Peregrine Sues Arthur Andersen

Software maker Peregrine Systems Inc. is taking what legal experts say is an unusual approach to the financial woes that landed it in Bankruptcy Court: blaming the auditors for letting management get away with faulty accounting.

In a lawsuit filed Monday against Arthur Andersen, the San Diego company acknowledges that its accounting methods were flawed. But Peregrine accuses Andersen of fraud, negligence and failure in the performance of its auditing and accounting duties. The suit seeks more than $1 billion in damages.

Peregrine also disclosed in its Sunday bankruptcy filing that it had received a subpoena from the Justice Department. The alleged financial misdeeds at Peregrine, whose chairman is San Diego Padres owner John J. Moores, already are under investigation by the Securities and Exchange Commission.

Peregrine executives insist the blame lies with Andersen because the auditors failed to alert the board of directors when Peregrine management changed its accounting methods--changes that could have raised red flags about what executives were doing. Peregrine fired Andersen in April.

“The board put a substantial amount of reliance on Arthur Andersen and their expertise,” said Charles La Bella, a former federal prosecutor who is representing Peregrine. “Peregrine’s board does not review day-to-day operations of the company. That’s not what they’re supposed to do.”

Andersen officials said the suit is without merit.

“Any attempt by this company to try to pin their woes on their auditor is pathetic,” said Patrick Dorton, a spokesman for Arthur Andersen. “Responsibility for bad business decisions lies with the board and their management team. This lawsuit is clearly an effort to divert attention from the company’s own missteps.”

Even if Peregrine were to win in court, its chances of collecting any money from Andersen are slim. Once considered the paragon of public accounting, the firm essentially went out of business last month after it was convicted of obstruction of justice for shredding documents relating to its client Enron Corp.

Former Arthur Andersen clients have filed suits against the firm, and the claims are likely to exceed the amount of money it ultimately would be able to pay out.

Experts on corporate governance who are not involved in the case said boards of directors--and particularly the members of a board’s audit committee--always have had a fiduciary responsibility to question their auditors about all changes in accounting treatments.

“This case is like saying that if you default on a loan, the bank was negligent in giving you the loan in the first place,” said Chester Salomon, a bankruptcy attorney.

Brett Trueman, a professor of accounting at UC Berkeley who specializes in corporate financial reporting, said that although the Andersen auditors may have contributed to the problem, the Peregrine board also bears some of the responsibility. “At the minimum, they certainly should have been asking the auditor questions along the way,” Trueman said.

The suit, filed in San Diego Superior Court, names Arthur Andersen LLP, Andersen Germany, Arthur Andersen Worldwide S.C. and Daniel Stulac, the lead auditor.

One key issue is whether Peregrine’s board of directors should have known that the company, which makes supply-chain software, improperly allowed revenue to be overstated for nearly three years--or whether directors failed to ask the right questions.

Peregrine’s revenue may have been inflated by as much as $250 million from April 1999 to December 2001, according to the suit. Among other things, the company improperly booked sales of accounts receivables as revenue and created a faulty stock-option valuation system.

“There were material deficiencies happening at this company,” La Bella said. “Arthur Andersen was aware that there was trouble. Their client is the [Peregrine] auditing committee, and they failed to tell the committee or the board what was really going on.”

Two top Peregrine executives also served on the board during the period in question.

Stephen P. Gardner became the company’s chief executive in 1998 and added the role of chairman of the board in July 2000. Matthew C. Gless served as Peregrine’s chief financial officer and a board member in October 2000.

In May, Peregrine announced that both had resigned.

Gardner, Gless and their attorneys could not be reached for comment. La Bella said the blame still lies with Andersen. “As a group, the board was not apprised by Arthur Andersen of any of these irregularities,” he said.

Times staff writer Ralph Frammolino contributed to this report.