s time
running out for Arthur Andersen & Company?
Three months ago, financial experts asked the same question about
the Enron Corporation (news/quote),
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.
