Barely a year ago, Arthur Andersen LLP's new CEO, Joseph F. Berardino, told employees and clients in an inaugural message on the firm's Web site that he was looking forward to "terrific times" and more "robust achievement" at the 88-year-old firm. Today, he is in the biggest fight of his professional life in the wake of the Chapter 11 bankruptcy filing of Andersen's once high-flying audit and consulting client Enron Corp. (ENE
) on Dec. 2. And as the Houston energy company crashes and burns, Berardino may find himself struggling to keep the smallest of accounting's Big Five intact and independent after years of resisting the industry's merger mania.
The biggest corporate collapse in American history has exposed the Chicago-based accounting firm to the possibility of crippling financial damages as well as a severely dented reputation. Enron has left a spectacular trail of nearly $80 billion in investor losses that have spurred a flurry of announcements of class actions against Andersen. The firm is also facing blistering attacks from reform-minded members of Congress, such as Michigan's John D. Dingell, ranking Democrat on the House Energy & Commerce Committee, who signaled in a Dec. 5 letter to Securities & Exchange Commission Chairman Harvey L. Pitt that he will haul Andersen over the coals. Dingell suggests that the roughly $50 million in fees from Enron in 2000--the exact amount is in dispute--may have figured prominently in the firm's auditing considerations. "Could that million dollars a week have played a role in their clouded judgment here?" asks Dingell. Adds R. Ramy Elitzur, an associate professor of accounting at the University of Toronto's Rotman School of Management: "There's no question that it's going to affect their reputation badly."
SPREADING THE BLAME. Berardino knows how high the stakes are. In congressional testimony on Dec. 12, he faulted both his firm and Enron--and the way the accounting profession, Wall Street, and companies police themselves. "Andersen will not hide from its responsibilities," he vowed, admitting that the firm's professional judgment "turned out to be wrong" in one major Enron auditing decision. But he also cited "possible illegal acts" within Enron, particularly a failure by its execs to share crucial financial data about an important off-balance-sheet deal. Enron denied any wrongdoing. Earlier, in an interview with BusinessWeek, Berardino conceded that "our reputation is on the line."
Andersen's reputation has taken hits before. Prior to Berardino's appointment, the firm slogged through a string of high-profile scandals--notably Sunbeam Corp. (SOCNQ
) and Waste Management Inc. (WMI
) In May, Berardino O.K.'d a $110 million payment to settle Sunbeam shareholder litigation without accepting or denying blame. Several years before, Andersen had signed off on the company's financial statements even after one of its partners uncovered transactions that the SEC says were fraudulent. In June, Andersen agreed to accept, again without admitting or denying responsibility, an SEC antifraud injunction, along with a censure and a $7 million fine in the Waste Management case. In late 1998, it agreed to pay part of a $220 million class action settlement without admitting any fault. The SEC said Andersen hadn't raised objections to company financials that overstated Waste Management's income by more than $1 billion. "If this were the first big hassle Andersen had with regulators, I think most people would shrug it off," says Alan R. Bromberg, professor of corporate and securities law at Southern Methodist University. "But this is the third time, so it'll be hard for people to ignore."
Morale at the firm--battered by the Enron case and the painful splitting off of Andersen's Accenture Ltd. consulting arm last year after a protracted legal fight--is in the tank, says Bowman's Accounting Report editor Arthur W. Bowman. Even Berardino concedes that employees "hate reading the paper every day" and says he's encouraging them to spend time with clients instead. And the air isn't likely to clear anytime soon. For years, regulators, investors, and lawyers will be raking through the wreckage to see what Enron and its auditors should have done. Andersen is putting its Houston office under the microscope by reopening and widening a routine peer review by auditors Deloitte & Touche. Regulators at the SEC and other agencies are scrutinizing Andersen's work as part of a probe of Enron. The SEC's Pitt, in an interview with BusinessWeek, promises "a complete and thorough and expeditious investigation."
Berardino, a 51-year-old Andersen lifer, may find the firm's competence in auditing complex financial companies questioned. While Andersen was its auditor, Enron's managers shoveled debt into partnerships with Enron's own execs to get it off the balance sheet--a dubious though legal ploy. In one case, says Berardino, hoarse from defending the firm on Capitol Hill, Andersen's auditors made an "error in judgment" and should have consolidated the partnership in Enron's overall results. Regarding another, larger partnership, he says Enron officials did not tell their auditor about "a separate agreement" they had with an outside investor, so the auditor mistakenly let Enron keep the partnership's results separate.
Enron says a special board committee is investigating why management and the board did not learn about this arrangement until October. Now that Enron has consolidated such set-ups into its financial statements, it had to restate its financial reports from 1997 onward, cutting earnings by nearly $600 million. Damningly, the company says more than four years' worth of audits and statements approved by Andersen "should not be relied upon."
The impact on Andersen's business could be severe. Even before the Enron debacle, managers at Wilshire Financial Services Group Inc. in Portland, Ore., owner of the $800 million First Bank of Beverly Hills, switched to Deloitte & Touche late last year because they wanted a firm they felt was more adept at accounting for financial institutions. Deloitte "had a competency in our industry that we didn't believe Arthur Andersen delivered," says CFO Bruce A. Weinstein.
The Enron meltdown gives present and prospective clients an excuse to flee. They may want to avoid the heightened attention an Andersen audit might get in shareholder litigation or fear their financial reports could draw more scrutiny from regulators if they're handled by Andersen. "Certainly, it'll be tougher to get new business," says Douglas R. Carmichael, an accounting professor at Baruch College. "I don't think any firm could come away from a disaster of this magnitude unscathed." Berardino says the firm has not lost any clients since Enron came to light. "We've met adversity before, and every time we've learned from it and gotten stronger and better," he says.
This time, however, Andersen's fate may turn on just how far-reaching the inquiries--and the blame--go. The firm, known for its aggressiveness in winning and keeping business, has largely escaped the consolidations that created other accounting-consulting behemoths. It survived the contentious splitting off of most of its consulting operations into Accenture, a move that toppled Andersen from No. 1 in accounting to No. 5. But now, it has become the poster child for accounting blunders--a far cry from "the stand-up firm" that Berardino says Andersen really is.
By Joseph Weber, with Darnell Little, in Chicago, and David Henry and Louis Lavelle in New York
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