Merck & Co dropped Arthur Andersen LLP, its auditor for the past 31 years, becoming the biggest company to abandon the accounting firm that reviewed the records of the failed Enron Corp.
Merck, the second-largest US drugmaker, appointed PricewaterhouseCoopers as its outside auditor for 2002, said Merck spokesman Chris Loder.
Merck's dismissal of Andersen is the latest blow to the reputation of the accounting firm, which faces investigations by Congress, the Securities and Exchange Commission and the Justice Department over its duties as Enron's auditor. Merck paid Andersen, the smallest of the Big Five US accounting firms, US$6.3 million for auditing services in 2000.
"This should be viewed as a very serious matter for Andersen and might lead to many more defections," said Howard Schilit, an accounting watchdog who heads the Center for Financial Research & Analysis Inc. in Rockville, Maryland.
The move to replace auditors, which must be approved by shareholders, was part of Whitehouse Station, New Jersey-based Merck's annual review, Loder said. He declined comment on Andersen's role in the Enron scandal.
Whether Andersen will survive as an independent auditor or will be taken over by another firm is now an open question, he said. Merck's shareholders likely will greet news of the change in auditors with "relief," Schilit said.
"Merck has enough headaches with other things," said L. Roy Papp, managing partner of Phoenix-based L. Roy Papp & Associates.
"They might as well not have another headache with this."
Papp, who manages about US$1 billion in assets and holds 635,000 shares of Merck, noted the drugmaker's profits have fallen as patents on its medicines have expired.
Papp uses Andersen for his company's outside audit work and said he doesn't plan to drop the firm.
More than 20 publicly traded companies have replaced Andersen as their auditor since the beginning of January.
Some shareholders sent letters to Merck, questioning the drugmaker as to whether it would retain Andersen, Loder said. The company also received some letters in support of keeping the auditing firm, he said.
Merck paid Andersen US$4.2 million for its 2000 audit, and an additional US$2.1 million for tax services fees and employee benefit plan audits, according to a proxy filing with the SEC. Merck hasn't yet filed its 2001 proxy statement, which would include fees for the most recent year. Merck has historically filed its proxy at the end of March, SEC filings show.
Roy Vagelos, a former Merck chairman, was named this week to an oversight board formed to order changes at Andersen. Paul Volcker, a former Federal Reserve chairman, heads the panel.
AdvancePCS, an Irving, Texas-based health care company, fired Andersen on Feb. 12 and hired PricewaterhouseCoopers, according to an SEC filing.
Harris & Harris Group Inc, a venture capital firm based in New York, disclosed in a filing today that it would dismiss Andersen as its auditor as soon as its 2001 audit was completed.
Harris & Harris said it would retain PricewaterhouseCoopers as its new auditor, the filing said.
Other companies that have dropped Andersen as their auditor include White Plains, New York-based Paxar Corp, which makes electronic bar code printers and labeling devices. Paxar dismissed Andersen on Feb. 20, as part of a plan by its audit committee to rotate auditors every seven years, according to an SEC filing.
Corinthian Colleges Inc, a private for-profit education company based in Santa Ana, California, dropped Andersen as its auditor on Feb. 18, hiring Ernst & Young LLP, a regulatory filing showed.
Andersen is seeking to settle lawsuits with Enron creditors and shareholders.
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