The Securities and Exchange Commission brought civil fraud charges against Arthur Andersen yesterday in the first such case filed against a Big Five accounting firm in more than a decade. Andersen settled the charges and agreed to pay a penalty of $7 million.
The charges stemmed from failed audits at Waste Management Inc., the large trash company, which led to a $1.43 billion restatement of earnings in 1997. The commission said the restatement was the largest in American history.
The SEC said Andersen and its top executives, including the firm's top accountant at the time, knew the company was exaggerating its profits throughout the early and mid-1990s and repeatedly pleaded with the company to make changes.
Waste Management made promises of reform - some of which were not kept - but refused to reduce reported profits as the auditor recommended, the SEC said. Each year, Andersen gave in, certifying the company's annual financial statements as being in conformance with generally accepted accounting principles.
"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," said Richard H. Walker, the SEC's director of enforcement. "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."
The SEC filed civil fraud charges against three Andersen partners who were involved in the audit, all of whom settled the charges without admitting or denying the allegations. The three agreed to pay fines of $30,000 to $50,000 each and will be banned from auditing public companies for up to five years. A fourth partner was censured by the SEC and barred from auditing for one year.
"This settlement allows the firm and its partners to close a very difficult chapter and move on," said Terry E. Hatchett, Andersen's managing partner for North America. "There are important lessons to be learned from this settlement by all involved in the financial reporting process. The pressures on management to meet expectations are greater than ever in a market where information and capital move instantaneously."
While the settlement will not prevent Andersen from continuing to audit companies, it represents a second embarrassment within weeks. Last month the commission filed fraud charges against an Andersen partner in connection with an audit of the Sunbeam Corp. The partner is fighting those charges, which did not name the firm itself.