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Andersen Indictment Weighs on Funds, Boards


The U.S. Department of Justice's felony indictment of March 14, which charged Arthur Andersen with obstruction of justice in the federal investigation of Enron, may be causing fund advisers and their boards of directors to take pause and more carefully consider the auditing process for their funds. That is true even where fund groups have never utilized Andersen to audit their funds.

At least one of Andersen's mutual fund audit clients is prepared to shift the responsibility for auditing the group's mutual funds to another accounting firm. Andersen's mutual fund audit clients include Fred Alger Management, Calvert Group, The Hartford Funds, Northern Trust, Nuveen Investments, Pioneer Investments and Wasatch Funds.

"We are very concerned over the events surrounding the Enron bankruptcy and the light which it has cast over Arthur Andersen as a firm," said a spokesman for Wasatch Funds of Salt Lake City, all of whose mutual funds are audited by Andersen. "We have contacted all of the other Big Five international accounting firms and are in discussions with them regarding their interest and ability to provide superior audit services to Wasatch Funds. We are being thorough in making this important and costly decision," the spokesman said.

"Arthur Andersen is the Northern Funds' independent public accounting firm," confirmed a spokeswoman for Northern Trust in Chicago, the adviser to the fund group. The Northern Funds are compromised of 31 retail mutual funds, including money market funds, and 21 institutional mutual funds with a collective $47 billion under management, she said. "We do review our auditors annually, and we are watching closely."

An Advantage

"We're at a bit of an advantage," said Jim Connelly, executive VP for the Alger Fund group in New York. "Our next scheduled audit is not for nine months so there is no need for us to do anything right now. But the board is paying close attention to this," he said. Connelly is also the vice chairman of the fund group's board of directors.

Right now, Andersen's fund audit clients should be very concerned with the recent indictment that was handed down, said one fund industry accountant and partner with a Big Five accounting firm. Since it is the board of directors that is charged with approving the appointment of the auditing firm, the board's members must review this situation very carefully. "[It] is crucial for a board to understand that if they reach the conclusion that they retain Andersen, they should protect themselves by indicating that they have discussed all recent events and their conclusions," the accountant said.

The fund's board of trustees must base their decision on several factors, including communications with their Andersen audit team, an assessment of the level of service that team has provided in the past, and the team members' expertise in the industry, the accountant said.

Houston, We Have a Problem

Whether to retain Andersen as an auditor is a tough question. From a mutual fund companys perspective, a fund's board of directors must take a close look at exactly what involvement, if any, its own audit team members had in the Houston office's handling of Enron's financial statements and audits, said David Ruder, a professor at Northwestern University's School of Law, and the chairman of the Mutual Fund Directors Education Council, which runs educational programs for independent fund trustees. He was the chairman of the SEC from 1987 to 1989.

Trustees must also consider what Andersen's future will be; whether the firm will pursue a merger with another firm or simply close its doors, Ruder said. "But the most important thing to consider is whether or not Andersen's reputation has been tarnished too badly," he said.

Since many funds' fiscal year parallels the calendar year, fund boards may not have to immediately make a decision, Ruder said. But they will have to decide what to do in the future. "It's hard for a board to say, I think they were competent to do this yesterday, but are not competent today,'" he said. "It's really a business judgment."

The good news is that the SEC has made clear that it is allowing Andersen to continue auditing clients who are staying put, at least for the short term. That means that the SEC believes Andersen can be trusted to properly handle current audits, Ruder said.

Non-Andersen Clients Taking Stock

While Andersen's fund audit clients may be the ones huddled behind closed doors trying to decide what to do, other fund groups are likely wondering what impact Andersen's troubles may have on the broader universe of accounting firms and how they can protect themselves from similar problems with auditors.

In a letter sent to the Department of Justice by Mayer, Brown, Rowe & Maw, one of Andersen's law firms, one day before the indictment was unsealed, lawyers implored Assistant Attorney General Michael Chertoff to consider the broad implications of the pending indictment. In the letter, obtained by Mutual Fund Market News, a Mayer attorney explained that prosecution against Andersen could lead to destruction of the 89-year-old firm, leading to the loss of livelihood for 28,000 employees. The letter also said an indictment would be harmful to Andersen's audit clients as it would place their current SEC filings in jeopardy, and would "eliminate the nation's fifth largest accounting firm and thus lead to further concentration in an already concentrated market."

A call to Andersen seeking comment was not returned by press time.