerned.

Moreover, Andersen has been sued to high heaven for numerous botched consulting and auditing arrangements. I know for a fact that O'Neal Steel here in Alabama took Andersen out to the woodshed in court for their failed consulting promises, and Andersen auditors reported as "sound" IHI's financial condition just days before it became the largest bankruptcy in Australian history.

But as crooked executives probably know all around the world, if you want your audit to look good, then hire Andersen for your audit and hire their system firm Andersen/Accenture for your tech consulting...

In fact, there has even been an entire published BOOK written about Andersen's ethical shenanigans back in the 1990's.

[Dog Gone]

But the managing partner of the Houston office was a huge Bush/Cheney contributor!

Huge? That's not huge. That's not even the cost of a plate at some fundraising dinners.

Not that it matters. Somehow people seem to think that the sins of a contributor belong to the recipient. What kind of a leap of logic is that?

[Southack]

DANGEROUS COMPANY

The Consulting Powerhouses and the Businesses They Save and Ruin
By James O'Shea and Charles Madigan
Times Business 355pp $27.50

That's at least one book that slams Andersen by name.

[independentmind]

I am sorry to hear about your experience with Andersen but I think you are wrong to think the problem is isolated to one firm. In fact the problem may even be worse in second tier firms where partners are even more aggressive about getting and keeping new clients. And BTW, firm quality often varies significantly from office to office; much depends upon the makeup of the partners and managers in the local office.

[Roger_W_Isom]

They wanna know WHY they destroyed documents????? Try HILLARY CLINTON!!!!! Try TOMMY DASSHOLE! Try TRICKY DICK GEPHARDT!!!Try JESSE JACKSON!!!!!Try Al "THE PIMP" SHARPTON!!!! Try the DNC!!!! Shall I keep Going????

[Roger_W_Isom]

To Itzhak Sharav.

Its REAL EASY to have documents DISSAPPEAR!!! Especially if you are HILLARY CLINTON AND YOU'LL DO ANYTHING TO BECOME PRESIDENT!!!!!

[Red Jones]

I've only had a few dealings with Andersen, but I concur with you that their corporate culture is not what I like. They are the sort of people you meet in the business world who think they can lie and cheat if only they can get away with it. They've been involved in some very dishonest things in the past few years also.

[Dog Gone]

I agree. We don't have a good picture of exactly what documents were destroyed.

But I think it strains credulity to believe that what is being talked about is copies of Enron material. Nor do I think it is finished work product relating to the audit.

Almost certainly, what is missing is the internal communications within Andersen from the principals involved in the Enron audit.

I say that because I have been involved in numerous subpoenas of records of my employer. That is often what is the most difficult to retrieve. Many times these are destroyed routinely, simply as work notes that become outdated. There's no problem with that. Nobody is required to keep every note they take or piece of paper they generate. There is a lot of trash created which is innocent and necessary.

But the stuff that you do keep that becomes part of your files, and the notes and other material that you haven't thrown away yet can't be destroyed once you've received a subpoena. That includes backup tapes for computers or anything at all which is relevant.

What apparently is missing, and we don't know for sure, is the backup material which is routinely kept. We don't have any explanation offered yet as to why these items are gone and that only adds fuel to the fire.

It's possible that this is entirely innocent. But it looks very bad, and given the gravity of the misrepresentation of the financial condition of Enron, it looks like someone is trying very hard to save their own butt.

[Roger_W_Isom]

If the WORKPAPERS are toast then Andersen is, by default. DEAD as a company.... It won't last till June friend!!!

[independentmind]

I agree with you about how bad it looks. I would also suggest that some people have a real interest in seeing Andersen, and not Enron execs, bear most of the blame for the collapse.

I am not an attorney, so I don't know what the rules are regarding destruction of records in anticipation of subpoenas; but I would suggest that this happens far more frequently than the article implies.

One possibility I can think of is that when the news about Enron broke, the audit staff on the Enron account took it upon themselves to dump records. Whether that should have been prevented by senior management at Andersen is something that should be looked at.