Attorneys for Arthur Andersen LLP had alleged that the board was aware of the fraud as early as 1996, according to Dow Jones.
However, Reverend W Berry Norwood acknowledged that the BFA Chief Executive William Crotts told the board at a December 5, 1996, meeting that the BFA had transferred real estate assets to another company, in exchange for IOUs. Norwood also said the board was told that that firm was controlled by an entrepreneur who “made money maturing properties,” according to the DJ report. Additionally, Norwood claimed that Crotts told the board that if something happened to the firm, the BFA would get back the properties.
The 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.
Signs of Trouble
Andersen attorney Peter Devereaux showed the jury footnotes in audited financial statements of BFA for 1997 that acknowledged that the foundation was paying out millions more in interest each year than it was earning – and that it expected to continue doing so for years. However, there was no qualifier attached to BFA’s financial statements expressing doubt about BFA’s ability to continue as a going concern.
The trust’s expert witness, Dan Guy, testified that the financial statements of BFA “beg for a work paper” on whether there was doubt about BFA’s ability to continue as a going concern.
Devereaux, pointed out that according to accounting standards, an auditor is only required to evaluate whether there is substantial doubt about an entity’s ability to continue doing business for a period “not to exceed one year.”
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.
Andersen had reached a potential $217 million settlement in March – just days prior to going to trial. That agreement would have been the second-largest litigation settlement ever by an accounting firm over its work for an audit client, and the largest-ever by Andersen.
However, a month later Andersen says its insurance carrier was unable to pay the promised settlement – and a trial date was reset.