Even before it became embroiled in the unfolding Enron debacle, Chicago-based accounting firm Andersen had been battered by allegations of bogus audits, conflicts of interest and document destruction in a handful of high-profile cases.
While the cases reflect a tiny portion of Andersen’s audits, they represent some of the most egregious allegations of accounting fraud in history, according to court records and interviews.
In one instance, Andersen approved audits for a company that overstated its earnings by $1.4billion over five years. In another, Andersen signed off on the books for a church foundation that allegedly defrauded investors out of $590million.
The cases share the same underlying theme that is alleged in the Enron collapse: that Andersen, formerly known as Arthur Andersen, approved audits that misled investors about the financial condition of their clients.
Andersen’s previous problems also highlight the dramatic shifts in the accounting industry that have prompted calls in Congress and from federal regulators for stricter standards.
Once confined to the buttoned-down world of auditing, accounting firms now offer more lucrative financial services, such as consulting.
The additional work raises questions about whether the firms can objectively scrutinize the books of corporations that are also paying them millions in consulting fees.
The Big Five accounting firms also have come under fire for pushing the envelope with aggressive accounting practices in an effort to help companies meet earnings projections and keep Wall Street happy. The aggressive techniques have been allowed to flourish because accounting guidelines are outdated and oversight is poor, critics say.
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In many of the previous instances where Andersen was accused of wrongdoing, investors were left with little.
Darrel Srader, 54, an Arizona businessman, invested about $4 million from the sale of two Ford dealerships in a church foundation that promised some of the investment profits would go to charities. State officials now say the foundation was a sophisticated Ponzi scheme, audited by Andersen.
Seen as `gold standard’
“Andersen, as far as I thought, was the gold standard,” said Srader, who built up the dealerships for 20 years before selling them. “Now I have more respect for armed robbers. At least when the armed robber pulls a gun, you know where you stand.”
So far, Congress is tightly focused on Andersen’s role in the Enron implosion; last week, congressional committees spent hours grilling Andersen executives. But given Andersen’s history of similar allegations, some state officials are urging a more comprehensive review.
“We certainly communicated our concerns about the pattern of evidence emerging showing violations of ethical and legal standards over the years,” Richard Blumenthal, the Connecticut attorney general, said last week of his discussions with congressional leaders.
Arizona Atty. Gen. Janet Napolitano has also voiced her concerns about Andersen to Congress.
“I am very troubled by the similarities between the allegations against Andersen by Enron’s investors and the facts our office has discovered in our various investigations of Andersen,” she recently wrote.
David Tabolt, a spokesman for Andersen, said the firm is facing problems that are plaguing other accounting firms as the industry changes and the economy gets more complex.
“There’s a lot of litigation,” he said. “We’ve done nothing wrong. … Everyone is struggling to get the right accounting.”
Tabolt said they’ve settled some lawsuits brought by shareholders because they’ve decided it was too expensive to fight.
He noted that the firm, which audits 1,400 publicly traded companies a year, has faced relatively few allegations of wrongdoing. And when allegations have surfaced, he said, the problems are often due to fraud on the part of Andersen clients or disagreements over how to apply accounting principles.
Andersen’s role in the Enron case, which is the largest bankruptcy in U.S. history, remains murky. The accounting firm has come under fire for allegedly approving audits that misled investors, for shredding key documents and for maintaining a relationship in which former Andersen employees occupied top posts at Enron. The Securities and Exchange Commission, the Justice Department and 11 congressional committees are investigating the Enron matter.
Andersen has suggested its problems at Enron were limited to employees at its Houston office.
Lawsuits and SEC filings against Andersen suggest that the firm’s problems didn’t start with Enron. In at least a half dozen cases in recent years, Andersen has been accused of signing off on audits that were later deemed to be misleading.
It is common for accounting disputes to be settled through private arbitration, in which case the allegations are not made public.
Past settlements
In one high-profile lawsuit, Andersen paid $90 million in 1999 to settle claims from investors stemming from the collapse of Colonial Realty Co., a Connecticut development firm. The company sold shares in a building complex using future revenue projections that Colonial officials–and Andersen–knew or should have known were inaccurate, court records state.
Andersen officials allegedly destroyed Colonial documents, including company budget figures, the records show.
Last year, Andersen paid $110 million to settle shareholder lawsuits in connection with Florida-based Sunbeam Corp., an appliance-maker. The lawsuits stem from a purported “turnaround” of the company that turned out to be little more than accounting gimmicks that pumped up Sunbeam’s earnings, the SEC stated. Earnings statements approved by Andersen for 1997 alone were eventually restated by $70 million, records show.
Andersen denied any wrongdoing and said the allegations stem from “professional disagreements about the application of sophisticated accounting standards.”
Waste Management mess
Then, in June 2001, Andersen paid the biggest civil penalty in SEC history for an accounting firm, $7 million, for approving audits for Waste Management, a case that shares many similarities with the unfolding Enron saga.
As with Enron, Andersen had a close relationship with Waste Management, a national waste hauling firm that moved its headquarters from Oak Brook to Houston after a merger in 1998.
Andersen audited the company’s books even before it went public in 1971. From 1971 to 1997, every one of Waste Management’s chief accounting officers and chief financial officers previously worked at Andersen, SEC records show. Many former Andersen employees also assumed key financial posts at Enron, a potential conflict because Andersen auditors may hesitate to scrutinize former colleagues.
