By John A. Byrne
Even as Arthur Andersen tries to defend itself in the Enron debacle, the accounting firm remains embroiled in an earlier scandal that resulted in the meltdown of another company: appliance maker Sunbeam Corp.
Andersen has resorted to an unusual legal maneuver in an attempt to avoid further liability over its role as Sunbeam's auditor. After Sunbeam imploded in 1998, amid public allegations of gross mismanagement and fraud, Andersen approved a restatement of two years worth of Sunbeam's earnings.
Instead of the $109.4 million in net income originally reported in 1997, Sunbeam's restated net became $38.3 million. Now, Andersen is trying to exclude the restated financials from a coming trial that pits Sunbeam's bondholders against the accounting giant.
PARTNERS TO PAY UP?
The stakes in that court fight are potentially huge. Andersen agreed last April to a $110 million settlement with Sunbeam shareholders. In up to four separate lawsuits by bondholders, the accounting firm could face more judgments in the tens of millions of dollars -- losses that might not be covered by its insurance carriers but instead come straight out of its partners' pockets.
The allegations turn on whether Sunbeam misled investors, and as part of the evidence, plaintiffs hope to present the restated numbers. If Andersen succeeds in keeping those out of the case, it could also weaken the Securities & Exchange Commission's (SEC) ability to win a civil suit brought against five former Sunbeam execs, including ex-CEO Albert J. Dunlap and Phillip E. Harlow, the Andersen partner who originally audited Sunbeam's books.
Andersen's gambit has not received any attention because its request, made on Dec. 10, is detailed only in sealed documents in a federal district court in Miami. However, several lawyers involved in the Sunbeam litigation confirm Andersen's move, and the accounting firm's position is plainly revealed in a friend-of-the-court brief filed by the SEC on behalf of the bondholders on Jan. 9.
How can Andersen argue that the restatements should be excluded? The firm declines comment. But Eliot Lauer, an attorney with Curtis Mallet, the law firm representing Andersen, contends that the restatement would, among other things, "create the potential for jury confusion and improper prejudice." Lauer also contends that the restatement was voluntary and that it was based on information not available to Andersen's auditors when the original financial statements were certified.
The SEC's papers, however, show that Andersen may be backing away from its restatement altogether. According to the agency's brief, Anderson also is claiming that "revisions found in the restatement were purely the result of changes in approach mandated by Sunbeam's new management." But Lauer contends that is a misrepresentation of the auditor's position. The new management was brought in soon after "Chainsaw Al" Dunlap's ouster, when Sunbeam's financial condition proved to be far weaker than the old management had let on.
Andersen's legal move has surprised lawyers and Sunbeam officials, some of whom use words such as "desperate" to describe its legal maneuvering. "It's a scorched-earth policy," says one Sunbeam official. "Andersen is doing anything to evade blame."
The dispute dates back to the implosion of the Florida-based appliance company that was run by Dunlap, once considered a top-notch turnaround artist, from July, 1996, to June, 1998. When Sunbeam's board fired Dunlap and CFO Russell Kersh on June 13, 1998, directors learned that the company could pay its employees only by borrowing money and that it was within a couple of weeks of being in default on a $1.7 billion loan. Two weeks later, Andersen withdrew its audit of Sunbeam's books, which had certified them as being in compliance with accepted accounting principles.
Sunbeam's board then brought in accountants Deloitte & Touche to help Andersen review the company's financials. After nearly four months of work, the auditors concluded that Dunlap had overstated Sunbeam's loss in 1996 and had vastly exaggerated profits for 1997 -- in addition to understating the magnitude of Sunbeam's first-quarter loss in 1998. Taken together, it explains why the SEC characterized what was going on at Sunbeam as a "massive financial fraud." That also helps explain why the management team that succeeded Dunlap could not prevent the company from filing for Chapter 11 bankruptcy in February, 2001.
The bondholders' suit is expected to go to trial in March. And the decision on Andersen's motion to exclude references to Sunbeam's restated earnings could have a bearing on the SEC's civil suit against Dunlap, Kersh, three other ex-Sunbeam executives, and Andersen engagement partner Harlow. The attorney for Kersh and Dunlap couldn't be reached for comment.
The SEC complaint alleges that Harlow authorized a clean bill of health for Sunbeam's books even though "he was aware of many of the company's accounting improprieties and disclosure failures." Harlow disputes that allegation. "Mr. Harlow acted with the appropriate degree of skepticism and exercised appropriate professional judgment," says Harlow's attorney, Vince DiBlasi of Sullivan & Cromwell. DiBlasi is also representing David Duncan, the Andersen engagement partner on the Enron account. For Andersen, it doesn't rain bad news. It just pours.
Byrne is a senior writer for BusinessWeek in New York