Risk & Compliance

Andersen Assembling Transition Team

Volcker taps two long-time partners; replacement for Berardino expected to be named tomorrow. Plus: Grand jury reportedly looking into Enron, and m...
Stephen TaubApril 1, 2002

The Paul Volcker regime is under way at Andersen.

The former Federal Reserve chairman, brought in to save the embattled auditor, named two senior Andersen partners to lead the firm’s transition. The two executives: C.E. Andrews, head of the firm’s worldwide audit practice, and Larry Rieger, another senior partner.

Andersen is expected to name a successor to Joe Berardino tomorrow, according to reports. Berardino resigned as chief executive last Tuesday, according to reports. The U.S. firm is currently being led by managing partner Larry Gorrell.

As you know, last Thursday Andersen management endorsed Volcker’s plan to separate the firm’s auditing business from its consulting business. Also last week, reports began circulating that Andersen will start laying off workers—perhaps as many as 6,000 employees—in the next few days.

Andersen also lost more audit clients during the past few days. Since Friday, at least three companies dumped the embattled auditor: Equifax, Domino’s, and Xcel Energy. Equifax, the credit-reporting company, had been an Andersen client for 55 years.

And on Sunday, management at Weyerhaeuser said it is “reviewing the role of” Andersen as its independent accountant.

In another major setback for Andersen, one of the firm’s insurers—Professional Services Insurance—reportedly told the auditor it would not pay Andersen’s $217 million settlement in the Baptist Foundation of Arizona case. The $217 million was to go to the Foundation’s bankruptcy trust as part of a settlement stemming from alleged accounting malpractice charges at the Foundation. Andersen was the Foundation’s auditor.

According to the Wall Street Journal, Professional Services can’t make the payout because it has been rendered technically insolvent. The reason for its insolvency? Reportedly, Andersen failed to make a $100 million premium payment to the insurer.

About a month ago, Andersen agreed to pay the $217 million to settle claims by investors that say they lost hundreds of millions of dollars with the Foundation. The nonprofit Foundation sold investment products to around 11,000 investors during the ’90s. Investors claim the Foundation was nothing more than a Ponzi scheme.

Prosecutors: Enron Next

Having indicted Arthur Andersen, federal prosecutors now have Enron executives in their crosshairs, according to Monday’s New York Times.

According to the paper, prosecutors last week convened a special grand jury in Houston. The grand jury’s sole task is to investigate possible crimes committed in connection with Enron’s collapse, according to the paper.

In federal courts, these kinds of special grand juries are typically convened for complex and significant cases. Government lawyers appear to be most interested in specific transactions involving a number of partnerships controlled by Enron’s former chief financial officer, Andrew Fastow, according to the published account. Prosecutors are said to be particularly interested in a number of partnerships that Enron executives allegedly used to enrich themselves. Two of the partnerships reportedly being looked at by the grand jury: Raptor and Southampton Place.

The FBI is also reportedly investigating conversations between Enron executives and Thomas E. White, the former Enron executive who is currently secretary of the Army. The bureau is said to be examining whether those conversations convinced White to dump $3 million worth of Enron stock in October.

FBI agents are also reportedly investigating statements made by a number of Enron executives under oath before congressional committees to determine whether anyone committed perjury.

SEC Investigating Baker Hughes

Management at Baker Hughes said over the weekend that it is being investigated by the Securities and Exchange Commission and the Department of Justice for alleged violations of law relating to Nigeria and other related matters.

Last week, Alan Ferguson, a British national who was overseeing a division of Baker Hughes’s operations in Nigeria, filed a lawsuit alleging he was fired five months after refusing to give a share of the company’s contract revenues to a Nigerian official, according to published reports.

Baker Hughes was bidding on an oil and gas project with the Shell Petroleum Development Co. of Nigeria in 1999. Ferguson claims that he and another Nigerian-based Baker Hughes managers were told by a manager of Western Geophysical, now owned by Baker Hughes, “that his company had an inside contact at Shell Nigeria who agreed to give Baker Hughes a two-year contract to drill the wells if he received a percentage of the gross revenue,” said the published account.

Ferguson claims he was laid off five months after complaining to the company’s human resources department.

“Baker Hughes’ policy is to provide full cooperation to the government and it is doing so in connection with this matter,” it said in a statement. “Baker Hughes is committed to integrity in all its activities and will not tolerate improper payments or other improprieties by any employee or in any of its business dealings.”

Fun With FAS 142

  • Broadwing Communications management said it expects to write down goodwill in excess of $1 billion as a result of the adoption of Financial Accounting Standard 142. It added it expects its amortization expense to decrease to about $42 million a year as a result of FAS 142.

Under FAS 142, goodwill and intangible assets that have indefinite lives should not be amortized, but should be tested annually for impairment.

  • Management at Schawk Inc., which provides digital prepress graphic arts services, said it expects net income to increase about $1.5 million annually as a result of adopting FAS 142.

(To see how other corporations are dealing with FAS 142, read “The Goodwill Games.”)

Today’s Earnings Restatements

  • Management at independent power producer Calpine Corp. said it would restate 2001 earnings after learning that certain emission reduction credits (ERCs) it purchased in 2001 were not available. “The company is aggressively pursuing recovery of this loss and has filed a civil suit against the ERC broker,” it added in a statement.
  • CryoLife Inc., maker of a number of health-care devices, said it is revising its results for the quarters ended March 31, 2001, and December 31, 2001, by recording nonoperating, noncash after-tax charges relating to a decline in value of certain marketable securities held by the company.

Company management said it had previously characterized the decline in value as temporary, and recorded the decline as an unrealized loss on the balance sheet in other comprehensive income as a separate component of shareholders’ equity for the years ended December 31, 1999—2001. “After careful reevaluation the company concluded the decline in value was ‘other than temporary’ as defined in Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities and, therefore, should be reflected in the income statement,” it said in a statement.