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Andersen's future at stake after Enron

Andersen, once the creme de la creme of accounting firms, has been knocked to its knees after a series of revelations about its audit of bankrupt energy trader Enron Corp.

After the No 5 accounting firm's startling admission on Thursday that it destroyed a number of Enron documents, Andersen faces legal wrangles and a desperate race to restore its once pristine credibility, say experts.

The beleaguered accounting firm, already sullied by other accounting snafus, earlier admitted it erred in its audit of Enron off-balance sheet partnerships. The murky deals led investors to dump Enron stock, which led to its collapse.

"It's an extremely serious situation for Andersen," said Jerry Bernstein, a former federal prosecutor who heads up the white collar crime and corporate compliance unit in New York at law firm Holland & Knight. "First of all you have the potential for a criminal violation, then you have a huge civil liability exposure from shareholders who are looking for deep pockets to compensate them."

Few would have imagined Andersen's fall from grace a few years ago. The company stood tall above its accounting peers with the prized Arthur Andersen name and a clientele that boasted of some of the biggest blue-chip public companies.

That has since changed. Andersen's record has been marred by its role in several high-profile accounting scandals including Sunbeam and Waste Management and a bitter separation from its consulting arm that toppled it to No 5 from the top spot among accounting firms.

In recent months, the Big Five firm, now known only as Andersen, had been facing mounting criticism from lawmakers and investors alike for blessing Enron's books.

But its startling revelation on Thursday runs the risk of being the final straw that breaks the camel's back, some said.

"Andersen is a strong firm and we expect to be around for a long time," said Andersen spokesman Patrick Dorton. "As our CEO said, we will acknowledge our mistakes and do the right thing in this matter."

In a terse statement on Thursday, the company said its employees had disposed of or deleted a significant but unknown number of documents related to Enron in recent months.

Meanwhile, the House of Representatives Energy and Commerce Committee on Friday sent a letter to Andersen demanding it turn over "additional records relevant to the committee's far-reaching probe into Enron's financial collapse."

VIOLATED TENETS

The latest disclosure stunned industry experts, who questioned how accountants -- known for their love of record keeping -- could have destroyed documents.

The firm violated one of the accounting profession's basic auditing standards by destroying documents, said Itzhak Sharav, a professor and accounting educator at Columbia University.

"You can't just have papers disappear," said Sharav. "It's well established that you don't destroy working papers supporting an audit for three to four years. Even if it were a former client, you don't destroy them."

Questions remain about the destroyed documents, including who shredded them, when, and most importantly, why. What is clear, however, is that Andersen's most valuable possession -- its reputation -- is now tainted.

Its shattered credibility may discourage prospective clients and even drive away existing ones, said Sharav.

"Probably all the goodwill and reputation that Andersen had carefully built up all these years are being sacrificed at the altar of Enron," Bob Willens, accounting analyst at Lehman Brothers, said on Thursday. "They were the gold standard those days. Now, whenever you mention Andersen, you think of Enron."

EXACERBATED WOES

Andersen's latest admission will only worsen its woes, legal experts said. The firm has already been named as a defendant in several Enron-related class-action lawsuits, which could cost it millions.

The company could also face criminal proceedings depending on when the documents were destroyed, which Andersen said occurred before it was subpoenaed by the Securities and Exchange Commission in early November.

But some legal experts say that irrespective of when the subpoena was issued, Andersen was obliged to retain all documents as soon as it was clear there were questions surrounding its audit of Enron.

"The ramifications could be huge. You can just imagine the litigation industry lining up to feast on Andersen's bones," Arthur Bowman, editor of the widely read industry newsletter Bowman's Accounting Report, said on Thursday.

UNCLEAR ACTION FROM REGULATORS

The company could also face some tough decisions from regulators given the magnitude of the Enron saga that Andersen is now mired in, say experts.

In Washington, the SEC said it views Andersen's disclosure as an "extremely serious matter."

Based on its investigation of Enron, the nation's top market regulator could suspend Andersen or some of its partners from practicing before the commission, said Sharav. If it were suspended, Andersen would not be able to audit any public companies since they are registered with the SEC, he said.

In its last embarrassing brush with the SEC, the agency slapped a $7 million fine on the firm to settle charges it filed false and misleading audit reports of trash hauler Waste Management Inc. in the largest-ever civil penalty against a Big Five accounting firm.

Further, the saga has the potential to bring down censure from the profession's key membership body, the American Institute of Certified Public Accountants, which sets auditing standards, Sharav said.

"The market too exacts a price which is just as potent as any regulatory actions," said Sharav. "After all, the name of Andersen has been sullied, and what else does an (accounting) practitioner have apart from its credibility."

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