Risk & Compliance

Volcker to the Rescue?

Offers radical plan to save Andersen. But what will become of the firm's top management?
Stephen TaubMarch 25, 2002

You’ve got to hand it to Paul Volcker. He cuts to the chase.

On Friday, the man who was brought in to revise Arthur Andersen’s audit practices did a little revising of his own. Rather than advise Andersen top management on how to reform the company, Volcker offered to kick those managers out—and take charge at the accountancy himself.

Volcker’s plan, announced on Friday, would establish a seven-member panel that would ultimately select a new management team at Andersen. Volcker, the former Federal Reserve Board chairman and current head of the trustees of the International Accounting Standards Committee Foundation, would head the panel. Volcker said the move is necessary to save the company. Without such a dramatic action, he noted, “there are good chances Arthur Andersen will disappear.”

The real question is: will current Andersen CEO Joseph Berardino disappear? Remember, Berardino brought Volcker in in early February to head up an independent oversight board. At the time, some members of the press thought the move was merely a PR gimmick—designed to stanch the tide of bad press Andersen was receiving in the wake of the Enron scandal. As CFO.com reported at the time, Berardino practically gushed over Volcker’s arrival. “We are pleased that Paul Volcker has agreed to help us in this effort,” he said in a press statement on February 1. “Mr. Volcker is one of the most independent and innovative thinkers in American finance. Andersen, our clients, and America’s investors will jointly benefit from his active participation and leadership.”

It’s not sure if Andersen’s top executives will benefit from Volcker’s participation and leadership, however. According to a press release on Andersen’s Web site, Volcker’s new board would “promptly make necessary changes in the firm’s operating leadership, realign and reinforce senior management as necessary, and implement the reforms outlined in the oversight board’s earlier report.”

Indeed, Andersen management put out a one-paragraph statement responding to Volcker’s announcement. While the statement does seem to back the plan, it’s not exactly a ringing endorsement.

“We appreciate Mr. Volcker’s hard work on these issues,” said Andersen in the statement. “This is a positive and constructive proposal that works to resolve the difficult issues with the SEC, the Department of Justice, and other claimants. We hope that the Department of Justice will carefully consider Mr. Volcker’s proposal and come to a conclusion based on the best interests of our capital markets.”

As you’ll notice, nowhere in the statement does Andersen management actually say it supports the plan. The last sentence seems particularly vague.

Under Volcker’s plan, the revamped Andersen would focus almost exclusively on auditing—and would substantially scale back its consulting business. Of course, the viability of Volcker’s proposal depends entirely on the Department of Justice, the SEC, and the plaintiffs in the Enron case. All those players must agree to the plan—and even Volcker admits such a scenario is a real long shot.

Still, Volcker is pressing ahead. The reason for his urgency: the accelerating exodus of Andersen clients.

Since Friday, the following companies said they have dumped Andersen or that they are searching for a new auditor: Waste Management, Apache Corp., Hartford Financial Services Group, Occidental Petroleum, the Chicago Mercantile Exchange, and Vectren Corp.

Meanwhile, some of Andersen’s non-U.S. affiliates are not waiting around to see how the Justice Department reacts to Volcker’s plan. They are desperately trying to hammer out their own deals to hook up with and dissolve into a rival auditor’s operations.

On Friday, partners at Andersen’s New Zealand operations said they would merge the operation with Ernst & Young.

In addition, the Canadian member firms of KPMG and Andersen announced they have begun negotiations to merge their businesses.

“We have commenced the process of conducting due diligence,” said KPMG Canada chairman and CEO Bill MacKinnon in a statement. “We are working towards an agreement. Negotiations will be required to address the business and legal issues associated with bringing the two firms together. Any agreement will require approvals from the partners of both firms.”

Last Thursday, Andersen’s Hong Kong and China affiliates announced they would merge with PricewaterhouseCoopers LLP.

Further, the Russian units of Ernst & Young and Andersen ZAO said they would merge their practices and assume the E&Y name.

More Woes for Andersen

If this were a football game, the ref would probably throw a flag for piling on.

It seems the SEC is investigating Andersen’s role in auditing the books of three telecommunications companies. Those companies’ accounting methods are apparently being scrutinized by regulators, according to The Wall Street Journal.

The three companies being probed: Global Crossing Ltd., Qwest Communications International Inc., and WorldCom Inc.

The SEC is looking at whether Andersen advised its three clients to use aggressive accounting for treating so-called swaps of network capacity, which could have led to the inflation of revenue figures.

The paper noted that at a Thursday congressional hearing, Global Crossing chief executive John Legere said his company’s treatment of swaps was guided by the accounting model Arthur Andersen provided. The swaps were “fully and fairly” disclosed, he reportedly said.

The Journal added that an Andersen spokesman acknowledged it has received requests for information from the SEC. But the spokesman stressed he didn’t believe the firm is a focus of the SEC’s investigations into the three telecom companies’ accounting.

“Andersen auditors conducted their audits properly and in accordance with SEC and professional guidelines at all times,” the spokesman told the paper. “As we normally would, we have provided information to the SEC regarding their inquiries that are focused on other subjects.”

Earlier last week, the Journal claimed that Andersen had written a comprehensive “white paper” to clients outlining its philosophy on swaps and other telecommunications accounting issues. Andersen officials reportedly said the accounting firm’s white paper was developed in consultation with others in the accounting field, and with the involvement of the SEC.