Disclosure Is Latest Blow to Andersen

Andersen’s admission that it destroyed thousands of documents involving Enron Corp. may deal a crippling blow to one of America’s oldest accounting companies, accounting experts said Friday.

“When the watchdog for the public turns out to be the dog that ate the papers, there is a big problem,” said Lynn Turner, the former chief accountant for the Securities and Exchange Commission, who now heads the Center for Quality Financial Reporting at Colorado State University.

The Chicago-based firm told investigators this week that it had destroyed thousands of electronic and paper documents in September, October and November.

At the same time documents were being trashed, Enron was disclosing damaging new financial information. On Oct. 16, Enron reported $638 million in losses and a $1.2-billion reduction in shareholder equity. And on Nov. 8 the company revised its financial statements, slashing $586 million from profit to account for losses over a four-year period.

Andersen was both Enron’s auditor and a major consulting partner, at one point collecting $1 million a week in fees.

Andersen said that its staff destroyed documents before receiving a subpoena from the SEC in November. After that, the firm issued instructions to preserve any documents related to Enron, but it isn’t sure its orders were followed.

“If the folks who were destroying these documents were destroying evidence, that is very serious and almost surely criminal behavior,” said Randolph Beatty, dean of USC’s Leventhal School of Accounting.

The firm has not described the types of documents destroyed but accounting experts suspect they come under the broad category of what the industry calls “work papers.”

“That could be everything from a memo discussing the facts around an accounting issue and the rational for the firm’s treatment of that issue to ledger extracts and spreadsheets to memos that discuss what invoices or other documents the auditor looked at,” Turner said.

News that the Andersen staff destroyed documents is only the latest hit on the reputation of the firm, which was founded in 1913 as Andersen, DeLaney & Co., and was more recently known as Arthur Andersen. It was viewed among the nation’s most prestigious accounting firms.

Andersen agreed to pay $110 million to settle an accounting fraud lawsuit involving appliance maker Sunbeam Corp. last May. A month later, the SEC fined the accounting firm $7 million to settle a landmark fraud lawsuit over the firm’s audits of Houston-based Waste Management Inc.

More recently, it drew criticism for its treatment of off-balance sheet partnerships and ventures at Enron and its eventual restatement of the energy company’s books that shaved $586 million off its reported profit over four years.

Board members--the individuals who decide which auditing firm to recommend for the almost always perfunctory approval by shareholders--say these troubles have hurt Andersen’s reputation and that it should expect trouble winning new clients and keeping old ones.

“As the head of a company or a member of an audit committee on a board, I would not select Andersen right now,” said Edward Muller, former chief executive of Edison Mission Energy and a board-of-directors member on the audit committee of GlobalSantaFe Corp., a Houston oil drilling contractor.

“Even if they are innocent, there are five major accounting firms out there. Andersen is going to be totally absorbed by the Enron debacle for a long time, the others are not. Why pick the one with all the troubles?” Muller asked.

“Let’s say you have a problem at your company, why would you want to put yourself in the position of explaining why you picked Andersen now when you could chose one of the others?” Muller added.

Andersen may have an easier time holding on to current audit clients than gaining new ones, said David H. Batchelder, partner at Relational Investors, a San Diego-based institutional investor that specializes in distressed companies and turnaround situations. Batchelder sits on three boards: Costa Mesa-based Apria Healthcare Group Inc., Houston-based Nuevo Energy Co. and Boise, Idaho-based Washington Group International.

“For a firm using Andersen today, it will depend on a company’s confidence in the individuals who are doing an audit,” Batchelder said. “If you are on an audit committee reviewing firms for a new assignment, Andersen would be a disadvantage.”

Andersen declined to comment on the destruction of the documents, citing pending investigations. A spokesman also declined to give much detail on how its Enron problems were affecting its business.

“Clients have obviously been concerned, but most have been understanding. They recognize that unfortunate things happen to companies,” said David Tabolt, the firm’s spokesman.

How long and how deep the company’s slump might be isn’t clear. Both Batchelder and Beatty, the USC dean, believe the downturn for Andersen could last a year or two, provided a new crisis doesn’t arrive.

However, Turner, the former SEC official, believes Andersen could go out of business especially if it is hit with large judgments in the dozens of lawsuits it faces from Enron investors and pension holders or large government fines.

Turner said that Andersen’s best hope may be that it is worth more alive than dead. A viable company has a revenue stream that can pay off damages. Attorneys attacking the accounting firm have a keen understanding of that, Turner said, and will likely try to wrest the largest settlement that still is within the ability to pay.

One result could be that Andersen, the nation’s fifth-largest accounting firm, may be forced to merge with a larger sibling, Turner said. Andersen had $3.6 billion in revenue from its U.S. operations last year, less than half the $8.3 billion collected by the largest, PricewaterhouseCoopers, according to the Public Accounting Report.

Andersen officials say they expect to survive as an independent company.

Another problem looming for Andersen will be its ability to retain and attract talent.

It’s possible “that young people who were considering Andersen as a place to start their careers--the best and the brightest in their field--don’t go to Andersen,” said Arthur Bowman, editor of the trade newsletter Bowman’s Accounting Report.

Damage from the Enron-Andersen scandal could spread beyond the accounting firm to the other members of the Big Five companies that dominate the industry, and could ultimately lead to greater government oversight, observers said.

“This points out how we need a new regulatory plan for the accounting profession,” Turner said.

Bowman said that “the actions of the past few days are opening the door for the government to become involved again in how the profession polices itself,” just as it did in the late-1970s after a series of other accounting scandals.