Andersen Fined $7 Million by SEC
The SEC filed civil charges in federal court Tuesday against Andersen, alleging the firm "knowingly or recklessly issued false and misleading" audit reports for its client, Waste Management, Inc., for the years 1993 through 1996.
In a swift response to the charges, Andersen settled with the SEC and consented to be censured by the agency and to pay a fine of $7 million, the largest ever paid by a Big Five accounting firm in an SEC enforcement action.
Three Andersen partners also agreed to pay a total of $120,000 in civil fines related to the case.
The SEC found that Andersen engaged in "improper professional conduct" and that the firm "knew or was reckless in not knowing that the unqualified audit reports that it issued for the years 1993 through 1996 were materially false and misleading because the audits were not conducted in accordance with GAAS and the financial statements did not conform to GAAP."
Andersen has neither admitted to nor denied the allegations.
Where was the board?
From: Economist: "Cleaning up the mess, Jun 28th 2001"
1. Widely diversified: Integration problem (SAS82)
"Waste Management and USA Waste Services had between them bought up 1,250 waste outfits in America, and even more in 20 other countries, before they merged with each other in 1998.
"Integration of all these takeovers was horrendous. When Mr Myers arrived, there were 1,120 Andersen consultants trying to hack their way through the company’s accounts. Billing was a mess, as was the payroll. Of the firm’s 57,000 employees, 10,000 were receiving incorrect pay slips. Predictably, morale was awful."
2. Consulting contract in place, and the auditors signed off on the audit. Auditors says, "Things are great" with 1,120 of their own consultants on the payroll.
"To minimise further instability, Andersen was retained as the company’s auditor, notwithstanding its past sins. Until the final days before the March 2000 deadline for 1999 results, Mr Myers was unsure whether the company could produce an accurate financial statement."
Questions:
- How could WM possibly produce a reliable annual report filed with SEC when they were still integrating their newly acquired firms in 1999?
- Management requires reliable information to ensure that the money spent is actually achieving results. Given the poor information, how was it determined that the firm was actually achieve the results following the Andersen consulting visits?
- How could the board determine that the advertised results were real?
- Idea behind auditing is to have an objective evaluation. Given the uncertainty behind the auditor reliability, why would the board permit a firm too retain the same auditor?
Companies exist to create wealth -- for whom and at what risk?
Financial incentives to lobby client for non-audit services
All of Waste Management's top financial officials were former Andersen auditors
The partner in charge of the Waste Management audit, Robert F. Allgyer, was also the marketing director for Andersen's Chicago office, and his compensation depended in part on his great success at selling consulting services to Waste Management.
1. Why calling themselves "independent" auditors?
2. What financial incentives existed for auditors to lobby FASB to get changes to GAAP? (Valuation, cashflows)
3. How many audit clients would not be going concerns (and unable to purchase non-audit services) without the changes to GAAP?
How many ~more~ audit failures do we have to have?
Voluntary lookback program results are due. Auditors continued to own shares in how many clients?
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Error: Correction -- Pool was $220M, not $200M
Andersen's liablity covered a class period that went until Feb 1998, only 3 years ago.
Point: Andersen can't say, "This was such a long time ago."
Audit failures continued well into the late 1990s. This is not ancient history.
From WSJ
The settlement, which is subject to approval by the U.S. District Court in Chicago, as well as other conditions, will establish a $220 million fund to compensate investors who purchased Waste Management shares between Nov. 3, 1994, and Feb. 24, 1998.
Source:
Waste Management, Andersen Agree To Settle Holder Suits for $220 Million
Wall Street Journal; New York; Dec 10, 1998; By James P. Miller
How can it be argued that the POB 2000 report was independent?
Auditors canceled funding for POB in 2000
SAS82 was issued in 1996 for comments, passed in 1997, effective after Dec97; partners from Andersen reported in 1997 that SAS82 implementation was going well. What happened?
Just because the auditors say something, I have no confidence in their statement.
Why are we calling auditors with conflicts "independent" auditors?
Andersen part of $200M fund for damaged investors (WSJ 10 Dec 1998, p1)
$7M fine is only part of it...
Andersen fired?Yes...Fired from ~this~ audit:http://www.accountingweb.co.uk/cgi-bin/item.cgi?id=14962&d=448&muscat
Self regulation fails?
Sure, fraud indicators apply to auditorsSAS82: What kind of attitude toward regulators?http://www.cpaspan.com/sas82.htm
Responded only after SEC called?http://www.sec.gov/news/headlines/andersenfraud.htm
Partners owned shares in how many clients?http://www.sec.gov/news/press/2000-77.txt
Auditors opposed Public Oversight Board?http://www.sec.gov/news/speech/spch370.htm
It is hard for me to fathom continuing industry resistance to the POB's plan--Levitt
Fools merge with ~which~ auditor?