A Tattered Andersen Fights for Its Future
A Tattered Andersen Fights for Its Future
ALEX BERENSON with JONATHAN D. GLATER . NY Times . 13 january 2002
Is time running out for Arthur Andersen & Company?
Three months ago, financial experts asked the same question about the Enron Corporation, the giant energy trading company that was Andersen's second-largest client in 2000. Beset by questions about self- dealing by its top executives and the accuracy of its financial statements, Enron rapidly collapsed, costing shareholders tens of billions of dollars and leaving thousands of its employees out of work.
Besides Enron itself, no company has been more seriously wounded by its collapse than Andersen, one of the world's largest accounting firms. With more than $9 billion in sales last year and 85,000 employees in 84 countries, Andersen is one of the Big Five that audit the financial statements of most publicly traded American companies.
After months of damaging revelations about its relationship with Enron, capped by the acknowledgment on Thursday that it had destroyed a large number of Enron documents, Andersen is facing Congressional investigations, a federal criminal inquiry and lawsuits from shareholders that could cost it billions of dollars.
Perhaps even more seriously for a firm that lives and dies by its reputation, Andersen's name is in tatters. The Enron crisis is only the latest blow to a firm that has suffered repeated allegations of impropriety over the last five years. Last year, it paid a $7 million fine levied by the Securities and Exchange Commission, the largest ever assessed against an accounting firm, for allowing fraud at Waste Management (news/quote).
"Things look very bleak for Andersen," said J. Edward Ketz, associate professor and director of the M.B.A. program at Pennsylvania State University. "There's a chance that they go under on this one."
Andersen did not respond to questions about its future for this article.
To save itself, Andersen is considering a merger with one of the other Big Five Ernst & Young, KPMG Peat Marwick, Deloitte Touche Tohmatsu and PricewaterhouseCoopers according to former Andersen partners and other experts on the accounting industry, which has indeed been consolidating. There's just one problem: The other firms may not want to take on Andersen's problems.
KPMG declined to confirm or deny whether it was in merger talks with Andersen. The other firms did not return calls seeking comment.
Even so, the rest of the accounting industry will not be able to escape the fallout from this crisis, critics of the industry say. Over the last several years, independent accounting experts have attacked the Big Five as being too close to their large corporate clients. The firms face an inherent conflict of interest because most of their profits come from lucrative consulting services, not auditing, the critics say. As a result, they are reluctant to force clients to change questionable accounting practices for fear of losing consulting business.
"The problems that exist here are endemic to the profession as a whole," Mr. Ketz said. "What's happening to Andersen might happen to other firms later."
Arthur Levitt, the former S.E.C. chairman, said Andersen's problems would force the commission and Congress to "think about the way standards are set, accountants are paid and how the industry is overseen."
He added, "I think all of that is up for grabs and should be."
As the rest of the industry struggles with those questions, Andersen will focus on controlling the damage from revelations about its behavior in the Enron case and surviving the crisis of confidence that threatens to swamp it.
The most serious question about Andersen's behavior, so far, concerns the admission it made on Thursday that it had destroyed Enron documents, which included both paper and electronic records. The elimination began in September and continued through November, Andersen said.
The firm has also said that it is not sure how many documents were destroyed. It did not disclose who had ordered the destruction, who knew it was happening or whether the destruction had continued after the S.E.C. subpoenaed Andersen for its Enron records.
That acknowledgment came less than a month after Joseph F. Berardino, Andersen's chief executive, told Congress that his firm had made an "error in judgment," allowing Enron to use a partnership run by its former chief financial officer to move debt off its balance sheet. The disclosure that Enron's debts were far higher than Enron had disclosed was a crucial factor that led investors and Enron's trading partners to refuse to lend to it or do business with it.
Mr. Berardino also said in his testimony that Enron had misled Andersen by withholding important information about other partnerships Enron had created to move debt off its balance sheet and overstate its profits. But that assertion has been undercut by the fact that several top Enron financial executives, including Richard A. Causey, the chief accounting officer, worked for Andersen before they joined Enron, raising the question of whether Enron and Andersen were improperly close.
Another potential problem Andersen faces concerns Enron's relationship with other energy-trading companies, including Calpine (news/quote), Dynegy (news/quote) and Mirant (news/quote), which Andersen also audits. If the way Enron accounted for its trades is found to be inaccurate, Andersen will confront additional scrutiny about why it did not inform Enron and its trading partners that their positions had been booked improperly.
In the wake of the revelations, both the House and Senate have announced investigations. The Senate's Permanent Subcommittee on Investigations has subpoenaed Andersen officials.
