Inside Andersen's Web

Here's a quick Wall Street quiz with which to start your week: What do Boston Chicken, Sunbeam, and Waste Management all have in common? 

If the word bankruptcy leaps to mind, you'd only be half right. The other thing they have in common is the see-no-evil auditing expertise of the Arthur Andersen LP accounting firm. 

Arthur Andersen is not necessarily the worst of the Big Five auditing firms, but it does seem to have a knack for stepping into embarrassing problems more frequently than do its competitors. 

All, in fact, are conflicted by the very nature of the work they do, which is supposedly to function as a kind of watchdog for investors regarding the financial trustworthiness of the books and records of public companies. 

But since the companies - and not the investors - are the ones paying the auditors for their work, it is inevitable that auditors rarely disagree with the managements of the companies they audit. 

That is something to remember whenever you hear Joe Berardino, the managing partner and CEO of Arthur Andersen, carry on in front of the cameras - which he's doing constantly these days - about his firm's rock-solid integrity and its covenant of trust with the public. 

As the whole world now knows, the Andersen auditors working on Enron's books got caught stuffing their office memos about Enron's financials into the shredder as the once-high-flying energy company began careening toward bankruptcy last autumn. 

The company finally went belly up in December - but not before its chairman and CEO, Kenneth Lay, dumped nearly $5 million of his own personal stock into the market - even as his own employees were barred from selling theirs. 

Now the feds are crawling all over Enron even as Andersen's top auditor at the company, David Duncan, took the Fifth Amendment as a congressional witness late last week regarding his auditing activities at the company. 

The truth is, Arthur Andersen, the largest of the so-called Big Five accounting firms, has a long history of failed and questionable audits, a number of which involve obvious questions as to just how hard the firm's auditors really looked to ferret out financial fraud by the companies they were auditing. 

According to the regulations that govern accounting audits of companies, auditors are under no obligation to look for fraud or financial irregularities in the companies they audit, but simply to report such things when they actually encounter them. 

So they don't look very hard, and in fact sometimes seem determined not to see what is staring them in the face. Here are some examples: 

Boston Chicken, Inc. - Arthur Andersen was the auditor of record for this fast-food chain, which crumbled from $40 to less than 10 cents in bankruptcy once the air went out of its Ponzi-like scheme of using licensing fees from franchisees to prop up overall corporate revenues. 

The company's basic business thus wasn't selling chicken sandwiches, it was selling store franchises. What's worse, the company was lending its franchisees the money to make their licensing payments, then declaring those payments as part of the company's revenues. There were no loan provisions on the balance sheet for loan defaults by the borrowers. 

Sunbeam Corp. - Arthur Andersen was the auditor of record for this consumer-goods manufacturing company, which collapsed from $53 to 8 cents once a management scheme to inflate revenues by stuffing its distribution pipeline with excess goods began to unravel. 

The auditors sounded no alarms about the fraud, which led eventually to a civil fraud case against Sunbeam by the SEC and the collapse of the company. 

Waste Management Corp. - Arthur Andersen was the auditor of record for this Houston- based trash company, which lost nearly two-thirds of its value in the summer and autumn of 1999 after the company had pumped up its stock price through years of false and misleading financial statements, at which point the Waste Management brass began dumping their stock at the inflated price. 

The company eventually had to restate its earnings twice, as well as take a nearly $2 billion write-off. 

Last November Waste Management settled more than 30 securities fraud lawsuits, for an eye-popping $457 million. In this scandal, even Andersen got nailed, agreeing to pay $20 million of its own in a fraud case with angry Waste Management shareholders. 

There are plenty of other Arthur Andersen clients with equally troubled financials. 

Arthur Andersen audits the books and records of a Bermuda-based telecom company bearing the name Global Crossing Ltd. Founded by a former Drexel Burnham junk bond promoter named Gary Winnick, Global Crossing is in the fiber-optics end of the telecom space, and has seen its stock price collapse in the last two years from $61 per share to a current price of less than a dollar as the tech sector has imploded. 

But is that really the reason for the collapse, or are there problems lurking in the company's financials that Arthur Andersen either hasn't spotted or, more likely, tried very hard to find? 

One clue might be back in May, when Winnick sold nearly 10 million shares of Global Crossing, or 12.5 percent of his entire stake in the company, for $123.5 million at $12.38 per share. The same shares, if sold today, would fetch a mere $5.3 million. 

Here's another one: PeopleSoft, Inc. This stock looks great, if you don't look too carefully. 

But dig into the numbers and it turns out that PeopleSoft's big product is a software package called PeopleSoft 8. This program was developed by what might be called a Wall Street version of the old Three Card Monte card game. 

In it, PeopleSoft set up a company at the start of 1999 with exactly one employee on the payroll, then transferred $250 million in seed money into the company's bank account. 

This new company, called Momentum Business Applications, Inc., was supposedly in the business of writing up the software code for PeopleSoft 8. 

So, want to guess how they did it? Simple: they just signed up PeopleSoft, Inc. as Momentum's subcon- tractor to do the actual work, and began paying them for their efforts. 

This enabled PeopleSoft to convert what would otherwise have been development costs into revenue instead! (PeopleSoft gives the money to Momentum, which gets booked as a one-time capital outlay, then Momentum starts feeding the dough right back to PeopleSoft as revenue, creating the illusion of a growing business. Nifty or what!) 

Most astonishing of all, the new company - Momentum - was created by PeopleSoft via a stock spin-off through which it emerged as a separate, publicly traded company all its own, with, currently, a nearly $100 million market value on barely $5 million of yearly revenues and more than $100 million of "costs." Those costs, of course, simply reappear as "revenue" on PeopleSoft's income statement. 

And presiding over the whole rigamarole is but a single employee - a chap named Ron Cobb - who gets $212,000 per year for a job that sounds about as stressful as turning up at the office and shooting paperclips into the wastebasket. 

It's hard to imagine any business purpose whatsoever for the whole arrangement except to convert an expense that would otherwise have lowered the company's bottom line, into a kind of make-believe revenue stream that seemed to plump up its top line. 

And like so many other such deals, Arthur Andersen signed off - as an auditor of record, along with Ernst & Young - on this arrangement as well. 

Remember all this the next time you see one of those people from Arthur Andersen turn up on TV and start carrying on about how they hold some sacred trust with the public, and they're there to serve your interests. 

No, they're not. They go to work every morning for the exact same reason everyone else does: to make money. 

And in the case of Wall Street and the auditing game, it's ultimately your money they're after. It's how Wall Street works.