Arthur Andersen is once again the target of litigation, even though the former Big Five accounting firm exists, for the most part, in name only.
Creditors are blaming the onetime auditing giant for the financial woes that plunged Mirant Corp. into bankruptcy, according to The Atlanta Journal-Constitution. The creditors allege in a recently filed lawsuit that Andersen failed to investigate problems at Mirant and gave the Atlanta-based electric-power company a clean bill of financial health despite “numerous red flags” that included its own internal reports, according to the newspaper.
The Andersen reports were put together several months before Southern Co., the utility’s then-parent, spun off Mirant in 2001. The reports asserted that Mirant was overly concerned with meeting specific earnings goals and at “maximum” risk for misstating its financial position, according to the newspaper’s account of the lawsuit.
In June, Mirant and its creditors’ committee filed a separate lawsuit against Southern, asserting that the holding company played a role in its bankruptcy. The Journal-Constitution said Mirant officials referred comments on the latest lawsuit to creditors’ attorneys, who were unavailable to comment.
“The valuation models used to support and value many of Mirant’s acquisitions were based on assumptions…that were unrealistic and significantly higher than the prices forecast by Mirant’s trading and marketing group, based on actual market data,” the Andersen lawsuit charges. That lawsuit described as “stunning” the differences between Mirant’s forecasts and eventual reality.
In addition, the Andersen lawsuit accuses Mirant’s trading operation of overstating revenue and earnings, having material weaknesses in accounting controls, and keeping two different sets of books related to trades, according to the newspaper.
The suit also alleges that Andersen’s internal reports in late 2000 and early 2001 said Mirant was “aggressive” in its accounting, “highly optimistic” in its asset valuations, and “demonstrated a consistent bias toward overstatement of income in accounting estimates,” said the report.
The newspaper also said the lawsuit claims the reports deemed Mirant’s management to be financially unskilled and “unable to reliably measure the value of a specific business or any of its significant segments in a strategic context.”