Risk & Compliance

Say It Ain’t So, Joe: Berardino Out at AA

Worried he could become "impediment" to saving the company. Also: SEC probes Network Associates, sues Waste Management. Plus: PwC Consulting to cha...
Stephen TaubMarch 27, 2002

You knew somebody at Andersen would fall on their sword.

Turns out, it was CEO Joe Berardino. Late Tuesday, he resigned as managing partner and chief executive at Andersen Worldwide. Berardino had served a little more than a year on the job at the global professional services company.

Berardino, 52, told partners and personnel worldwide of his decision in an early-evening E-mail. The memo was sent after he notified the Andersen Worldwide Board of Partners he was resigning. Berardino’s resignation will take effect after the board chooses an interim CEO.

Earlier this week, former Federal Reserve Board chairman Paul Volcker offered to take over at the foundering accounting firm—all part of a plan to keep the company from going under. (“Volcker to the Rescue?”)

“Joe Berardino has led this firm well, with integrity and courage, through the most difficult period in its history,” said Aldo Cardoso, chairman of the Andersen Worldwide Board of Partners, in a press release. “We regret Joe’s personal choice to step down, and thank him for his service. Like Joe, we are all committed to doing everything we can to reassure our clients and the public of Andersen’s quality and integrity.”

Ever since the Enron accounting scandal broke, Berardino has staunchly defended Andersen’s actions. When it became public that Andersen employees destroyed vast amounts of sensitive Enron-related documents, Berardino admitted these actions took place. But he tried to distance top management from the shredding, characterizing the document destruction as the unauthorized actions of just a handful of lower-level employees.

In his E-mail message, Berardino told his colleagues, “There has been a great deal of skepticism about whether we would take the leadership necessary to make fundamental changes in our U.S. firm, even though we had brought in Paul Volcker with a broad mandate to recommend changes.”

Volcker continues to negotiate a settlement with the Justice Department, which indicted the auditor last week for its role in shredding the critical Enron-related documents.

“In the wake of an unprecedented criminal indictment of the U.S. firm, I have concluded that my continuing as Worldwide CEO could become an impediment to the efforts of Mr. Volcker and many others to save the U.S. firm,” continued Berardino. “While my nature is to keep fighting to protect our people and our clients, the fact is that the improper shredding of documents took place on my watch—and I believe it is now in the best interests of the firm for me to step down from the CEO position.”

Volcker has publicly insisted a deal must be completed this week for the firm to survive. “[Berardino] feels his resignation as chief executive will help clear the air and facilitate the recovery of Arthur Andersen under fresh management,” said Volcker in a statement shortly after Berardino announced his resignation.

SEC Probing Network Associates; Share Price Tumbles

Management at Network Associates said the Securities and Exchange Commission is investigating the computer security provider’s accounting practices during the 2000 fiscal year.

The company noted the inquiry relates to accounting issues that predate the current management team’s arrival in early 2001. “The company has reviewed its accounting for fiscal 2000 with its outside auditors and continues to believe that the accounting was proper,” added Network Associates management.

Nevertheless, Network Associates said it will cooperate with the SEC. Company management also announced that it will postpone the beginning of its proposed offer to exchange 0.675 shares of Network Associates common stock for each share of McAfee.com Class A common stock.

As a result of the announcement, the company’s share price sank more than 11 percent on Tuesday.

The SEC began questioning Network Associates in early 2001, company CEO George Samenuk told Reuters. But, after infrequent and irregular contact throughout 2001, the SEC informed the company on Friday that it was launching a formal investigation, he stated.

Samenuk told the wire service he did not know why the SEC escalated its investigation. He did point out that on December 26, 2000, however, the company announced an approximately $120 million revenue shortfall for that fourth quarter. In that same statement, Network Associates also reported it was changing the way it books revenue from distributors, and that three top executives had resigned, including CFO Prabhat Goyal.

Company spokeswoman Jennifer Keavney told Reuters, “PricewaterhouseCoopers reviewed our accounting for 2000. The company believes that the fiscal statements for 2000 properly reflect the results.”

In April 1999, Network Associates said it would restate 1998 results at the request of SEC officials, who were concerned with how the company was reporting research and development related to acquisitions. About a year ago, Network Associates paid $30 million to settle a separate class-action lawsuit from 1999 over the company’s practices of taking huge write-offs for acquisitions.

