Risk & Compliance

Keep on Truckin’: DOJ Says Andersen Destroyed Tons of Evidence

Large trucks used to haul away Enron documents; employees paid overtime to shred. Also: Restructurings at Accenture, FASB. Plus: Sales staff side d...
Stephen TaubMarch 15, 2002

Call it March Madness. It looks like the Big Five may soon become the Final Four.

A federal grand jury has indicted accounting firm Andersen for obstruction of justice for shredding sensitive documents related to the bankruptcy of energy trader Enron Corp.

Ironically, neither Enron nor any of its employees have been brought up on criminal charges—a classic example of the cover-up being worse than the original sin.

The indictment “alleges that, at the firm’s direction, Andersen personnel engaged in the wholesale destruction of tons of paperwork and attempted to purge huge volumes of electronic data or information,” said Deputy Attorney General Larry Thompson. “Dozens of large trunks were brought in to haul documents from Andersen’s office and Enron’s building to Andersen’s office in Houston in order to destroy literally tons of documents.”

Thompson added, “Employees were told to work overtime if necessary to finish the job of destroying documents. The shredder at the Andersen office and Enron building ran virtually constantly.”

The maximum penalty for the charges is a $500,000 fine and five years on probation. The reality is that Andersen will have trouble maintaining its normal activities.

Andersen, however, said it has no plans to file for bankruptcy. It also called the action “a gross abuse of government power.” Reuters reported that Andersen lawyers would probably seek a dismissal of the charge.

The indictment seemed likely when Deloitte Touche Tohmatsu and Ernst & Young decided Wednesday not to pursue a merger with Andersen, which in turn refused to hammer out a settlement with the Justice Department.

Filing for Chapter 11 bankruptcy might spell the end for the 94-year-old accounting firm. “I don’t see an independent Arthur Andersen in the future, no matter what they do,” said Michael Perino, a securities law expert at St. John’s University Law School in New York, according to one wire service report. “Arthur Andersen’s reputation is so sullied right now that…if they do file a bankruptcy action, the only likely outcome is that the remaining pieces get bought up by somebody.”

A Chapter 11 filing would enable the company to convert the dozens of lawsuits filed against it into bankruptcy claims.

Meanwhile, the SEC moved quickly after the indictment to assure little disruption in the auditing process. The commission said Andersen would continue to audit financial statements in accordance with generally accepted auditing standards (GAAS) and applicable professional and firm auditing standards, including quality-control standards.

In addition, issuers whose audits are completed by Andersen after March 14, 2002, must obtain from Andersen certain representations concerning audit quality controls, including representations regarding the continuity of Andersen personnel working on the audit, the availability of national office consultation, and the availability of personnel at foreign affiliates of Andersen to conduct relevant portions of the audit, said the SEC. “So long as Andersen continues to be in a position to provide those assurances, the Commission will continue to accept financial statements audited by Andersen in filings,” it added in a statement.

The commission also said it will accept filings that include unaudited financial statements from any issuer unable to provide timely audited financial statements because of the cessation of its audit relationship with Andersen. Issuers electing this alternative will generally be required to amend their filings within 60 days to include audited financial statements.

Meanwhile, the Andersen defections continued on Thursday when SouthTrust Corp., which has used Andersen as its accountant since 1989, said it is seeking proposals from independent accounting firms for the audit of its financial statements for this year.

FASB Proposes Structural Changes

The Financial Accounting Foundation (FAF), which oversees the Financial Accounting Standards Board (FASB), said it would streamline its board in an attempt to “strengthen its commitment to a strong, transparent, and rigorous system of financial accounting standards for America’s capital markets.”

“FAF Trustees realize that in the minds of some investors the system of accounting standards and the audited financial statements that must comply with them are being questioned,” said Manuel H. Johnson, chairman of the FAF board, in a statement. “We understand that the FAF is an essential part of the fabric of the American accounting system’s framework, and the Trustees have determined that the FAF will do everything within its power both to review and improve the procedures and policies within its official mandate and to participate, where appropriate, in the larger debate about how to strengthen all parts of that system.”

Seeking to improve FASB’s efficiency, the trustees have proposed the following:

  • A reduction in the size of FASB from seven to five members.
  • A simple majority-voting requirement of 3-2 for the five-member board. The current board has a 5-2 supermajority requirement.
  • A recommendation to FASB that it expose proposed standards for shorter comment periods.

“The Trustees will carefully consider responses to the proposal before deciding on a course of action,” it added.

Metawave to Restate; Side Deals in Asia Blamed

Wireless-antenna maker Metawave Communications Corp. said it would restate 2001 earnings due, in part, to questionable accounting. The restatement will lower the company’s previously claimed income by around 15 percent.

In after-hours trading following the announcement, Metawave’s share price plunged nearly 50 percent—and that’s on top of an 8 percent drop during regular trading hours.

Metawave’s management also noted the company will be cutting staff by half. The company also said that Stuart Fuhlendorf, its chief financial officer since March 2000, would leave. Fuhlendorf will be replaced by controller Randy Scheer.

The company also expects to reduce its reported 2001 revenue of $43.6 million by $5 million to $7 million. That would be about a 13 percent reduction.

In a conference call with analysts, CEO Bob Hunsberger said the restatement resulted from “unauthorized commitments” to some customers in Asia. “What we discovered was some side letters to customers that allowed them to return the product to us under certain circumstances,” said Hunsberger. “Given the accounting rules, this would have precluded revenue recognition.”

Hunsberger said future regulatory filings will detail how the restatements will affect earnings.

Earlier in the week, rival telecommunications companies WorldCom and Qwest Communications said the SEC is probing their accounting practices.

Accenture Shakes Up Things

Consultancy Accenture has formed an Office of the CEO. That office is comprised of chairman and chief executive officer Joe Forehand and COO Steve James. The creation of the office is part of a major shakeup at the former Andersen consulting unit.

“Our future rests on our ability to evolve our strategy and organization to stay relevant to our clients,” said Forehand in a statement. “With these changes, we are confident that we continue to build a management team that is focused on delivering to our clients the very best solutions to the challenges of a changing business environment and accelerating the growth of our company.”

Among the key appointments:

  • Gregg Hartemayer has been named group chief executive of the Technology & Outsourcing Capability Group.
  • Tim Breene has been named group chief executive of the Business Consulting Capability Group.
  • Mark Foster has been named group chief executive of the Products Operating Group, assuming the previous responsibilities of Hartemayer. Foster, who most recently served as managing partner for Products-Europe and has been instrumental in the development of Accenture’s strategy, will also join the management committee.
  • Accenture also named four additional group chief executives: Bill Green in Communications & High Tech, David Hunter in Government, Karl-Heinz Floether in Financial Services, and Mary Tolan in Resources.
  • In addition, Gill Rider will become the chief leadership officer. “Rider will place special emphasis on developing the leadership capabilities and professional skills of Accenture’s people, and fostering a culture that encourages diversity and achievement,” stated the company. She has also been named to the management committee. Rider is a former head of the company’s resources operating unit in Europe, the Middle East and Africa, and Latin America, and is a former chair of the United Kingdom/Ireland geographic council.
  • Mike McGrath has been named chief risk officer.
  • Jack Wilson, Accenture’s corporate development officer, will continue to support the operating groups in their business development efforts, and will take on additional responsibilities as chairman of the capital committee, replacing McGrath.