Oversight Board looks to restore firm's rep

by Melissa Klein

Already regarded as a poster child for audit reform in the wake of Enron, Andersen's woes keep mounting as the Big Five firm has in recent weeks been broadsided by a high-profile client exodus, an expulsion from an influential lobbying group and a multi-million dollar settlement of shareholder litigation.

The remaining Big Five firms and the American Institute of CPAs jettisoned Andersen from a lobbying group which is fighting legislative efforts to overhaul the auditing profession because they felt the firm's sinking reputation post-Enron undermined the group's ability to effectively lobby Capitol Hill.

"At this point in time Andersen is in a different and difficult position than all the other accounting firms, especially in the area of public policy debate," said AICPA spokesman Geoff Pickard. "We are very mindful that their major agenda right now is litigation settlement. But we and the other firms need to continue to move along with longer-term policy changes. So for now, we will separately pursue our long-term policy changes affecting the status and functioning of the financial markets."

Andersen representatives did not respond to any requests for comment.

At the same time, Andersen paid $217 million to settle all claims against stemming from its audit of the Baptist Foundation of Arizona, marking that state's largest ever victim-restitution award. As part of the settlement, Andersen partner Jay Ozer and audit engagement manager Ann McGrath, who had primary responsibility over Andersen's audits, relinquished their CPA licenses. Arizona's Accountancy Board will monitor Andersen's audits of companies that offer private and public securities for the next two years.

As if that weren't enough, long-time Fortune 500 client Merck & Co. dropped Andersen as its outside auditor after more than 30 years, adding to the firm's growing list of client defections. Although, in announcing that it hired PricewaterhouseCoopers for its 2002 audit, Merck did offer the embattled firm a few kind words, noting that Andersen provided "excellent" auditing services and that it "valued its relationship with the firm."

In the meantime, the firm is still reportedly scrambling to hammer out an all-inclusive settlement deal in the Enron matter before the price tag gets any bigger. Settlement figures as high as $750 million have been rumored.

But not everyone has walked away from the accountancy giant.

A high-profile trio has stepped up to lead the effort to restore Andersen's sullied credibility. Charles A. Bowsher, chair of the soon-to-be-disbanded Public Oversight Board, and P. Roy Vagelos, retired chair and chief executive of Merck & Co. Inc., have joined former Federal Reserve chairman Paul Volcker on Andersen's Independent Oversight Board. The firm formed the board in January as part of efforts to regain the confidence of regulators, lawmakers and investors and remove some of the tarnish left on its reputation by the Enron mess.

"It's fair to say that none of us would be here if we didn't think it would be a good thing for Andersen to have a future," Volcker said, responding to inquiries about the firm's viability at a New York press conference last month. He later added, "I'd like to see this firm returned as a recognized leader in the audit business."

Still, even with the distinguished panel behind it, the firm faces an arduous task in restoring the faith of regulators and the public as questions linger about its role in Enron's implosion.

"The board certainly has the confidence and the independence, given the composition, to make some significant changes," commented Douglas Carmichael, accounting professor and director of Baruch College's Center for Integrity in Financial Reporting. "I'm certainly hopeful that there will be meaningful changes."

First and foremost, Carmichael said that he'd like to see Volcker's board tackle the firm's risk and reward system - a system he believes should be changed for all of the large firms.

"It has to be changed so the incentives are there so not just to bring in business, but to do the right kind of auditing jobs," he said. "Right now, they reward those who bring in the most business. They have to change it so partners don't have incentive to go along with the client when they should be saying no."

Carmichael also warned that the board must be wary of falling into what he called the "best practices trap." "What firms like to do is to develop 'best practices,' where they say 'here's the best thing to do in that situation,'" Carmichael said. "But the problem with best practices is that they're not binding. They're only goals."

For example, he said, past commissions have recommended that safeguards are needed when a firm provides accounting advice to clients. "But there are none right now," Carmichael noted. "It's a conflict of interest for a firm to advise a client on how to get around accounting rules and then come in as the independent auditor and pass judgement on whether the client complied with the rules. That's what was going on with Andersen in the Enron special purpose entities. The board report indicates that they were paid $5.7 million for that accounting advice."

He'd also like to see a focus on endorsing the "core values" of independence and technical competence. One problem, Carmichael said, is that firm leaders are "out of touch with what's going on out in the field." A prevalent practice that is particularly troublesome to Carmichael is the pressure placed on auditors by superiors to sign off on audits where they found a problem.

"Any instructor of accounting will tell you that invariably, they've had disillusioned students who have come back and said they've had that exact experience. A manager on an audit finds a serious accounting problem, but a partner said 'I've resolved them, you just sign off.'"

Carmichael called the response by many firms that they wouldn't want anyone working for them who wouldn't stand up to the partner in such a case, "totally out of touch with reality." He added, "The pressures on these people are tremendous. There's nothing to give them support to do it."

The three-member oversight board will have sweeping authority to change policies at the troubled accounting firm and to terminate or reassign personnel. While the board's contract grants an initial two-year term, Volcker said he would be "very disappointed" if the firm wasn't in good shape in 18 months.

The board will focus on five areas at the firm: strong control procedures to ensure prompt resolution of technical accounting issues; measures to maintain audit quality and discipline; resolution of questions concerning client retention by senior partners; enforcement of appropriate restrictions regarding future employment of Andersen employees by audit clients; and review of compensation and other business practices that could affect the judgement of audit partners.

For Bowsher, the appointment comes on the heels of a two-year stint as chair of the POB, which will disband at the end of the month. The five-person panel was charged with overseeing the Securities and Exchange Commission Practice Section and its peer review system. But, angered over the fact that SEC chairman Harvey Pitt bypassed the group when he unveiled plans to create a new independent body to bolster accounting regulations, the POB in January voted unanimously to disband.

Vagelos and Bowsher will receive $50,000 honorariums and $1,000 per meeting for their work. Volcker will receive no stipend for his participation.

Tracey Miller-Segarra contributed to this report.

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