Risk & Compliance

Don’t Shred on Me: Justice Department to Charge Andersen

Report says government will charge auditor with obstruction of justice for shredding Enron-related documents. Plus: Coke takes $1 billion impairmen...
Stephen TaubMarch 8, 2002

The Justice Department may indict Andersen as early as today for its role in shredding key documents related to the Enron Corp. investigation, according to several published reports.

U.S. prosecutors are expected to bring obstruction of justice charges against Andersen to a grand jury in Texas, according to Bloomberg.

As you recall, management at Andersen acknowledged in January that documents related to its audits of Enron were destroyed in the energy trader’s Houston office after the SEC began investigating Enron. Soon after, Enron fired Andersen as the company’s auditor.

David Duncan, who headed up Andersen’s audits of Enron, has told congressional investigators that he directed the shredding on orders from Andersen executives working out of the accountancy’s Chicago headquarters. Andersen management, however, insists it had nothing to do with the shredding, and that the document destruction actually ended on November 9 after the accounting firm received a subpoena from the SEC.

And how does Enron management feel about the Andersen indictment? Who knows? “We don’t comment on rumors and speculation,” Enron spokesman Patrick Dorton told Bloomberg.

Andersen has been in a fierce struggle to survive since its role in Enron’s collapse became known. In recent weeks about 30 clients have fired Andersen as their auditor, including 3 of its top 10 clients, according to Bowman’s Accounting Report. And yesterday Delta Air Lines ended a relationship with Andersen that dates back to 1949.

President Bush Gets Tough on Execs

As we anticipated on Thursday, President Bush later in the day called for a series of reforms to hold top executives much more accountable for their corporate actions.

“Reform should begin with accountability, and reform should start at the top,” he said, speaking at the Malcolm Baldrige National Quality Award Ceremony in Washington, D.C. “To properly inform shareholders and the investing public, we must adopt better standards of disclosure and accounting practices for all of Corporate America.”

For example, Bush said CEOs should relinquish their bonuses if a financial statement turns out to be “grossly inaccurate, or the result of serious misconduct.”

He also said corporate officers should be required to reveal trades in their company’s stock within two days. “The SEC should be able to punish corporate leaders who clearly abuse their powers, by banning them from ever serving again as officers or directors of publicly-held corporations,” added Bush.

The President also called for reforms within the accounting profession. He stressed the need for an independent regulatory board to hold accounting firms to the highest ethical standards and called on the Securities and Exchange Commission to exercise more oversight of accounting standards. “The SEC should also do more to guard against conflicts of interest, requiring, for example, that an external auditor not be permitted to provide internal audits to the same client,” added Bush. (For a look at SEC chairman Harvey Pitt’s plan to create a new accounting oversight board, see “POB Out, PAB In.”

In addition, President Bush said auditors should do more than use minimum standards when evaluating a company. Instead, the President thinks auditors should compare a company’s financial controls with the best industry practices, and then give those findings to a company’s internal audit committee.

Separately, a number of Senate Democrats introduced legislation Thursday to impose tougher oversight on accountants.

The Investor Confidence in Public Accounting Act would create a new, private oversight board for accountants, provide independent funding for the Financial Accounting Standards Board, and dramatically expand the number of accountants at the SEC.

New Coke

While many executives, regulators, politicians, and investors are focusing on the recent rash of corporate financial restatements and auditor independence issues, an accounting issue that figured to attract a lot of attention during the current annual reporting season was shoved to the background.

This changed on Thursday, however, when Coca-Cola reported it will take a noncash, $1 billion pretax charge in the first quarter because of FASB’s new accounting rule on goodwill.

“Under the new rules, goodwill and indefinite lived intangible assets will no longer be amortized but will be reviewed annually for impairment,” stated Coke management in an SEC filing. “Intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives.”

The company added that, thanks to reduced amortization from company-owned intangible assets, the adoption of the new standard would add $60 million in earnings beginning in 2002. Coke management also said that FASB’s new rule would also add approximately $150 million of increased equity income relating to the company’s share of amortization savings from equity method investees. That bump up will also come in 2002.

Financing News

  • Merrill Lynch & Co. wound up issuing $2 billion in 30-year, zero-coupon Liquid Yield Option Notes (LYONs), double what it intended. The notes were priced at a yield to maturity of 2 percent less than the three-month LIBOR rate, and at a premium of 33 percent above Wednesday’s closing price of the company’s common stock.
  • KPMG Consulting Inc. on Thursday filed a $1 billion universal shelf registration statement for the issuance of various types of securities, including debt, preferred stock, common stock, and warrants to purchase common stock. “Similar to many other public companies, we are utilizing a universal shelf registration statement because it is a practical and efficient way to access the public markets,” said chief financial officer Robert Lamb Jr. in a statement. “While we currently have no specific plans to sell securities, the shelf registration positions us to act quickly to take advantage of growth opportunities and favorable market conditions.”
  • Standard & Poor’s on Thursday cut Hewlett-Packard Co.’s long-term debt ratings three notches due to declining earnings and risks associated with its planned merger with lower-rated Compaq Computer Corp. While that deal has met with some stiff resistance, the two parties have recently launched an aggressive ad campaign touting the benefits of the coupling. At this point, it appears the merger may actually go through.