Risk & Compliance

Andersen Losing Customers–Will Delta Fly the Coop as Well?

Berardino says Enron scandal costing Andersen business. Also: Just how reliable are the Big Five's peer-to-peer reviews?
Stephen TaubJanuary 29, 2002

Andersen’s association with Enron Corp. has already cost the accounting giant some business, chief executive officer Joseph Berardino said Monday.

“Yes. We’ve lost business,” Berardino reportedly said at a press conference held at Andersen’s Chicago headquarters, when asked by reporters whether clients have bolted. But he added: “We will survive. People know us. People respect us. Will we lose business? Absolutely.”

In fact, The Wall Street Journal reported on Tuesday that Delta Air Lines is looking to dump Andersen in favor of another auditor.

Berardino last Thursday made a presentation to Delta’s board, added the paper, making the case that Andersen is still equipped to handle the airline’s auditing needs. Berardino was said to be accompanied by Steve Rogers, Andersen’s managing partner in Atlanta, who oversees the Delta account.

The Journal also said Andersen will be considered among the candidates for the Delta job. “Arthur Andersen is continuing to perform its duties for Delta in a professional way,” Thomas J. Slocum, Delta’s senior vice president of corporate communications, told the Journal. “The matter of Delta’s independent auditor for 2002 is under review by the board. As is our normal practice, the independent auditor will be named in the proxy in early March.”

Otherwise, Berardino took the offensive at his Monday press conference. In prepared remarks published on the company’s Web site, the embattled executive reiterated his stance that Enron’s saga is the story of a failed business model — not shoddy accounting. “This company tried to develop new markets that got investors very excited,” Berardino asserted. “It made big investments that did not pan out. And when it became apparent that they wouldn’t Enron’s share price fell. Few people realize that two thirds of Enron’s market value was gone before its accounting practices became an issue for the SEC. Accounting issues did not cause Enron’s stock price to fall — its failed business model did.”

He also distanced himself from reports of shredding at his firm, calling it an isolated event involving a number of rogue employees. He claimed those workers took it upon themselves to destroy the Enron documents.

In another development, a group of former Enron employees filed suit against the bankrupt company, seeking to regain lost savings. Calling itself the Severed Enron Employees Coalition, or SEEC, a group of 400 current and former employees is seeking to recover the “staggering losses” suffered by employees who contributed to Enron’s 401(k) plan.

The suit names former Enron chief executives Kenneth Lay and Jeffrey Skilling, former chief financial officer Andrew Fastow, Enron accountant Arthur Andersen LLP, and Northern Trust Co., trustee for the retirement account.

Rod Jordan, co-chairman of the Severed Enron Employees Coalition, said in a statement: “It’s well known now that Enron executives ‘hid the ball.’ They structured financial dealings in such a complicated and impenetrable manner that even the most veteran Enron employees had no way of discerning the company’s true financial status.”

Pitt Halted Accounting Review Study, Says Report

Last week, CFO.com reported that SEC chairman Harvey Pitt wants to ratchet up the oversight of accounting firms by, among other things, creating an independent oversight body.

But a story in today’s Wall Street Journal claims that Pitt actually put the kibosh on a scathing assessment of the accounting industry’s practice of self-regulation. The story claims Pitt did this after he first took over as SEC chairman.

The paper claims that exhibits to the draft report showed that in performing “peer reviews,” the Big Five accounting firms frequently found major flaws in the way audits were conducted. Yet the story says the firms gave each other high marks when the reports were made public.

“The SEC draft report includes a March 13, 2000, letter from Lynn Turner, then the SEC’s chief accountant, to the head of the Public Oversight Board, which oversees the peer-review system, that picked apart a 1999 review of KPMG LLP,” writes the Journal. This review, performed by PricewaterhouseCoopers LLP, found many violations of auditing standards by KPMG, adds the paper, including five audits that the SEC said should have been declared invalid because of conflicts of interest with the companies being audited, the paper says.

“The findings of the KPMG peer review were the worst results from a large firm peer review it had seen in 15 years,” the letter reportedly said.

Micrel Restates Four Years of Earnings

Integrated circuit maker Micrel Inc. said it will restate earnings downward by $12.9 million for the years 1998 to 2000 and the first three quarters of 2001. The restatements reflect non-cash expenses related to the company’ employee stock option program.

Micrel management said that, in consultation with its auditors, Deloitte & Touche, it determined that its past method of setting the exercise price on certain employee stock options results in non-cash stock compensation. Micrel added that it will restate results for the four years “to record the non-cash stock compensation expense and related tax effects.”

“Micrel sought outside professional advice prior to implementation of the option grant method that resulted in the unintentional consequence of stock compensation charges,” company management said in a statement. As a result, its total net income for the entire period from 1998 through the third quarter of 2001 was $121.4 million, compared with the previously reported $134.3 million.

28 Days Later, The Year’s First IPO

After nearly four weeks — and one false alarm — the first IPO of 2002 came to market yesterday.

Synaptics Inc., the maker of those touchpad devices on notebook computers, raised $55 million in its initial public offering, according to lead underwriter Bear, Stearns & Co. The company sold 5 million shares at $11 each — below the expected range of $14 to $16.

Still, an IPO’s an IPO. As a result of the offering, Synaptics has a market cap of about $250 million. In fiscal 2001, the company earned $810,000 on revenues of $73.7 million.

Short Take

U.S. Bank National Association, a unit of U.S. Bancorp, issued $1 billion in 12-year notes, led by Lehman Brothers and U.S. Bancorp Piper Jaffray. The offering was priced to yield 6.321 percent, or 125 basis points over comparable Treasurys, and was rated A1 by Moody’s and A by S&P.

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