June 21, 2001
One of the Big Five is a bit smaller today – at least in the pocketbook. On June 18th the Securities and Exchange Commission filed civil fraud charges against Arthur Andersen LLP and three of its partners in connection with improper accounting practices that inflated the financial results at the firm’s client, Waste Management, Inc., from 1992 through 1996.
The SEC complaint, filed in United State District Court in Washington, D.C., alleges that these improper practices led Waste Management to restate earnings by $1.43 billion in 1998 – the largest restatement in American history. The three Arthur Andersen partners handling the Waste Management account were Robert Allgyer, of Lake Forest, Illinois; Walter Cercavschi, of Harwood Heights, Illinois; and Edward Maier, of Chicago, Illinois. A fourth partner, Robert G. Kutsenda, consented to administrative sanctions based on the SEC finding that he had engaged in improper professional conduct.
Although the auditing firm and its partners declined to either admit or deny the allegations, they did agree to pay some hefty fines: $7 million in the case of Arthur Andersen and another $120,000 in total from the three individual accountants.
The action represents the first case brought by the SEC against an auditing firm since 1985. According to Richard H. Walker, the SEC's Director of Enforcement, “Arthur Andersen and its partners failed to stand up to company management and thereby betrayed their ultimate allegiance to Waste Management's shareholders and the investing public. Given the positions held by these partners and the duration and gravity of the misconduct, the firm itself must be held responsible for the false and misleading audit reports issued in its name.”
Mr. Walker went on to say that “[a]ccountants play a critical role in providing access to our capital markets. We will not shy away from pursuing accountants and accounting firms when they fail to live up to their responsibilities to ensure the integrity of financial reporting process.”
As the SEC points out, Arthur Andersen became aware of the problems at Waste Management in the late 1980’s. Then, in early 1994, the auditors identified $128 million in misstatements relating to 1993 and prior periods. Arthur Andersen even suggested reforms and corrections. Still, when Waste Management refused to implement those changes, and declined to correct the earnings misstatements, Arthur Andersen certified that the Company’s annual reports were in accordance with generally accepted accounting principles. To justify that position, the auditors maintained that the misstatements were not material. That allowed the auditors to give their unqualified certification to the financial statements – despite their misgivings. It also meant that stockholders were not getting a fair or accurate picture of the Company’s performance.
In later years, Arthur Andersen continued to caution Waste Management against improper practices, but nevertheless approved the Company’s annual financial reports.
The SEC maintains that Arthur Andersen’s top accountant, Richard Measelle, concurred in the decision not to force Waste Management to correct its books. No charges have been brought against Mr. Measelle.
Why was Arthur Andersen willing to compromise accepted standards and practices, and risk liability, fines and sanctions? The SEC charges suggest an ongoing pattern of potential conflicts between the auditing firm and its client. Waste Management was one of the premier clients of the firm, which had been auditing the Company’s financial statements since before it went public in 1971. As a consequence of that relationship, until 1997, every chief financial officer and chief accounting officer at Waste Management had previously been employed by Arthur Andersen.
In addition, Robert Allgyer, the partner in charge of the Waste Management audit, was also the “marketing director” for Arthur Andersen’s Chicago office, and his compensation was tied to Arthur Andersen’s sale of consulting services to Waste Management. From 1991 to 1997, the firm billed Waste Management $7.5 million in audit fees and an additional $11.8 million in other fees - $12.3 million more than the fine now being assessed.
Terry Hatchett, Arthur Andersen's managing partner-North America, had this to say following the SEC announcement: "This settlement allows the firm and its partners to close a very difficult chapter and move on. The SEC has not questioned the underlying quality or effectiveness of our overall audit methodology, nor has the SEC limited our ability to conduct audits for other public companies."
That may be true, but the four individual auditors who consented to sanctions have been barred from working on public audits for periods ranging from one to five years.
Neither Waste Management nor any of its employees were named in the SEC proceedings.
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