New York City Controller William Thompson is considering rescinding Big Five firm Andersen's automatic approval to do business for the city. A "prequalified certified public accounting list" published by the city lists 97 CPA firms that are qualified to do business with city agencies. The controller is considering removing Andersen from the list. Mr. Thompson has asked representatives from Andersen to meet with him on Thursday to offer explanations as to why they should continue to be included on the list.
"We have a great track record of doing work with New York City," said Patrick Dorton, Andersen spokesman. "It's understandable there might be some questions, but we welcome the opportunity to discuss the strong quality of our work."
Arthur Bowman, editor of Bowman Accounting Report, dismissed the action, stating that Mr. Thompson's actions were "misdirected against an office of Andersen that has been exemplary in its work."
NASA Error Disclosed
Last March, the General Accounting Office (GAO) issued a report that disclosed an accounting error in NASA's 1999 audit, which was performed by Andersen. The $644 million error appeared to be a genuine accounting error and not an attempt to cover up any financial activities, according to the director of GAO's financial management and assurance division, Gregory Kutz.
Attention is being called to the report again, now that Andersen is in the spotlight due to accounting irregularities in the Enron situation.
According to a statement issued by Andersen, the problem was a result of "NASA's good-faith misinterpretation" of guidance it received from the Office of Management and Budget on how to fill out a new budgeting statement. According to Mr. Kutz, Andersen's auditors did not understand the process used by NASA to compile accounting data.
In any case, Andersen is no longer performing audits for NASA.
More Legal Hassles
In related news, Andersen is being sued by investors in Styling Technology, a California beauty products company that filed for bankruptcy in 2000 after admitting it recorded about $4 million in fictitious sales of sun tanning products on its financial statements.
The overstatement in income represented about one third of the company's annual sales. Blaming the auditors who didn't challenge the financial statement numbers, Styling Technology division manager Phillip Teal said, "If someone understood the tanning business, these numbers are horribly out of whack."
It was Mr. Teal himself who contacted the Securities and Exchange Commission when he feared prosecution for the misstatement.
Investors who lost more than $60 million claim Andersen's independence was compromised due to the fact that Andersen received $7.5 million in fees and that Styling Technology had hired eight Andersen auditors to fill senior financial positions in the company, including chief financial officer, accounting director, and tax director.
Andersen is also being sued by lingerie company Frederick's of Hollywood for negligence that allegedly led the company to file for bankruptcy in 2000.
According to Frederick's, Andersen improperly sought to be released from any claims the retailer might have related to its auditing services.
"Andersen's misleading tactics, concealment of material information, and ultimate termination of all work destroyed Frederick's ability to carry on its operations," reads the lawsuit.