Andersen may lose big Vegas clients

David Strow

Thursday, March 28, 2002 | 11:17 a.m.

In a move likely to cost Arthur Andersen two of its largest Las Vegas clients, New Jersey gaming regulators on Wednesday barred the state's casino operators from doing business with the embattled accounting firm.

The state Casino Control Commission voted 5-0 to force casinos and their parent companies to sever ties with Andersen by May 15, saying public confidence in Atlantic City casinos would be undermined if Andersen was allowed to keep working as a casino industry vendor. The move followed Andersen's indictment earlier this month on a federal obstruction of justice charge related to the Enron scandal.

"In a highly regulated industry such as ours, it is difficult to conceive of conduct that is more inimical than the destruction of documents by an agency in the face of an investigation by the government," Deputy Attorney General Frederick McDonough said.

The order is almost certain to cost Andersen its auditing contracts with Harrah's Entertainment Inc. and MGM MIRAGE. Both use Chicago-based Andersen as their corporate auditor -- and both are covered by the New Jersey order.

"Arthur Andersen, as of May 15, is not going to be able to represent our Atlantic City (subsidiary) or MGM MIRAGE," said Alan Feldman, MGM MIRAGE spokesman.

Neither company, however, took immediate action against Andersen on Wednesday.

"For the time being, we're monitoring the situation, and are considering our options," Harrah's spokesman Gary Thompson said. "We will make a decision on how best to proceed, and if we have any announcements to make, we'll make them at an appropriate time."

Harrah's has asked New Jersey to extend the order's effective date to May 31 to give it time to find a new accounting firm.

"Our audit committee will meet and make a recommendation to the board as to how to handle this," Feldman said. "There's nothing to do today, until we know what it is we're going to do."

In the business of auditing the books of gaming companies, Andersen is the largest player. In Las Vegas alone, its clients include Mandalay Resort Group, Station Casinos Inc., Ameristar Casinos Inc., Alliance Gaming Corp. and Mikohn Gaming Corp. Generally, gaming companies have shown an inclination to stay with the auditor -- as of today, only one gaming company, Hard Rock Hotel, has fired Andersen following the Enron scandal. And following New Jersey's action, both Mandalay and Station on Wednesday repeated their commitment to Andersen, at least for the time being.

Harrah's and MGM MIRAGE were among Andersen's staunchest defenders. In a proxy statement earlier this month, Harrah's urged its shareholders to approve Andersen's rehiring as the company's auditor. And MGM MIRAGE officials stated repeatedly they were comfortable with the firm's Las Vegas employees.

But there's more than mere loyalty at stake -- changing auditors is an expensive, lengthy process, and one that companies don't do lightly.

"Anytime you have to change your accountants or auditors, it's a traumatic event," said attorney Lloyd Levenson, who represented Boyd Gaming Corp. in Wednesday's hearing.

But Harrah's owns and operates two New Jersey casinos, and must cut ties at the corporate level, under New Jersey's order. MGM MIRAGE doesn't have an operating casino in Atlantic City, but it does have an application on file for its New Jersey subsidiary, which plans to develop a resort casino adjacent to the $1 billion Borgata. The Borgata is jointly owned by Boyd Gaming Corp. and MGM MIRAGE.

It is possible Andersen could keep some of the two companies' business. While parent companies are covered, subsidiaries in other states are not covered by the New Jersey order, as New Jersey Attorney General David Samson had recommended. That means MGM MIRAGE, for example, could use Andersen to audit the books of the Bellagio or MGM Grand Detroit while using a different auditor at corporate headquarters.

That's one of the options MGM MIRAGE will consider, Feldman said.

"That being said, we've historically used a single auditor for the entire company," Feldman said.

Harrah's paid Andersen $2.5 million for audit and other services in 2001. MGM MIRAGE paid $2.2 million in 2000 to Andersen.

New Jersey is the first casino jurisdiction to take such action against the company, but others may take their lead from Wednesday's action, according to Roberto Rivera-Soto, one of two Andersen lawyers to make impassioned pleas for mercy.

He called the Andersen employees who allegedly destroyed Enron Corp. documents "rogue folks who acted like rogues," but he predicted the company would be cleared when its federal criminal case goes to trial next month.

If so, it will be impossible to undo the damage done to Andersen's reputation by a New Jersey ban, he said.

"Ask yourself who it is you're judging here today," he said. "All you have before you is an indictment."

But Nevada, at least, is not prepared to follow New Jersey. Unlike New Jersey, Nevada doesn't require Andersen to be a licensed vendor -- and it doesn't have provisions that automatically disqualify a company from licensure if it is indicted.

"We continue to monitor the situation and investigate the facts, but to date, we've not been able to make a connection between the reasons for the indictment and the Nevada Arthur Andersen office," Nevada Gaming Control Board Chairman Dennis Neilander said.

However, Neilander emphasized that Nevada regulators do not consider the case closed, and will continue monitoring the situation. "This will be an ongoing thing," Neilander said.

One of the biggest reasons Nevada doesn't license auditing firms is that the control board sends its own auditing teams to casinos to verify casinos' revenues and taxes.

Even before the New Jersey order, Andersen's competitors were aggressively trying to recruit away Andersen's casino customers in Nevada. There was talk that several were trying to recruit away members of Andersen's casino auditing team, including its head, Tom Roche.

But one gaming industry source expressed doubts that would happen. Leaving a company and taking clients to a competitor puts you at risk of a lawsuit, the source said.

"I think there's probably five or six major gaming companies hoping Tom Roche will take a position somewhere else, but he's not in a position to do that," the source said.