The scrutiny that Andersen faces from Congress comes in sharp contrast to the influence it and other big accounting firms have recently wielded there. Two years ago, Andersen vehemently opposed a rule proposed by Mr. Levitt and the S.E.C. that would have banned firms from offering consulting services to companies they audited. Andersen, KPMG and Deloitte lobbied Congress to prevent the S.E.C. from imposing the rule, and Mr. Levitt backed down, agreeing in November 2000 to a compromise that banned only a fraction of consulting work.
To buttress its influence, Andersen has been a big contributor to both Republicans and Democrats in Congress. Since 2000, its political action committee has donated $630,000 to Republicans and $360,000 to Democrats, according to records from the Federal Election Commission. Among the biggest individual recipients of its largess has been Representative Billy Tauzin, Republican of Louisiana and chairman of the House Energy and Commerce Committee, who received $10,000 last year alone, the records show.
Now, with investors and former employees looking for answers in the mystery of Enron's collapse, Congress may investigate Andersen twice as thoroughly to try to prove that the firm's donations have not influenced it. Andersen's admission that it destroyed documents will not help its cause. On Thursday, Mr. Tauzin said Andersen should be prosecuted if it were found to have destroyed the documents intentionally.
Even if it can escape legal liability, Andersen faces a public relations disaster. Auditors serve a crucial role in modern financial markets, ensuring that the statements companies issue are properly prepared and accurate. Although they are paid by their corporate clients, they are accountable to both the S.E.C. and the public.
Investors generally have not cared which accounting firm is used by a publicly traded company to audit its accounts, as long as the firm is a member of the Big Five, said Jack Ciesielski, publisher of the Analyst's Accounting Observer. But if Andersen is seen to have abused the trust of investors or develops a reputation as unethical, clients may shy away from hiring it.
In a sign of how seriously it takes its public relations problem, Andersen is lining up clients to testify to its integrity. "They've been our auditors for years, and from our vantage point, we think they do a terrific job for us," said Joseph Ryan, general counsel for Marriott International (news/quote), the hotel chain. "I'm sure they'll work through this." (Mr. Ryan said his son worked for Andersen, although not as an auditor.)
Still, the firm acknowledges that some clients have expressed concerns about its relationship with Enron. Privately, some employees are blunter, saying the revelations are having a serious effect on Andersen's ability to compete for business. In addition, the firm is rescinding some job offers, according to one person whose offer was taken back last month.
As it struggles to survive, Andersen's recent history will not make the task any easier.
Over the last five years, the firm has been involved in several other major accounting scandals. It audited both Sunbeam and Waste Management, which have had to restate their earnings after admitting fraud in their financial statements. (Andersen paid $110 million to settle lawsuits by Sunbeam shareholders.)
During the late 1990's and in 2000, Andersen also suffered through a messy divorce from its consulting arm, Andersen Consulting, now a publicly traded company called Accenture.
The breakup was embarrassing for both Accenture and Andersen, which pride themselves on helping clients develop successful corporate strategies. But Andersen was more seriously hurt, because Accenture was bigger and faster-growing than Andersen, said Dean E. McMann, chief executive of Ransford, a consulting firm that advises the Big Five.
Without Andersen Consulting, Mr. McMann said, Andersen became a middle-tier audit firm, smaller than the rest of the Big Five. Its efforts to develop an in-house consulting business to replace Accenture have also lagged behind.
"We thought that from that moment on they would be shopping to find a partner," Mr. McMann said. "We believe that Andersen's not going to survive alone."
Andersen's efforts to market itself have not been as successful as Accenture's, said Francis Karamouzis, who follows the company for the Gartner Group (news/quote). "It's been a struggle for them to establish their own independent brand," she said.
Interviews with current and potential Andersen clients, she said, indicate that they do confuse the firm with Accenture, and that Andersen is not the first name that companies think of when looking for an auditor.
Accenture spent tens of millions of dollars advertising its new name when it dropped Andersen Consulting, she said. Since Arthur Andersen became Andersen, she said, "you don't really see the same emphasis."
The firm's strength is its tax group, which would complement either KPMG's accounting business or that of Ernst & Young, said Mr. McMann of Ransford.
In addition, he said, both KPMG and Ernst & Young have spun off their consulting divisions, so they would be a good fit for Andersen, which has only a small consulting arm, he said.
But as it struggles to fashion a future, Andersen is still trying to
get its story straight. On Friday, Andersen said Mr. Berardino gave inaccurate
testimony to Congress when he spoke in December, although it characterized
his error as minor. If only the firm could say the same about the rest
of the Enron mess.