A U.S. federal grand jury has indicted Arthur Andersen LLP on an obstruction of justice charge, a development that hurts the embattled accounting firm’s efforts at surviving the Enron Corp. debacle it is involved in.
The fate of this Big Five accounting firm is of concern to chief information officers (CIOs) and other corporate IT decision makers because Arthur Andersen is a large provider of IT consulting services. IT decision makers who are clients of Arthur Andersen’s IT consulting business should closely monitor what’s happening with the firm, an analyst said.
“Clients should definitely keep an eye on the situation,” said Andy Efstathiou, a Yankee Group analyst who follows the IT services market.
Specifically, they should find out if the Arthur Andersen consulting teams they are dealing with continue to have the time and resources to deliver on projects they have committed to, and to what extent the legal travails of the firm are interfering with the IT consultants’ ability to do their jobs, Efstathiou added.
Those companies considering hiring Arthur Andersen for a long IT consulting project should break the project down into short and clearly defined phases, and should specify that they have a right to cancel the project contract at the end of any phase if they deem it necessary, said Christine Ferrusi Ross, an IT services analyst at Forrester Research Inc.
Companies also should demand detailed answers from Arthur Andersen as to how the firm will approach the project, given the firm’s uncertain future right now, and as to what contingency plans will be set in motion if needed, Ferrusi Ross added.
IT decision makers should also monitor any significant employee churn in the Arthur Andersen consulting teams they deal with, Ferrusi Ross said.
Eventually, Arthur Andersen will have to separate its core audit business from its IT consulting unit, turning the latter into a separate company or selling it to another firm, Yankee Group’s Efstathiou said, echoing the mandate made this week by an oversight board entrusted with outlining reforms for Arthur Andersen.
The other four Big Five accounting firms have taken or are taking steps to separate IT and other consulting services from their core audit businesses to address conflict-of-interest concerns that have flared up due to the Enron and Arthur Andersen relationship. In addition to providing audit services to Enron, Arthur Andersen also provided IT and other consulting services, which has led critics to question whether Arthur Andersen compromised the quality and integrity of the auditing in order to protect its lucrative consulting contracts. Thus, accounting firms that also offer consulting services are feeling pressure to protect the independence of their auditors by getting rid of their nonaudit consulting services.
The one-count indictment, returned last week by a grand jury in the U.S. District Court for the Southern District of Texas, was announced Thursday afternoon in a press conference by the U.S. Department of Justice.
The indictment alleges that Arthur Andersen destroyed “tons” of Enron documents in October and November 2001 in anticipation of litigation and government investigations in order to obstruct justice.
Arthur Andersen released a statement Thursday calling the indictment “a gross abuse of government power” and complained that “it is beyond comprehension for the Department of Justice to implicate the entire firm in criminal activity,” suggesting that charges should have been brought against individuals.
Arthur Andersen was Enron’s auditor. The accounting practices at Enron, which helped the energy trader hide a huge debt that ultimately pushed it into bankruptcy, have been at the center of the scandal.
A copy of the indictment is at http://news.findlaw.com/hdocs/docs/enron/usandersen030702ind.pdf
