The agreement is the second-largest litigation settlement ever by an accounting firm over its work for an audit client, and the largest-ever by Andersen. Court documents cited claims that investors lost an estimated $590 million as a result of the foundation’s 1999 collapse – itself the largest by a nonprofit group in US history, according to Dow Jones.
The settlement resolves four complaints that had been filed against the accounting giant in Arizona:
- one by the foundation’s bankruptcy trust that was due to begin trial today
- a separate class-action on behalf of foundation investors
- one by the attorney general’s office against Andersen seeking restitution for investors
- an administrative complaint by the Arizona State Board of Accountancy.
The Baptist Foundation (BFA) offered high interest rates on retirement accounts and put its money in real estate. It claimed to be assisting in the funding of Baptist ministries that, combined with a promise of above-market returns, drew in some 13,000 investors. However, Arizona regulators said it was operating a Ponzi scheme — using money from new investors to make payments to old investors.
Senior managers at the BFA allegedly used transactions with companies run by current and former foundation executives to hide investment losses. One reason the scheme lasted as long as it did, the lawsuits had alleged, was that Andersen continued to certify the foundation’s financial statements.
Andersen was hired to advise the BFA on its vulnerability to IRS scrutiny, having audited the Foundation’s returns from 1984 though 1997, according to the Washington Post. According to the suit, an Andersen tax specialist spotted potential trouble, which she thought could affect Andersen’s audit opinion. But, in an action eerily similar to recent accusations in the Enron case, an Andersen partner allegedly told her to delete her written warning.
After legal fees, an estimated 11,000 BFA investors will share $185 million of the $217 million Andersen settlement, distribution of which is expected to begin late this year, a spokeswoman for the state attorney general said. In years to come investors might recover as much as 83% of their money, according to the attorney general’s office.
Andersen, acknowledging that the accord was ‘fair and reasonable,’ said it settled the case without admitting or denying wrongdoing ‘to enable our firm to move forward without the uncertainty and distraction of costly and protracted litigation in Arizona.’
As a result of the settlement, Andersen’s Phoenix office will be placed under the supervision of an independent three-person oversight board for the next two years, according to Dow Jones. Former Andersen partner Jay Ozer, who retired in 2000 and had been the partner in charge of the foundation’s audit, has agreed to voluntarily surrender his state license to practice accountancy. Ann McGrath, an Andersen principal assigned to the foundation’s audit, also has agreed to voluntarily surrender her accountancy license.
Andersen will pay $640,000 to the Arizona State Board of Accountancy to cover the costs of its investigation.
Three former foundation officials have pleaded guilty to felonies in the case, and five others face fraud and racketeering charges.
The largest settlement ever paid by an accounting firm came in 1999, when Ernst & Young LLP paid $335 million to settle shareholder lawsuits over its audit of Cendant Corp.