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Shopping Centers Today -> June 2002
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RETAIL REITS WEIGH ANDERSEN TIES
By Donna Mitchell
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Retail REITs are keeping a watchful eye on events that threaten to ruin venerable accounting firm Arthur Andersen.
At least eight retail property REITs currently use Arthur Andersen as an auditor, according to data from Morgan Stanley Dean Witter, New York City. The list includes CBL & Associates Properties, Chattanooga, Tenn.; Crown American Realty Trust, Johnstown, Pa.; and Philadelphia-based Pennsylvania REIT. At press time, none of the companies contacted had decided to cut the Chicago-based accounting firm loose, but they said they were in preliminary talks with other firms about it.
Corporate boards are under a lot of pressure to decide whether to retain Andersen, since accountants are important to a company’s governance, said Edward Glickman, executive vice president and CFO of Pennsylvania REIT.
For its part, Pennsylvania REIT appears ready to stay with the accounting firm until its widely expected demise.
“It’s a topic at every meeting of the board’s auditing committee members,” said Glickman, who opines that with all that has happened to Arthur Andersen in the past few months, it is unlikely the firm will come through intact.
Arthur Andersen, the fourth-largest U.S. accounting firm, continues to struggle under the weight of its federal indictment for obstruction of justice. At press time, the firm was expected to go on trial to answer charges that it shredded documents related to Enron’s questionable business practices when it acted as the company’s auditor. Enron allegedly used a series of complicated partnerships to hide some $1 billion in debt and inflate profits. As Enron’s accountant, Andersen signed off on the company’s financial statements. Houston-based Enron filed for Chapter 11 bankruptcy protection in December. At $50 billion, it is the largest bankruptcy filing in U.S. history.
“It’s sad what is happening to this firm,” said Terry Stevens, CFO of Crown American Realty. “A vast majority of these people have done nothing wrong, but are paying a huge price for the actions of others.”
Crown American had kept Arthur Andersen on to complete its first quarter 2002 review as of press time, but was in preliminary talks with other accounting firms that might have to step in as its replacement, said Stevens.
Switching auditors would not be a major headache for REITs, he explained, mainly because they are domestic companies that don’t have foreign operations that need additional auditing. Further, new auditors could be brought up to speed quickly on REIT businesses well before such deadlines as year-end 10-K filings to the Securities and Exchange Commission.
Glickman, whose company has used Arthur Andersen’s accounting services for 10 years, said choosing a replacement comes down to whether a firm has professionals with real estate accounting expertise. It also matters whether the firm happens to operate an office within reach. Because accounting services are billed by the hour, flying in auditors from Chicago or New York City would be expensive. There is one other major accounting firm with an office in Philadelphia that also employs teams with significant real estate accounting expertise: New York City-based Ernst & Young, he said.
“It is our hope that the group of people in Philadelphia that we’ve worked with will find a new home,” said Glickman. That would weigh heavily in our decision about where to move.”
Crown American sees things much the same way. Arthur Andersen has audited the company’s finances since 1991, two years before the REIT’s IPO in 1993, said Stevens. The REIT would likely take its auditing business to whatever firm hires the Andersen auditors that have handled Crown American’s accounts, said Chris Menna, a Crown American spokeswoman.
Since Andersen’s indictment in March, hundreds of audit clients have fled the accounting firm. Among them are casinos in Atlantic City, N.J., which were ordered by the state Casino Control Commission to sever their ties with the firm because of the indictment.
In April the firm announced that it would cut 7,000 jobs, positions that would most likely come from its audit and administrative services, said Jennifer Frost, a spokeswoman for Arthur Andersen.
Andersen has admitted that Enron-related documents were shredded but said it was the result of unauthorized action on the part of former partner David Duncan. In April Duncan pleaded guilty to obstruction of justice charges and agreed to cooperate with government prosecutors.
CBL & Associates, which has employed Andersen since 1993, said it was undecided at press time whether to keep the accounting firm. A proxy statement filed with the SEC in March, however, said that its board of directors would soon select an independent accountant for its 2002 fiscal year.
Simon Property Group, Indianapolis, also uses Andersen’s auditing services, but officials there declined to comment for this article.
Paul A. Volker, the former Federal Reserve chairman, quit a panel last month aimed at helping the firm, telling The New York Times that Andersen is “a very lame horse, a lame horse that just got shot in the head.” Andersen has been in talks with several rival firms, including Deloitte & Touche, KPMG and PricewaterhouseCoopers, all New York City-based, to sell off its tax and consulting businesses.
Meanwhile, the firm has faced another crisis: Andersen last month paid $217 million to settle a civil case stemming from the collapse of the Baptist Foundation of Arizona. The collapse, in which 13,000 mostly elderly investors lost $570 million, is the largest nonprofit bankruptcy in U.S. history.
“At this point it is somewhat unlikely for Andersen to stay together, though it’s not impossible,” said Glickman. “To be responsible, every company needs to develop a contingency plan if the company falls apart.”
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