The Securities and Exchange Commission on Tuesday settled charges against Arthur Andersen LLP and four of its current or former partners, resulting in the largest-ever civil penalty–$7 million–in an SEC enforcement action against a Big Five accounting firm.
The settlement stems from Andersen’s audits of Waste Management, Inc. from 1992 to 1996.
Those financial statements, on which Andersen issued unqualified or “clean” opinions, overstated Waste Management’s pre-tax income by more than $1 billion, according to the Commission. According to the complaint, “Andersen knowingly or recklessly issued materially false and misleading audit reports on Waste Management’s annual financial statements.”
Waste Management restated five years worth of financial results in 1998, reducing reported pretax earnings by $1.43 billion, the largest- ever restatement in SEC history.
Andersen was accused of having too close of a relationship with its client, viewing it as a “crown jewel” to be protected at all costs. Andersen’s received millions of dollars in fees from Waste Management.
Without admitting or denying the allegations or findings, Andersen further agreed to be censured under the SEC’s rules of practice.
Three Andersen partners also settled both the civil injunctive action, which also charges them with violations of antifraud provisions of the federal securities laws, and related administrative proceedings. Without admitting or denying the allegations, each agreed to the entry of an antifraud injunction to the payment of a civil penalty and to a bar from appearing or practicing before the Commission as an accountant. However, they have the right to request reinstatement after five years and two with the right to request reinstatement after three years.
The fourth Andersen partner, a regional practice director, settled administrative proceedings finding that he had engaged in improper professional conduct. Without admitting or denying the findings, he also agreed to a bar from appearing or practicing before the Commission as an accountant, with the right to request reinstatement after one year.
The four partners are: Robert E. Allgyer, now retired and then the partner responsible for the Waste Management engagement; Edward G. Maier, currently a partner and then the risk management partner for Andersen’s Chicago office and the concurring partner on the Waste Management engagement; Walter Cercavschi, currently a partner and then a partner on the Waste Management engagement; and Robert G. Kutsenda, currently a partner and then the Central Region Audit Practice Director responsible for Andersen’s Chicago, Kansas City, Indianapolis, and Omaha offices.
According to Richard H. Walker, the SEC’s Director of Enforcement, “Arthur Andersen and its partners failed to stand up to company management and thereby betrayed their ultimate allegiance to Waste Management’s shareholders and the investing public. Given the positions held by these partners and the duration and gravity of the misconduct, the firm itself must be held responsible for the false and misleading audit reports issued in its name.”
Walker added: “Accountants play a critical role in providing access to our capital markets. We will not shy away from pursuing accountants and accounting firms when they fail to live up to their responsibilities to ensure the integrity of financial reporting process.”
Read the SEC’s detailed settlement terms and complaint.
