A Man, a Plan, a Long Shot

In wake of Berardino departure, firm "committed" to Volcker's strategy. Also: SEC sends signal to Signal Tech. Plus: who loaned $700 million to Andersen?


Management at Arthur Andersen said Thursday it is aggressively proceeding with the recommendations made by Paul Volcker, the chairman of Andersen’s Independent Oversight Board. Volcker announced his plan to save the foundering accounting firm late last week.

“We are committed to building the audit firm of the future under the leadership and recommendations of Mr. Volcker,” said Larry Gorrell, Andersen managing partner in a statement.

Last Friday, Volcker offered to lead the accounting firm in what may be Andersen’s last chance for survival. Under his plan, the company will break into separate auditing and consulting businesses in an effort to avoid conflicts of interest.

“This course of action will require us to address those non-audit portions of our business that are not consistent with that plan — the tax, business consulting, and corporate finance practices,” Gorrell added in his statement. “We intend to do so with speed, and in a manner that assures continuity of services to all our clients and opportunities for employees, while at the same time building an audit practice based on the recommendations to improve audit quality and restore public confidence.”

In another Andersen-related development, the Justice Department urged a U.S. judge Thursday to permit prosecutors investigating Enron Corp. to continue questioning Andersen employees despite the auditor’s recent indictment.

Andersen’s lawyers insist that federal rules prohibit the use of a grand jury in a case where the defendant already has been indicted, according to published accounts.

In response, federal prosecutors on Thursday reportedly called Andersen’s arguments “another in a series of efforts to manipulate the pace and timing of the government’s investigation.”. They called these arguments “utterly unfounded in the law and inimical to the grand jury’s virtually unfettered right to investigate wrongdoing.”

Meanwhile, if Andersen does ultimately file for Ch.11 bankruptcy protection, a number of large financial institutions stand to lose large sums of money.

Apparently, Citigroup Inc., Bank of America Corp. and Barclays Bank PLC arranged (with a bank syndicate) a $700 million credit line for Andersen on Oct. 31. As you may recall, that’s the day managers at Enron Corp. disclosed that federal regulators were investigating the company’s accounting practices.

The timing and the terms of the loan have raised eyebrows among some bond market followers, particularly since questions had already been raised in the media about Andersen’s involvement in Enron’s accounting woes.

According to published reports, the two loans came with terms usually reserved for the most credit-worthy borrowers. One loan is said to be a $375 million credit facility of 364 days with a drawn interest rate of 0.55 percentage point over Libor, and a five-year line of $325 million with a drawn interest payment of 0.65 percentage point over Libor.

“The pricing and structure are indicative of an investment-grade facility which are typically unsecured,” Meredith Coffey, a senior vice president at Loan Pricing Corp., told Reuters.

In another Andersen-related story, money manager Atalanta/Sosnoff Capital Corp. said it canned Andersen on March 22 as internal auditor. In explaining the move, Atalanta/Sosnoff management cited its audit committee’s concern about Andersen’s exposure to civil and criminal liabilities. The firm hired non-Big Five accountancy Rothstein Kass & Co . P.C. as its auditor for 2002.

(For a look at how Andersen’s woes may be helping second-tier accounting firms, see “Who Goes Up if Andersen Goes Down?”)

SEC Settles With Signal Technology, Two Finance Execs

The SEC announced it settled charges that Signal Technology Corp. overstated its revenues and net income in 1996 and 1997 and the first quarter of 1998.

According to the Commission, Signal engaged in improper accounting practices at its Keltec division by failing to record known losses on major contracts, prematurely recognizing revenue and failing to write off worthless inventory. The Commission said Signal, a defense contractor, committed violations of the periodic reporting, record-keeping and internal controls provisions of the federal securities laws.

In addition, the Commission filed civil fraud charges against seven former Signal senior officers, alleging they caused Signal to inflate its reported earnings by over $9 million from January 1996 through June 1998.

According to the complaint, each of the defendants personally directed or participated in the company’s improper accounting practices at its Keltec division, when it failed to record known losses on major contracts, prematurely recognized revenue, and failed to write off worthless inventory.

The seven defendants are Dale Peterson, Signal Tech’s chairman and CEO; Russell Kinsch, CFO; James Walsh, president, who also served as president of the Keltec division; Michael Smith, Wayne Armstrong and Richard Nabozny, who served as presidents of Keltec; and Charles Balentine, Keltec’s controller.

SEC Investigating Robotic Vision

Management at Robotic Vision Systems, Inc. said the SEC has begun a formal investigation into the company’s past accounting practices. Those practices led to Robotic Vision’s May 2001 restatement of its financial results for the fiscal year ended September 30, 2000 and for the three-month period ended December 31, 2000.

The May 2001 restatement resulted from a review by Robotic Vision’s audit committee with the assistance of outside counsel and auditors, said the company.

“As a result of the review, new procedures and other safeguards were implemented to minimize the possibility of any future revenue recognition errors,” Robotic Vision’s management added in a statement. “RVSI believes it has taken the necessary remedial actions, and intends to work cooperatively with the SEC staff in order to bring this inquiry to a conclusion as promptly as possible.”

Robotic Vision makes vision-based technology inspection equipment.

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