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| Big
Five Quake as Andersen Faces Doomsday Scenario |
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Pity Joseph
Berardino, chief executive of Andersen. This month,
he should have been celebrating one year at the helm
of one of the world's pre-eminent accountancy firms.
Instead, he is presiding over the greatest crisis his
profession has ever seen. In another 12 months, Andersen
may be no more.
Many will feel no sympathy at all for Berardino - among
them 5,000 now-former Enron employees, and thousands
of Enron pensioners whose retirement funds evaporated
when the energy trading giant collapsed last month.
The biggest bankruptcy in US history has already entangled
a motley mix of worthies: hundreds of Enron executives,
who received big payouts on the eve of the company's
collapse; scores of US politicians who benefited from
Enron's largesse, including President Bush himself;
and even Lord Wakeham, Britain's erstwhile Energy Secretary,
who sat on Enron's board.
But Andersen, accused of negligently failing to spot
the debts that brought Enron down - a charge it strenuously
denies - is first in the firing line. As well as investigations
by the US Congress and regulators, the firm faces a
$1 billion legal action brought by shareholders.
It also faces a potential doomsday scenario, in which
prosecutors prove there was fraud at Enron and Andersen
knew about it. If that happens, Andersen could become
liable for the amount wiped off Enron's stock market
value since it restated its accounts: a figure running
into tens of billions.
Until last month, the idea of a 'Big Five' accounting
firm meeting with such a fate had seemed remote. They
had, after all, weathered such audit failures as Barings,
Polly Peck and BCCI. But Senator Joseph Lieberman, who
will chair a US Senate investigation, has put the profession
on notice: 'Andersen is a great company with a great
name. That name is being sullied and ultimately this
Enron episode may end this company's history.'
A senior British regulator agrees. 'Enron will dwarf
BCCI in its consequences for the accounting profession,'
he says. 'It is a scandal that has hit America, and
American politics, right in its heartland. If the investigations
conclude that Andersen was at fault, the reputational
damage alone will be enough to wipe it out. Clients
won't want to be associated with Andersen.'
In the end, the firm could be taken over by one of its
rivals - Price water house Cooper, Deloitte & Touche,
Ernst & Young or KPMG (the most likely buyer). Andersen
has 85,000 employees in 84 countries, but even before
the Enron crisis was seen as the weakest of the Big
Five, with the smallest number of audit clients.
In Britain, the Financial Services Authority and the
Institute of Chartered Accountants do not expect to
discover evidence of abuse relating to Enron. But the
scandal's reverberations will be felt in Andersen's
London office, where the mood is described as 'very
gloomy'. Unlike other big accounting firms, Andersen
is an 'international partnership', so its UK bosses
may not be well insulated from the fallout in America.
It is not even a foregone conclusion that any suitor
will be allowed to rescue Andersen. Accounting practices
are now under unprecedented scrutiny and the whole profession
may have to pay a price for the Enron disaster.
Figures emerged last week suggesting that Enron may
have overstated profits by as much as £2bn; so,
too, did evidence that has fuelled concern about Andersen's
audit role at the Texan gas group.
Andersen strongly denies it knew of anything 'illegal'
at Enron. At its world headquarters in Chicago, the
firm's senior management has distanced itself from the
actions of its Houston bureau, which shredded thousands
of documents relating to its work for Enron.
The shredding is extremely embarrassing for Andersen
- especially as it appears to have taken place after
the firm was notified that the Securities and Exchange
Commission (SEC), the US watchdog, was looking into
Enron. Some papers may even have been destroyed after
a formal SEC subpoena reached Andersen on 8 November.
Last Tuesday, Andersen disciplined top Houston staff
and sacked David Duncan, the partner who led the Enron
audit. But Duncan has refused to take the blame, telling
congressional investigators he was obeying orders.
US regulators are determined to learn from what happened
at Enron, and one lesson they may draw is that Andersen
had too cosy a relationship with Enron's directors,
several of whom were ex-Andersen themselves.
Andersen refutes the suggestion that it forgot it had
a duty to protect shareholders. Even so, the SEC may
make it compulsory in future for listed companies to
change auditors every few years.
In Britain, a similar move is under consideration. The
FSA is conducting a root-and-branch review of UK listing
rules and is considering a requirement that would force
public companies to rotate auditors at regular intervals.
'The big firms have always opposed the idea,' says the
senior regulator. 'But auditors are going to be more
careful if they know another firm is going to review
their work in a couple of years' time, and hold them
accountable if there are any discrepancies.'
Regulators may also clamp down on firms taking lucrative
consultancy work from the same companies they are auditing.
Andersen was paid $25 million by Enron for its audit
in 2000, and almost the same amount again for non-audit
work, although it strongly denies this caused its scrutiny
of Enron's accounts to be less rigorous.
There are even rumours that the US Justice Department
will move to address another persistent criticism: that
the Big Five stranglehold on the auditing industry has
caused standards to slip.
Andersen will be hoping this idea is not pursued: if
the US government wants to break up the big firms, it
is unlikely to allow Andersen to merge with anyone.
For now, Andersen is fighting. Berardino took out full-page
ads in US newspapers last week declaring that the firm
is devising 'comprehensive changes in our practices
and policies' to win back confidence. But for Andersen,
and perhaps for its rivals, it may be too late.
MORE ON ENRON
>>
January 22,
2002.
[Source: Observer January 20 ,2002]
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