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.
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