On Saturday, a federal jury in Houston convicted the auditing firm of one felony count of obstructing the Securities and Exchange Commission's investigation into Enron. Immediately after the verdict, which Arthur Andersen said it will appeal, the company informed the SEC that it intends to discontinue auditing public companies by the end of August.
In the aftermath of the debacle, tech clients including Qwest Communications International, WorldCom and Peregrine Systems are dealing with accounting issues ranging from SEC inquiries to earnings restatements. All three were former Arthur Andersen clients, according to regulatory filings.
Qwest and WorldCom are facing questions about how they recognized revenue and booked sales, respectively.
Peregrine shares collapsed after the company's new auditor, KPMG, found accounting issues. Peregrine, which dropped Arthur Andersen in April, said in May that it would restate its earnings for fiscal 2000 and 2001, and for the first three quarters of 2003. An SEC investigation followed.
The company has since dropped KPMG because some of the transactions under review were with KPMG Consulting. Peregrine hired PricewaterhouseCoopers to replace KPMG.
Meanwhile, many other tech companies had already dumped Arthur Andersen to avoid any perceived problems., Liberate Technologies, Iomega and BMC Software were just a few of the tech companies that dismissed Arthur Andersen after its indictment in March.
In an April statement, Oracle CFO Jeff Henley said Arthur Andersen delivered "professional work" for 15 years, but the company had to switch auditors after the auditing firm began selling some of its branch offices to rivals.
Oracle decided to go with Ernst & Young as an auditor because it "has no commercial relationship with the company that would impair its independence."
Other companies issued similar statements.
Analysts said tech companies dismissed Arthur Andersen because they didn't want to have a stigma attached to their financial results.
"I don't believe Arthur Andersen's quality was worse, but there was a stigma," said Lawrence D. Brown, an accounting professor at Georgia State University. "There was also a notion that the firm couldn't continue."
Brown said former Andersen clients aren't likely to have any more accounting problems than other technology companies. "No, I don't think they'll have more bad audits" than non-Andersen companies, he said.
Nevertheless, the Arthur Andersen-Enron mess has opened the door for a host of accounting concerns that will affect technology companies.
Bill Schaff, fund manager for the Berger Information Technology Fund, said the Arthur Andersen scandal has opened the door to accounting reforms.
"Arthur Andersen has more implications for accounting changes," he said. "More specifically, footnotes are being closely watched, and there's a lot of talk of expensing stock options, which will hurt a lot of tech companies."
Schaff said investors are scrutinizing the technology sector because it has been one of the most aggressive when it comes to accounting.
Although companies such as Amazon.com and Cisco Systems have been scrutinized for their accounting, analysts say the worries are often a case of witch hunting. "There's a big difference between being aggressive and being fraudulent," Schaff said.
Even though aggressive accounting may not be a crime, Wall Street isn't noting many distinctions.
"The accounting problems add another layer of complexity to the companies," said Sujatha R. Avutu, co-manager of the Evergreen Growth & Income Fund. "The accounting issues are a moving target. What was acceptable six months ago isn't now."
She said companies that focus on consumer staples and retailing have outshined technology in 2002.
That fact isn't lost on Schaff, who focuses solely on technology. "There's a lot of nuances in technology," he said. "Investors are getting back to basics. It's easy to understand Wal-Mart and McDonalds."