Who ya gonna believe floyd or some anonymous poster?
The Washington Post, March 13, 2002
HEADLINE: Accounting Industry Faces Legislative, Legal Challenges; 'Limited Liability' Structure Tested
BYLINE: Carrie Johnson, Washington Post Staff Writer
Partners at Arthur Andersen LLP are grappling with all kinds of uncertainty, including the imminent prospect of criminal charges for shredding documents and the possibility that the firm could be sold to a rival.
Another concern is whether they may be held accountable for the Chicago-based firm's mounting debts.
Andersen was the accountant for Enron Corp., and after the energy giant collapsed last year, Andersen faced allegations that it helped Enron deceive the public about its financial problems. Numerous shareholder lawsuits are pending, with plaintiffs seeking more than $ 1 billion in damages. Questions about potential liability have been a major hurdle in merger discussions with Deloitte Touche Thomatsu. They have hung over Andersen as it tries to persuade clients not to follow the more than 20 that have left already, and to keep partners and employees from fleeing.
Accounting firms such as Andersen changed their structures after costly lawsuits stemming from the savings and loan failures of the 1980s. The new "limited-liability partnership," or LLP, structure was designed to protect partners from the misdeeds of their colleagues.
Only a few court cases have tested the extent of that protection, so it is unclear how much insulation the structure provides. The Andersen case will be one of the most extensive tests of the limited-liability partnership, according to legal experts.
Unlike a general partnership, in which each partner has a substantial equity investment in the firm and is on the hook for all the losses a business incurs, limited-liability partnerships offer more protection. Partners are not supposed to have to pay for the wrongdoings of their colleagues. They are liable only for the capital contribution they make to the firm, as long as they did not know about or participate in illegal or unprofessional activities themselves.
"The risks and liabilities associated with the audit business have been growing significantly over the last few years, and exposure is not unique to Andersen," Andersen spokesman Charlie Leonard said. "All audit companies face these risks."
Andersen employs more than 85,000 people around the world, with about 1,700 partners in the United States. Its foreign operations, in 84 countries, are structured as independent entities that contract with each other, which may help shield overseas partners from legal troubles here, according to law professors.
U.S. partners may not be fully protected because some states have drilled holes through the protective wall, said Larry Ribstein, a George Mason University law professor.
In Illinois, where Arthur Andersen is registered, a supervising partner can be held accountable for the actions of an underling. PricewaterhouseCoopers, an Andersen rival that is also an LLP, is registered in Delaware, where state law and courts are more protective of the partners' interests.
Courts in other states have found directors of professional service firms liable, but limited the burden on partners not in the know.
"It's hard for me to conceive of [partner] liability in a case" involving document shredding, said Paul Kemp, a Rockville lawyer who regularly defends accountants and law firms. "There's a defense those people can raise in civil litigation. They can say, 'Hey, we didn't know.' "
Partners who know their colleagues are breaking the law or violating professional codes and fail to report it are open to lawsuits and possible criminal charges -- as are those who participate in wrongdoing or should know about it.
"The big exception is that if you, as an employee of a corporation or as a limited partner, have yourself engaged in the covering up, in the misstatements, then you're personally liable," said Jesse Choper, a professor of corporate law at the University of California at Berkeley.
A partner's liability does not vanish if a company goes out of business or is sold.
A federal court could erase the liability if Andersen files for bankruptcy protection, according to George Mason's Ribstein.
The liabilities are offset by insurance. Andersen has $ 250 million worth of insurance for each failed audit, through an insurance company it owns, according to a company source. Andersen has offered to settle with plaintiff's lawyers for about $ 750 million, which would include a portion of the company's future earnings.
"The only way to pay a suit in the range of what's been reported is through future earnings," Leonard said.
Randal Picker, a law professor at the University of Chicago, said he believes that companies that hire former Andersen partners would not be on the hook for any liability they bring with them. But, he said, the companies may make partners sign statements saying that they did nothing illegal and that their new employers did nothing illegal.
"The interesting question is going to be how these firms manage legal uncertainty," Picker said. "Do they seek indemnities from these Andersen people? You're already seeing people and clients walking away from Arthur Andersen."
If Andersen attempts to survive on its own, the firm faces liability questions that could imperil its auditing business. Firms or partners that have been convicted of a crime are barred from certifying financial statements filed with the Securities and Exchange Commission. And even if Andersen and its partners avoid a criminal conviction, they could still face civil fraud charges from the SEC. |
