- The Washington Times - Tuesday, January 15, 2002

Arthur Andersen is in the middle of a nightmare.
The Big Five accounting firm is expected to undergo intense scrutiny by investors and prospective clients as it faces a possible criminal investigation into its audits of Enron Corp., which filed the largest bankruptcy ever. Enron's collapse is under investigation by the Securities and Exchange Commission, Justice Department, Labor Department and at least eight congressional committees.
"Long-term, the firm is at risk," said Arthur Bowman, editor of the Bowman's Accounting Report in Atlanta. "To me, it's much bigger than [a black eye]. This may be the biggest scandal of its kind we've ever had to deal with."
Scrutiny on Andersen centers on whether or not the firm's employees willingly destroyed crucial items relating to its audit of Enron, the Houston energy company that sank into bankruptcy after having to restate its earnings for 41/2 years.
"Every firm has its own document-management plan, but the question is whether they deviated from that plan," Mr. Bowman said.
If Andersen employees are found to have acted criminally, insurance policies might not cover the cost of civil trials and settlements, said Lynn Turner, a former head accountant for the SEC and director of the Center for Quality Financial Reporting at Colorado State University. "The worst-case scenario would be that charges would trigger clauses in the insurance policies and leave them uncovered," he said.
Without that coverage, Andersen might be forced to file for bankruptcy, he said.
A big blow to Andersen also could come if members of the firm's Fortune 500 client list choose to switch auditors. Merck, ChevronTexaco and Motorola are among Andersen's clients. But so far, no heavyweight names have announced plans to make a switch, and analysts say they don't expect many defections.
"Historically, the giant companies do not like to change auditors, because it's too expensive a process," Mr. Bowman said. "The potential for losing clients is not that great."
Also, the Fortune 500 companies are so big that they face limited options when looking to hire auditors. Five accounting firms, including Andersen, have the capabilities to audit Fortune 500 companies.
Still, analysts said, Andersen should be working with clients to smooth over any concerns.
"What I suspect is that there's going to be some investor questioning of a company that's appointing or reappointing Andersen," said Peter Knutson, a former professor of accounting at the University of Pennsylvania's Wharton School of Business. "This is just going to ruin [Andersens] reputation."
The Enron problems are Andersen's latest accounting woes.
In May, the Securities and Exchange Commission levied federal charges against an Andersen partner, claiming the partner participated in a scheme with the CEO of Sunbeam Corp. to inflate profits.
Former Sunbeam Corp. Chief Executive Officer Al Dunlap has agreed to pay $15 million to settle a shareholder lawsuit on the issue, attorneys said yesterday. Mr. Dunlap admitted no wrongdoing in the settlement, said his attorney, Donald Zakarin.
In June, Andersen paid $7 million to the SEC to settle charges that it filed incorrect audits of Houston-based Waste Management Corp. The SEC claimed Waste Management overstated earnings by $1.4 billion between 1992 and 1996.
Analysts say Andersen's future hangs on two questions: Did the firm's destruction of Enron-related documents go against normal protocol, and did any transgressions occur outside the Houston office, or, more important, among Andersen's senior officers?
"If this [turns out] to be of the order of a conspiracy firm-wide, that will kill the firm," Mr. Knutson said. But he believes that is unlikely.
"The real question is who saw the small picture. Certainly not [Anderson CEO] Joe Berardino."
Mr. Bowman agreed. "I cannot imagine this growing to become a firm-wide scandal. It appears, superficially, that this problem is centered around Houston."

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