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Enron may prove to be least of Andersen's problems

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By ROBERT TRIGAUX, Times Business Columnist

© St. Petersburg Times
published February 1, 2002


Maybe we should hire an accountant -- just to keep up with the growing troubles of corporate clients audited by the struggling Arthur Andersen accounting firm.

Sure, endless tales of Andersen's bungling of Houston's Enron Corp. already seem to fill these business pages. Blessing false profits? Sure, why not. Shredding thousands of documents amid a federal criminal investigation? No problem.

But it won't be long before Andersen will look back fondly at these days when Enron was its only big headache. Other Andersen accounting screw-ups, including such no-no's as document destruction, are about to hit the fan.

Enron gets all the attention, but another whopper bankruptcy took place this week. Global Crossing, a Wall Street darling that lays undersea cables connecting the world's largest cities, filed for Chapter 11 protection.

So maybe it's not an Enron. With $22.4-billion in assets, Global was only the fifth-largest bankruptcy case in U.S. history. And its accounting practices, especially its practice of inflating revenues, are attracting concerns.

Global Crossing's auditor? Andersen.

Here's a simple version of how it worked. Global Crossing would sell capacity on its international telecommunications network to other telecom carriers. Global would often sell 20-year contracts and then book the 20-year revenue upfront in one lump sum. But when Global would buy similar capacity elsewhere for the same customer, the company would spread the cost of that deal over a number of years.

Eventually, the soaring revenues and hard-to-find expenses became too hard to swallow even for go-go investors. It probably did not help that Global Crossing was founded only six years ago, based offshore in Bermuda and controlled by billionaire investor Gary Winnick. Winnick once worked with former junk bond king Michael Milken at the defunct Drexel Burnham Lambert investment firm.

But it is Andersen, already wounded by Enron, that surely will be called upon to explain why it signed off on Global's aggressive accounting style.

Global paid Andersen about $2.3-million in audit fees in 2000. At the same time, it shelled out nearly six times as much -- $12 million -- in fees to Andersen for non-audit work.

Wait. There's a third leg on Andersen's stool of iffy audits. Right here in Florida.

In 1998, as the Securities and Exchange Commission investigated Sunbeam's restatement of earnings, auditors in Andersen's Fort Lauderdale office were busy destroying Sunbeam documents.

Phillip Harlow was Andersen's lead partner on Sunbeam. Harlow (in remarks reminding us of Andersen's David Duncan and his client Enron) said his accounting firm ordered its employees to dispose of any papers or correspondence "that don't agree with the final documentation" of Sunbeam's restated earnings.

Sunbeam, you may recall, is an appliance manufacturer that at the time was run by "Chainsaw" Al Dunlap. It, too, sought Chapter 11 bankruptcy protection.

Andersen's disposal of Sunbeam documents is new information. It was disclosed in depositions and court records, and reported this week by USA Today and Business Week.

To say the least, Sunbeam was imaginative with its accounting. Sunbeam decided to sell the spare parts used to fix its blenders and grills to its warehouse storage company. If Sunbeam sold the parts for $11-million, it could book an $8-million profit -- even if the buying company thought the parts were only worth $2-million. How? Sunbeam convinced the buyer to "purchase" the parts for $11-million, but it gave the buyer the option to walk away from the deal later.

Harlow at first balked at such a funny-money deal. But after Sunbeam trimmed its "profit" by $3-million, Harlow let it pass.

Sunbeam? Strike 1. Enron? Strike 2. Global Crossing? Is this Strike 3 for the mighty Andersen?

Short takes

SHOW US THE MONEY: The Bank of America name dominates the Florida banking market, but some shareholders still are not happy with the original $67-billion NationsBank merger with BofA in 1998. More than 300,000 NationsBank investors say their bank overpaid for BofA, leaving them shortchanged. They seek $6-billion in damages. A jury trial is set for this spring. A settlement seems very, very likely . . .

SUPER (BOWL) RECRUITING? Leave it to Jacksonville economic leaders to interrupt the mindless, pre-Super Bowl partying in New Orleans with serious business recruiting. With Super Bowl 2005 scheduled for Jacksonville, two dozen of the city's Bowl organizers say they want to hire Michael Kelly to run their Big Game. Kelly ran (at age 28) Tampa Bay's 1999 Final Four college basketball championship, and then organized Tampa's Super Bowl XXXV last year. Kelly, now associate athletics director at the University of South Florida, is also supposed to be in New Orleans . . .

-- Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.

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