Arthur Andersen’s ‘creative accounting’ scrutinized overseas

Author: 
By Tim Kennedy
Publication Date: 
Wed, 2002-02-20 03:00

The shock waves passing throughout the United States from the bankruptcy of US energy giant Enron — propelled by the shady business advice and “creative accounting” of Arthur Andersen, LLP — are continuing to reverberate throughout America. Corporate officials and outside auditors for the once-mighty Enron are now suspected of hiding staggering company losses in order to pocket $1 billion in stock options.

Arthur Andersen, the firm that simultaneously kept Enron’s books while advising it how to engineer questionable offshore business partnerships, is also the focus of a scandal at Global Crossing, a high-flying telecommunications firm that recently filed for bankruptcy.

Like Enron, Global Crossing used the services of Arthur Andersen to assure the public of its solvency while also finding ways to prevent employees — but not top management — from cashing in company stock before their value plummeted to near worthlessness.

Overseas, Arthur Andersen also figures deeply in a growing business scandal in Moscow that the local press is calling the “Russian Enron.” Unlike Enron investors, who lost billions, the company at the center of the Russian scandal is valued at a relatively puny $50 million. But once more, Andersen’s role in this disgraceful episode casts doubt on the integrity of US accounting and consulting firms doing businesses abroad.

“There was a time when foreign governments and businesses sought out CPA firms that could be counted on for fudging the numbers. Among accountants, they consider dishonestly a virtue,” says a Washington diplomat whose country currently has a consulting and auditing contract with an American accounting firm. “Today, unfortunately, ‘transparency’ is the watchword. If a country wants to join the WTO [World Trade Organization] or get a loan from the World Bank, it can’t afford to associate with financial advisors whose honesty are under a cloud.”

“The accounting profession is virtually unregulated in its off-shore activities,” say a press spokesman for the House Energy and Commerce Committee, one of the half-dozen congressional panels looking into the affairs of Enron and its accounting partners at Arthur Andersen. “The Committee Chairman [W.J. “Billy” Tauzin, D-North Dakota] will definitely be looking into this issue.”

Chicago-based Arthur Andersen operates in 84 countries, with many foreign governments directly contracting the firm’s services. The company earned $3.6 billion in 2000, with 45 percent of its revenue coming from accounting services, and the balance earned for “consulting services”: The offering of advice to businesses and foreign governments on how to reduce tax payments, employ technology systems, outsource financial management duties, and conduct mergers. Arthur Andersen’s biggest competitors — the four other members of the so-called “Big Five” — are Deloitte & Touche, Ernest & Young, KPMG, and PricewaterhouseCoopers.

The “Russian Enron” involves Independent Media (IM) BV, a publicly held company with a 35 percent share owned by VNU, a Dutch media conglomerate. IM produces several publications in Russia, including the Moscow Times, an English language daily newspaper, and — in partnership with the Wall Street Journal and the Financial Times —Vedomosti, a Russian language daily.

According to news accounts, IM operates in partnership with media conglomerates from around the world in Russia, the Netherlands and some offshore havens. “Other partners in [IM’s] ventures are also publicly listed companies,” says the Russia Journal, an independent English language weekly published in Moscow. “The company accounts are audited by Big Five auditors and annual shareholders’ meetings are held in offshore locations.”

Salaries for IM employees are paid, say local accounts, from “suitcases of cash”; Kremlin authorities routinely raid the company’s Moscow offices for unpaid taxes. (In 1998, a search netted officials $250,000).

The scheme at the center of the “Russian Enron” involves “creative accounting” by IM to evade $10 million in federal income taxes. The company, with the aid of its auditors, did this by secretly charging clients for advertisements disguised as editorial content. IM is also accused of conspiring with its auditors to misrepresent circulation figures for its numerous publications: This has enabled IM to jack up advertising rates and dupe unwitting investors.

False accounting aside, the broader question being asked by media watchers about the Arthur Andersen/IM partnership is this: When a newspaper publishing company is in a close relationship with a Big Five auditing company — or any large corporation — will the reporting of financial or regulatory troubles affecting them or their clients be truthful?

By way of example, the Moscow Times published several consistently upbeat stories in its business pages about Wimm-Bill-Dann (WBD), a $484 million Russian food processor. WBD, it turns out, happens to have paid $200,000 to IM to help “sponsor” creation of the Moscow Times.

However, notes the Russia Journal, as soon at WBD’s advertising contract ended with Moscow Times, “negative reporting started in earnest.” The negative stories focused on well-known business indiscretions of WBD directors that were never mentioned by Moscow Times journalists in dozens of previous articles.

According to the Russia Journal, IM’s auditors have enabled the company to conceal from public scrutiny “the reported $5 million in losses in the company’s Internet ventures,” as well as losses in other money-losing publishing efforts: Kto, closed in 2002, Kapital closed in 1999, Skate, the Moscow Times, e-start, business.ru and Kult Lichnosti.

Public companies like Dow Jones, Pearson, Hearst, Rodale, and E-map, have reportedly poured millions of dollars into IM’s Russian operations, presumably assured by the firm’s auditors that potential profits outweigh the risks.

Now that VNU is putting its stake in the IM group up for sale, Russian business watchers worry that transparency is not being offered, particularly about the true financial situation at the company.

“The case of Enron is about the right of the public to know the full truth about the companies they put their money into — and the task of auditors is to make sure that disclosure is made truthfully and completely,” says Ajay Goyal, a business reporter for the Russia Journal. “The question is now being asked, how many Enrons are at work in Russia? And how many cases are there of ‘aggressive accounting’ and offshore private companies?”

[Note: Strategic Policy sought comment from Arthur Andersen about this story. Numerous phone calls to Arthur Andersen’s Chicago headquarters and Office of Government Services in suburban Washington were not returned.]

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