State board imposes reprimands and fines totaling $250,000 on Arthur Andersen LLP for violations of audit standards

Cases unrelated to Enron

(austin) The Texas State Board of Public Accountancy reprimanded the accounting firm of Arthur Anderson, LLP in two separate cases last week and fined the firm $125,000 in each circumstance.

The Board found that Andersen violated Generally Accepted Auditing Standards, and in doing so also violated the Texas Public Accountancy Act and the Board’s Rules of Professional Conduct.

Neither case is related to the Board’s investigation into Arthur Andersen’s involvement with Enron.

The Board also reprimanded former Arthur Andersen partner Wilbur J. Armatta of Houston for his role in one of the cases. As part of the reprimand, Armatta, who retired from the firm in 1991, agreed to remain retired from practicing public accounting.

The cases stem from audits and appraisals that Andersen performed for two clients: World Cycle Corp. in 1989 and Randall’s Food Markets, Inc. in 1993.

The World Cycle audit team, headed by Armatta, performed an audit which expressed the opinion that the financial statements were fairly stated but included a going concern qualification because of World Cycle’s noncompliance with certain loan convenants and net losses and negative cash flows.

The team utilized the results of its inventory observations to audit the balance sheet and income statement, including total inventory of World Cycle. Andersen and Armatta determined that sufficient coverage of inventory was provided by the number of test stores. However, Andersen’s audit workpapers contained no documentation that it tested the reasonableness of World Cycle management’s representations regarding the parts and accessories inventory.

Unknown to Andersen and Armatta, during the process of its physical inventory, World Cycle moved inventory from store-to-store in a scheme know as "stuffing", resulting in World Cycle’s overstated financial condition. World Cycle declared bankruptcy in 1990.

As the primary independent auditor of Randall’s Food Markets, Inc., Arthur Andersen performed audits of certain employee benefit plans and assumed responsibility for the annual appraisal of the Randall’s stock held by or for the benefit of Randall’s employee benefit plans.

Randall’s provided projections that indicated a return to profitability. Andersen used these projections in its appraisal without adjusting its assumptions for items such as discount rates to account for the increased risk of Randall’s situation, despite its knowledge that the appraisal of stock was not supported by the financial information and facts available to Andersen. Both the auditors and the appraisers had access to the same information and were aware of Randall’s negative financial trends and economic considerations.

Although Andersen’s appraisal group was overseen by CPA partners of the firm, including the managing partner of its Houston office, appraisals of the Randall’s stock for the employee benefit plans were certified by an Andersen principal who was not a CPA. Several CPAs were listed on Andersen’s workpapers as contributing appraisers.

 

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Contact: William Treacy
Executive Director
(512) 305-7801