A religious organization has filed a lawsuit against Arthur Andersen, claiming its former auditor's negligence led to its bankruptcy and the loss of hundreds of millions of dollars.
Arthur Andersen had acted as the auditor of the Baptist Foundation of Arizona (BFA) for 15 years. When accounting irregularities came to light, the BFA filed for Chapter 11 bankruptcy on 9 November last year.
The lawsuit filed on BFA's behalf by Bernstein Litovwitz Berger & Grossmann alleges that during its audits, Arthur Andersen overlooked numerous "red flags" that should have alerted it to suspicious transactions taking place.
The law firm has something of a track record in the field of auditor class action suits, having participated in the record-breaking case which saw Ernst & Young pay out $3bn in a case involving Cendant Corporation.
The Baptist suit alleges that senior managers at the BFA turned what was a legitimate investment vehicle into a "Ponzi Scheme," in which money from new investors was used to pay off old investors. BFA hid its losses by transferring non-performing assets to related entities in a series of highly suspicious, non-arms' length transactions. The lawyers argue that by failing to pursue these deals, Andersen let BFA's losses to escalate to hundreds of million of dollars, leading to its demise.
"The tragedy of BFA is an all too familiar example of accounting professionals failing to do their job, with innocent investors left holding the bag once the misconduct is disclosed," Alan Schulman of Bernstein Litowitz Berger & Grossmann told Business Wire. "By filing this lawsuit, we intend to hold Arthur Andersen responsible for the consequences of its failures."