Big Five firm Andersen has agreed to pay $217 million to settle litigation stemming from the bankruptcy of the Baptist Foundation of Arizona. The not-for-profit company collapsed in 1999 after running up huge debts which were not disclosed on financial statements audited by Andersen.
The operations of the foundation were found to be a Ponzi scheme whereby investors were paid with cash from new investors.
Under the terms of the agreement, Andersen is not required to take any blame for the failure of the foundation. In addition to the payment to investors, Andersen has agreed to pay $640,000 to the Arizona State Board of Accountancy to cover costs of the investigation.
In addition, two Andersen executives will lose their Arizona CPA licenses, and a three-member board will review the audit work of Andersen's Phoenix office for the next two years.
The settlement of $217 million is the second largest such payment ever made by an accounting firm for a dispute over audit work. The largest payment, $335 million, was paid by Ernst & Young to settle lawsuits for its work for Cendant Corporation. Andersen has already offered more than double that amount to settle claims resulting from the Enron collapse.
In other bad news for Andersen, the firm has lost another client, pharmaceutical company Merck, whose board of directors voted to end a 31-year relationship with Andersen. The firm's shareholders will vote on the decision to turn the audit work over to Andersen rival PricewaterhouseCoopers.
A spokesman for Merck said, "This appointment concludes a rigorous selection process that was part of Merck's annual formal review of auditing services." No specific comment was made about dismissing Andersen, however a Merck statement was released that spoke well of the firm. "Arthur Andersen has provided excellent auditing services to Merck since 1971 and Merck has valued its relationship with the firm."
According to financial statements filed with the Securities and Exchange Commission, Merck paid Andersen $4.2 million for auditing services and $2.1 million for other services in 2000.