Atlanta (Sept. 2, 2004) -- AFC Enterprises Inc., the franchisor and operator of brands such as Popeyes Chicken & Biscuits, Church's Chicken and Cinnabon, has filed a lawsuit against Arthur Andersen LLP, two of its former partners, and a former audit manager.

The suit, filed Tuesday in the Superior Court of Fulton County, Ga., charges the now-defunct audit firm, William B. Peard, then senior partner-in-charge of Andersen's Atlanta audit department, former audit engagement partner Robert Alton Johnson, and former AFC audit manager Allan Neil Crawford III with malpractice and breach of contract. The complaint alleges that the defendants violated generally accepted auditing standards and accounting principles, committed auditing malpractice and breached contracts, causing AFC to restate two years of financial statements and to incur substantial costs, fees and lost profits.

AFC announced in March 2003 that it would restate its financials for fiscal 2001 and the first three quarters of 2002, igniting an accounting scandal that saw a stream of shareholder lawsuits filed against it, the departure of several of its top executives and its de-listing by the Nasdaq. The accounting issues also led to an informal investigation by the Securities and Exchange Commission that is still ongoing.

Andersen served as AFC's auditor from 1992 through April 2002. An attorney for AFC told WebCPA that AFC specifically requested consultation with Andersen on several accounting issues, including gains on conversions and post-employment contract issues, and that on other areas, AFC drew to Andersen's attention to concerns that it had about certain accounting treatments.

"In every instance, Andersen either signed off on the inquiry and said they were the correct accounting treatments or simply didn't audit the area of concern and signed off on the year-end audits," said Teresa Tomlinson, outside counsel for AFC, an attorney with Pope, McGlamry, Kilpatrick, Morrison & Norwood in Atlanta.

Andersen, through spokesman Patrick Dorton, declined to comment on the lawsuit. The firm was convicted in 2002 of obstruction of justice for destroying documents related to its audit of fallen energy company Enron.

The complaint includes excerpts from 2002 audit committee minutes, in which the audit firm made assurances to AFC's audit committee regarding the company's accounting practices and controls. Tomlinson said, "That level of assurance and reliance on the auditors creates justifiable reliance," which she said will serve as AFC's defense in the securities actions against it.

"AFC is seeking to recoup the damages they've incurred and to clear their name. The lawsuit will also provide factual findings and legal findings that will serve as complete defense to the securities and derivatives action," Tomlinson said.

In addition to recovering the fees that it paid to Andersen from 2000 to 2002 and the cost of restatement process, which Tomlinson said is estimated at "tens of millions of dollars," AFC is seeking recompense for lost business as result of the restatement and equitable indemnification, and the reimbursement of any monies that AFC may have to pay out related to the ongoing litigation or investigation.

-- Melissa Klein Aguilar

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