Andersen partner Robert Allgyer was assigned to solicit business from Waste Management in 1991 because his “personal style” meshed with company executives, the SEC records state. In the next six years, Allgyer managed to win Andersen $7.5 million in auditing fees and $11.8 million in other services; he also won $6 million in business for an Andersen affiliate.
The mingling of accounting and consulting work, and the potential conflicts it creates, has angered some regulators and politicians who have called on accounting firms to become more independent of the corporations they audit.
At the same time Andersen was pushing for new business, Waste Management’s finances were deteriorating, in part because of competition and excess landfill capacity.
But instead of lowering investors’ expectations, Waste Management executives began overstating earnings and underreporting expenses, SEC records show.
Andersen recognized Waste Management’s “aggressive” accounting as early as 1988, according to SEC documents. By 1993, Andersen had labeled Waste Management a “high-risk client,” the SEC stated.
When Andersen reviewed Waste Management’s finances from 1993, auditors found that the firm’s profits had been overstated by more than $100 million, SEC records show. Top Andersen officials approved the audit nonetheless with the understanding that Waste Management would adopt “action steps” to rectify the accounting problems.
But Waste Management didn’t change its accounting practices, and Andersen continued to sign off on the company’s annual audits for the next three years.
A new team of executives took over Waste Management in 1997 and discovered the accounting irregularities.
Ronald LeMay, the incoming chief executive officer, left after just three months, later calling the company’s accounting “spooky,” records show.
Costly restatements
In 1998, Waste Management released a restatement of earnings from 1992 through 1996 that showed the firm had overstated profits by $1.4 billion. It was the largest restatement of earnings in history.
“Andersen failed to stand up to management,” SEC investigators charged. “Instead, Andersen allowed the company to establish–and then continue for many years–a series of improper accounting practices.”
In addition to the SEC penalty, Waste Management and Andersen paid $220 million to settle class-action lawsuits brought by shareholders.
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Andersen has faced similar allegations in Arizona, where an ongoing fraud case has wiped out the life savings of many small-time investors.
The case involves the Baptist Foundation of Arizona, a non-profit organization accused of defrauding $590 million from 13,000 investors, many of them retirees.
The foundation boasted that its books were reviewed by Andersen and promised that some of the investment profits would go to charities and Baptist causes.
“I thought, `My goodness. Here’s the best of two worlds,'” recalled Forrest Bomar, 73, a retiree from Palestine, Texas, who invested $217,000. “The interest rate was competitive, and our investments were going to be used for furthering the work of the Lord.”
Foundation built on `shells’
But the foundation collapsed three years ago after state authorities alleged it was an elaborate scheme in which money from new investors was used to pay previous investors.
To hide losses, authorities said, foundation officials used numerous affiliates and shell companies. Three key players associated with the foundation have pleaded guilty to felony charges, and five others have been indicted.
Andersen, meanwhile, has been hit by a flurry of lawsuits and administrative actions in the case.
A lawsuit by the attorney general seeks hundreds of millions of dollars in restitution from Andersen, alleging it misrepresented the foundation’s true financial health and repeatedly ignored warnings of problems. Andersen, the suit states, “engaged in a full cover-up of the fraud.”
State authorities want to revoke the licenses of three current or former Andersen accountants, and investors have sued the firm and picketed its offices.
The accounting firm has denied any wrongdoing, saying it was misled by the foundation and had followed professional guidelines.
Bomar said he and his wife, Lee, invested in the Baptist foundation in 1994 after receiving a solicitation in the mail.
The couple never asked the hard questions, like who was auditing the group, he said. “We took a blind leap of faith.”
When allegations surfaced in 1998 that the foundation was misleading investors, the Arizona Corporation Commission halted security sales. Within months, the foundation filed for bankruptcy protection. It now plans to sell off its assets and pay investors about 30 to 40 cents on the dollar, state officials said.
Fellow Baptist foundation investors Darrel and Patricia Srader said they hope Andersen settles the lawsuits and reimburses investors. “If they have any money left by then,” Patricia Srader said.
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Audits mired in controversy
Accounting firm Andersen, formerly known as Arthur Andersen, has settled several cases recently to end investigations into its auditing practices. In each of these cases, Andersen said the settlements were not an admission of guilt, but rather a way to avoid costly legal battles.
PARTIAL LIST OF RECENT SETTLEMENTS
1988: Andersen paid $5.7 million to settle claims against it resulting from the collapse of Home State Savings Bank of Ohio. Officials had sought damages of $275 million against Andersen for its role as Home State’s accountant.
1992: Andersen agreed to pay up to $30 million to settle claims it misrepresented the financial health of American Continental Corp. and its subsidiaries, which included Charles Keating’s failed savings and loan.
1999: Andersen paid $90 million to settle 31 federal lawsuits by investors stemming from the collapse of Colonial Realty Co. of Connecticut. Earlier in the decade, Andersen paid $14 million to settle two other Colonial cases.
1999: Andersen and Waste Management Inc. paid $220 million to settle a series of class-action lawsuits over accounting irregularities. Last year, Andersen reached a $7 million settlement with the Securities and Exchange Commission stemming from its Waste Management audits.
2001: Andersen agreed to pay $110 million to settle class-action suits brought by Sunbeam Corp. shareholders. Andersen was Sunbeam’s auditor when the company allegedly filed false financial statements in the mid-1990s.
2002: State investigations of Andersen are under way in Arizona and Connecticut while regulators in several other states are reviewing Anderson’s role in the Enron collapse.
Source: News reports