[A-List] On Arthur Andersen

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Top Financial News

01/21 10:26
Arthur Andersen Liability at Hundreds of Millions, Experts Say
By David Voreacos


New York, Jan. 21 (Bloomberg) -- Arthur Andersen LLP may have to pay
hundreds of millions of dollars to resolve civil lawsuits over the
accounting firm's audits of Enron Corp., and its survival might be
threatened, legal and bankruptcy experts said.

The risk to Andersen, the fifth-largest accounting firm with revenue of $9.2
billion last year, would increase if it's indicted or any of its 4,800
partners admit criminal wrongdoing for such acts as destroying documents
related to Enron's audits, experts said.

Shareholders, creditors and others who lost $60 billion in Enron's collapse
hope that Andersen's ``deep pockets'' will offer more than the energy
trader, which sought bankruptcy protection. Andersen had certified five
years of Enron statements that inflated earnings by almost $600 million.

``We could be looking at hundreds of millions of potential liability,'' said
Stephen Presser, a professor of law and business at Northwestern University.
``If ever there is a criminal conviction, the civil case becomes a
cakewalk.''

Chief Executive Officer Joseph F. Berardino of Andersen, who oversees 85,000
employees, denied wrongdoing by the 89-year-old firm. Enron failed because
of its management and business practices, not because of the actions of its
auditors, Berardino said yesterday on NBC's ``Meet the Press.'' Enron
collapsed ``because the economics didn't work.''

A spokesman for the Chicago-based company, Patrick Dorton, declined to
comment about the litigation or any company insurance that might help defray
the costs.

Concealed Debt

Andersen, which also may face liability for entities that helped Enron
conceal debt, is a codefendant in some shareholder suits against Enron, and
more are likely as congressional and criminal probes progress, experts said.
Andersen's position may only get worse, said Columbia University law
professor John Coffee Jr.

``This is a case that is extremely strong for the plaintiffs and close to
indefensible for Arthur Andersen,'' Coffee said. ``If the firm is indicted,
it may not survive. They have a management crisis of the highest
intensity.''

Andersen will probably try to settle lawsuits rather than fight them, Coffee
said. The company's posture would hinge on the firm's ability to pay and its
insurance coverage, he said.

Plaintiffs' attorney Melvyn Weiss, whose Manhattan firm has sued on behalf
of Amalgamated Bank of New York, said Andersen should settle. He estimated
its insurance coverage at about $400 million and said the partnership as a
whole may bear responsibility for the actions of individual members.

``We're going to have to sit down and figure out the maximum amount of
damages that can be recovered and still keep them alive,'' Weiss said.
``There's a tremendous amount of evidence that's been collected already to
indicate very serious liability. If they survive, it's going to be in a very
diminished form.''

`Stop the Shredding'

Andersen has fired partner David Duncan, who oversaw the Enron audit, and
disciplined seven others. Andersen said Duncan ordered documents destroyed
after the Securities and Exchange Commission requested information. Andersen
said he oversaw ``the deletion of thousands of e-mails and the rushed
disposal of large numbers of paper documents.''

The destruction spanned 18 days, ending when Andersen got an SEC subpoena on
Nov. 8 and Duncan's assistant told colleagues to ``stop the shredding,'' the
firm said. While Andersen said Duncan acted on his own, his lawyer said he
followed orders of an Andersen in-house lawyer. Duncan is helping
congressional investigators.

Andersen's liability could hinge on whether its workers were merely
negligent or if they intentionally concealed information, said Chester
Salomon, a Manhattan bankruptcy attorney.

``Willful deeds could result in much higher damages than negligent deeds,''
said Salomon. He said that willful acts also might result in the company
losing insurance coverage.

Global Settlement?

Manhattan bankruptcy attorney Richard Tilton said Enron's Chapter 11 case
might help Andersen dispel its cloud of litigation. If Enron sues Andersen
in bankruptcy court for negligence, the auditor could try to use that
lawsuit to settle all claims, Tilton said.

``All creditors and stockholders would then have to assert claims in
bankruptcy court,'' Tilton said. ``Why should shareholders in Texas be able
to step ahead of creditors in their claims against Andersen? Shareholders
are junior to creditors.''

Several experts said the torrent of negative publicity about Andersen also
will encourage it to settle civil lawsuits. The notoriety will hurt the
firm's ability to attract clients, although the damage won't be clear until
the current audit season ends, said Peter Knutson, an emeritus associate
accounting professor at the University of Pennsylvania's Wharton School.

Surviving

``I suspect that they won't go out of business, but I suspect that they will
suffer for a long time, and the partners will live on a fairly reduced
income,'' Knutson said.

J. Michael Cook, Deloitte & Touche's former chairman and chief executive,
said apportioning blame for Enron's meltdown is complex. Andersen's fees, he
said, were ``relatively modest'' compared to the ``huge personal gains'' of
some Enron executives. Still, Andersen's fate rests on the outcome, he said.

``They face the financial challenge of what people are going to seek from
them, and they have an equal concern with their reputation,'' Cook said.
``If the trust erodes to the point where people won't hire them to do their
primary function, it would be very hard to see them continuing in
existence.''