Shortly after the current probe was announced on Tuesday, two investment banks—J.P. Morgan and U.S. Bancorp Piper Jaffray—downgraded their ratings on Network Associates. Nevertheless, Gene Munster of U.S. Bancorp Piper Jaffray told Reuters, “We trust the [new] chief financial officer, Steve Richards. If he wasn’t trustworthy, the stock would be halved right now.”

SEC Sues Waste Management, Three Finance Execs

The SEC filed a lawsuit against the founder and five other former top officers of Waste Management Inc., including three finance executives. The commission charged the executives with perpetrating a massive financial fraud that went on for more than five years.

The complaint, filed in U.S. District Court in Chicago, accused the defendants of engaging in a systematic scheme to falsify and misrepresent Waste Management’s financial results between 1992 and 1997.

The SEC’s complaint names Waste Management’s former senior officers: Dean L. Buntrock, Waste Management’s founder, chairman of the board of directors, and chief executive officer during most of the relevant period; Phillip B. Rooney, president and chief operating officer, director, and CEO for a portion of the relevant period; James E. Koenig, executive vice president and chief financial officer; Thomas C. Hau, vice president, corporate controller, and chief accounting officer; Herbert Getz, senior vice president, general counsel, and secretary; and Bruce D. Tobecksen, vice president of finance.

The SEC alleges the executives pocketed nearly $29 million from bonuses and insider trading, among other activities. “Our complaint describes one of the most egregious accounting frauds we have seen,” said Thomas Newkirk, associate director of the SEC’s Division of Enforcement. “For years, these defendants cooked the books, enriched themselves, preserved their jobs, and duped unsuspecting shareholders.”

According to the complaint, the defendants violated, and aided and abetted violations of, antifraud, reporting, and record-keeping provisions of the federal securities laws.

The SEC said it is seeking injunctions prohibiting future violations, disgorgement of defendants’ ill-gotten gains, civil money penalties, and officer and director bars against all defendants.

The SEC also criticized Andersen’s role as Waste Management’s auditor. “Defendants were aided in their fraud by the company’s long-time auditor Arthur Andersen LLP, which repeatedly issued unqualified audit reports on the company’s materially false and misleading annual financial statements,” the commission stated in the complaint.

The SEC noted that at the outset of the fraud, the garbage hauler’s management capped Andersen’s audit fees and advised the Andersen engagement partner that the firm could earn additional fees through “special work.”

“Andersen nevertheless identified the company’s improper accounting practices and quantified much of the impact of those practices on the company’s financial statements,” the complaint stated.

“Andersen annually presented company management with what it called Proposed Adjusting Journal Entries (“PAJEs”) to correct errors that understated expenses and overstated earnings in the Company’s financial statements,” added the SEC. “Management consistently refused to make the adjustments called for by the PAJEs. Instead, defendants secretly entered into an agreement with Andersen fraudulently to write off the accumulated errors over periods of up to ten years and to change the underlying accounting practices, but to do so only in future periods.”

Last June, the SEC settled Waste Management—related charges against Andersen and four of its onetime partners. That settlement resulted in the largest-ever civil penalty—$7 million—in an SEC enforcement action against a Big Five accounting firm. The settlement stemmed from Andersen’s audits of Waste Management from 1992 to 1996.

In August, four former Waste Management officers said they would forgo $23.1 million in payments and benefits as the waste hauler moved to settle shareholder lawsuits related to accounting violations in the 1990s.

As CFO.com reported in November, Waste Management agreed to settle a class-action suit for $457 million stemming from its conduct in 1998 and 1999 with respect to the 1998 merger of USA Waste and old Waste Management, the financial projections and results from the first and second quarters of 1999, and the charges taken by the company in the third quarter of 1999.

Short Takes

  • PwC Consulting said on Tuesday it plans to change its name in an attempt to distance itself from its parent. The management and technology consulting arm of accounting firm PricewaterhouseCoopers plans to go public later in the year.
  • Red Hat Inc., a distributor of the open-source Linux computer operating system, on Tuesday unveiled a new server product targeted at large companies. “Red Hat Linux Advanced Server is the obvious choice for enterprises that want to break out of the stranglehold of proprietary software and high-cost hardware,” Red Hat’s vice president of engineering Paul Cormier said in a statement.
  • Pittsburgh-based PNC Bank said that in an effort to meet the needs of local entrepreneurs, it hopes to lend $12 billion to new and existing small-business customers during the next three years. The goal represents a compound annual growth rate of 10 percent over what the bank lent to small-business owners in 2001.