Risk & Compliance

Report: AA Offering Enron Plaintiffs $750 Million

Accounting firm reportedly wants to settle before proxy season begins in earnest. Why is that? Also: FASB set to deliver new SPE rules--but don't h...
Stephen TaubFebruary 28, 2002

Management at Arthur Andersen is determined to put the Enron debacle behind it and move on. That is, if it can.

The embattled auditor is said to have offered $750 million to cover civil lawsuits and is trying to convince the Justice Department not to indict the firm, according to Thursday’s Washington Post.

Andersen’s goal is to hammer out a settlement within the next two weeks. What’s the hurry? According to a source cited by the paper, Andersen wants to settle before many companies send out their proxies and annual meeting ballots asking shareholders to ratify their choice of independent auditors.

Apparently, Andersen management is looking for a sweeping settlement. The Post, citing lawyers for plaintiffs, says the Big Five firm wants a single settlement to cover suits from the Securities and Exchange Commission, Enron shareholders, creditors, and employees who held Enron stock in their 401(k) retirement plans.

The SEC is trying to arrange a meeting with many of the private parties to discuss an Andersen settlement, but so far such a get-together hasn’t taken place, according to several published reports.

The feeling is that if Andersen can successfully complete a settlement, it would be in a better position to persuade the Justice Department not to prosecute the auditor. The reason: an indictment could destroy the firm and prevent shareholders and employees from receiving any money.

Andersen, of course, was Enron’s auditor, and approved the bankrupt energy company’s financial reports. It also advised Enron on the controversial partnerships that ultimately brought down the giant energy trader. Andersen and its employees are also accused of shredding key Enron-related documents shortly after questions began to surface about Enron’s financial stability.

Under the proposed $750 million settlement offer, $250 million would immediately be paid by an insurance company jointly owned by Andersen and its global affiliates, according to the Post. The remaining $500 million would be paid out in $100 million increments over the next five years.

FASB Promises New Rules by August

The Financial Accounting Standards Board is promising to lock the barnyard door, now that the horses are out of the barn and in the next county.

The accounting rules makers said that by August they will issue new rules designed to tighten oversight of special purpose entities (SPEs), the controversial financial vehicles that have been blamed in large part for Enron’s collapse.

“The effective date for calendar year companies would be January 1, 2003, assuming we get this out on July 31,” said FASB chairman Edmund Jenkins in a conference call. “I think we’ve resolved the basic issues that will be included in this interpretation, subject to editing and comments that were made today…”

Wall Street and regulators are concerned that these SPEs are used to remove debt from a company’s balance sheet, thus masking that corporation’s true financial position. “The scope of the interpretation would include pension plans, investment companies, and broker dealers,” said Ray Simpson, a FASB project manager, according to published accounts. “Those entities should account for SPEs the same as everybody else does. However, other requirements…would not change.”

FASB promises to work out further details during future meetings.

SEC’s New Accountant

Carol A. Stacey was named chief accountant of the Securities and Exchange Commission’s Division of Corporation Finance.

Stacey will be the principal adviser to Alan Beller, director of the division, on accounting and auditing matters, and will work closely with Robert Herdman, the commission’s chief accountant, on revising and modernizing the SEC’s accounting and financial disclosure system.

“She is exceptionally qualified to take the lead in modernizing our disclosure system,” says Beller. Herdman adds, “I am pleased that I will have the opportunity to work closely with Carol in implementing Chairman Pitt’s regulatory reform initiatives and modernization of the financial disclosure requirements. We will work together to ensure consistency of the staff’s voice on accounting matters.”

Stacey joined the Division of Corporation Finance in 1996. She received a master’s degree in accounting from Virginia Polytechnic and State University and a B.S. in accounting from Bentley College in Waltham, Massachusetts. She has been a certified public accountant since 1987.

Volcker Names Andersen Dream Team

So you thought former Fed chairman Paul Volcker was brought in to Arthur Andersen strictly for show?

On Wednesday Volcker named several finance heavyweights to join him on Andersen’s independent oversight board. That board was set up to scrutinize the auditor’s procedures.

The overseers include Charles Bowsher, a former Andersen partner and Comptroller General of the United States, and P. Roy Vagelos, retired chairman and chief executive of drug company Merck & Co.

Bowsher leads the Public Oversight Board, which keeps tabs on the accounting profession’s self-regulatory process. Last month, however, the Public Oversight Board dropped out of sight—the group disbanded after being criticized for not doing a good job.

William Mutterperl, former top executive at FleetBoston Financial Corp., will also serve as executive director of Volcker’s Andersen board. The oversight board will receive assistance from an advisory panel headed by Russell Palmer, former dean of the Wharton School at the University of Pennsylvania.

The advisory panel’s seven other members include John Bogle, founder and retired chairman of Vanguard Group, and John Bohn, retired chief executive of Moody’s Investors Service and the U.S. Export-Import Bank.

“We’ve got a real challenge here,” Volcker reportedly told a press gathering at his midtown Manhattan law firm. “The most important single thing, I think, is that there are strong control procedures so that questions that accountants call technical issues aren’t so technical.”

He was referring to those SPEs that FASB promises to clamp down on—in August. “I think we would expect these technical issues to be resolved not just by looking at the letter of regulations and standards and how you get around it, but [whether] the company being audited respects the intent of the standards,” added Volcker.

Among the issues Volcker’s board will look at: whether auditors should join companies whose books they analyze. “Something we certainly want to look at is, should there be limits on the auditing partner moving into the very company that he audits,” said Volcker.

Volcker added: “There’s a lot that we want to look at. There are a lot of procedures that we want to review to make sure they’re adequate, there’s no question about that.”

Short Takes

  • Roy Olofson, a former vice president of finance at Global Crossing Ltd. who claims the telecom firm fired him for questioning its accounting practices, sued several officers and directors of the now-bankrupt company for defamation and interference with his contract. The suit names chairman Gary Winnick and executive vice president of finance Joseph Perrone among the defendants.

Olofson reportedly claims he was fired and defamed when he confronted Winnick, Perrone, and others over misleading transactions and accounting methods.

The suit seeks compensatory damages against all defendants, and special damages, including punitive damages, against Winnick for defamation, according to published accounts.

  • Reliant Resources Inc., which in early February said it would need to restate results for a number of quarters after discovering accounting errors, said on Wednesday it placed two executives on administrative leave. “We have taken some personnel actions in connection with our internal review,” Sandy Fruhman, spokeswoman for the Houston-based electricity-generation and energy-trading company, told Reuters. However, the company did not name names.
  • Network equipment maker Enterasys Networks Inc., which also discovered accounting irregularities in early February, canned three senior employees in its Asia-Pacific operations. The company said the employees had previously been placed on administrative leave. Enterasys said its legal counsel and the audit group of Deloitte & Touche are conducting a review of the Asia-Pacific operations.
  • The New York Times Co. said it experienced a security breach of its internal corporate Web site, but the security flaw has been fixed.
  • Citigroup Inc. issued $1.5 billion in five-year global senior notes, led by—no surprise—Salomon Smith Barney. The notes were priced to yield 5.053 percent, 80 basis points above comparable Treasuries, and were rated Aa1 by Moody’s and Aa-minus by S&P.
  • J.P. Morgan Chase & Co. also issued $1.5 billion in five-year global notes in a self-led transaction. The company had originally planned to raise $1 billion. The paper was priced to yield 5.378 percent, 123 basis points above comparable Treasuries, and was rated Aa3/AA-minus.

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