Make no mistake: Andersen's once-glorious reputation as an auditor is ruined. Its employees shredded Enron Corp. documents. It just paid a huge settlement to end litigation over audits of the Baptist Foundation of Arizona. Clients such as FedEx Corp. and Delta Air Lines Inc. are fleeing. And now, civil and criminal indictments over the Enron debacle hang over the company. Action against this firm is clearly in order.
Yet it would be better to reform Andersen than to destroy it. Indeed, that may be the only choice left, as both Deloitte Touche Tohmatsu and Ernst & Young back away from buying it. Paul A. Volcker has it right by proposing to separate Andersen's auditing and consulting businesses rather than merge the company with another firm. Making Andersen a benchmark for accounting reliability would go a long way toward rescuing investor confidence. Restatements of earnings are at a record level, and the Securities & Exchange Commission is currently scrutinizing the books of Global Crossing, WorldCom, and Qwest, among others. In this post-Enron era, one Big Five auditing firm that delivers authentic, comprehensible corporate financial data may pressure others to follow suit.
Volcker wants to separate the audit partners from those who give aggressive tax-saving, strategic, and information technology advice. Auditors would still be able to prepare corporate tax returns and do due diligence. Lead partners on audits would be rotated every five years and partners would have to wait years before seeking jobs with their clients. Sound advice, which Andersen must follow: It hired Volcker in a last-ditch effort to save itself and pledged to honor his recommendations.
To make Andersen a model for a rehabilitated accounting industry requires quick settlements between it and the SEC, the Justice Dept., and the trial lawyers representing Enron shareholders. A criminal indictment for destroying evidence would probably end any chance of Andersen remaining independent. Andersen must also find up to $1 billion or more to settle the civil suits brought by Enron shareholders protesting the loss of their investments. It has offered $750 million over five years; more will be needed. Yet it is in the interests of Enron investors that Andersen agree to a fast, reasonable settlement. The possible acquirers of Andersen are unlikely to take on its Enron liability. Long negotiations will lead to more Andersen clients bailing out, pushing the company toward bankruptcy or worse. Enron shareholders could lose big.
There was a time when the name Arthur Andersen stood for integrity and honesty. Andersen now has a chance to redeem its heritage by remaking itself according to the Volcker plan. If that happens, the whole country will benefit.