The Baptist Foundation Arthur Andersen LLP agreed to pay $217 million to settle a lawsuit over its audits for the Baptist Foundation of Arizona. At the time, this was the second largest settlement ever agreed to by a major accounting firm. The lawsuit alleged that Andersen accountants failed to detect fraudulent activity at the foundation. The lawsuit claimed that as a result, 11,000 people, most of them elderly investors, lost

$570 million when the Baptist Foundation of Arizona filed for bankruptcy in 1999.

The bankruptcy filing was one of the largest bankruptcy filings by a nonprofit organization.

The Baptist Foundation of Arizona was founded in 1948 to raise money to sup port Baptist causes and to pay a return for investors. It filed for bankruptcy in 1999 after many of the foundation's executives had been convicted of criminal charges or indicted for fraud.

The lawsuit against Arthur Andersen alleged that Andersen auditors failed to detect fraudulent activity at the Baptist Foundation including "hiding real-estate losses by transferring overvalued assets to shell companies in exchange for IOUs, and engaging in a Ponzi-like scheme of using new investor funds to make pay ments to previous investors." When the trial began, The Wall Street Journal stated,

"For Andersen, the question probably isn't whether the firm is liable at all, but rather how much it should be required to pay." 3

Dan Guy, an expert witness called to testify against Andersen over the founda tion audits, said, "Arthur Anderson did not live up to the minimum requirements in the rules set for auditors." The lawsuit alleged that Arthur Andersen auditors did little to investigate allegations of fraud from whistle-blowers and because of this omission, they were complicit in concealing fraud from investors. During the trial, Mr. Guy testified that he had reviewed Andersen working papers as well as the depositions from the whistle-blowers and determined that the fraud at the Baptist Foundation was not impenetrable. With the information from the whistle-blowers, Andersen had an obligation to gather evidence to investigate the charges. Citing a 1997 conversation between Baptist Foundation accountant, Karen Paetz, and Ann McGath, the Andersen auditor, McGath acknowledged that the client told her that the Baptist Foundation was selling overvalued assets to a related-party company.

According to Mr. Guy's testimony, such information would prompt a knowledge able auditor to investigate further.

Additional evidence related to fraudulent activity that had been disclosed to the auditors was presented during the trial. Two chief financial officers of Texas Bap tist Organization and a financial adviser from Mesa, Arizona, testified that they tried to alert Andersen to financial improprieties at the foundation and the likeli hood that the foundation was broke. 4 Andersen had not responded to their calls.

Andersen placed the blame for the foundation's collapse on the company's executives, the foundation's law firm, and the state regulators who failed to inves tigate investor complaints in the early 1990s. According to statements by Andersen executives, "There is clear evidence that all members of the Baptist Foundation's senior management and [a] majority of the Board of Directors engaged in a con spiracy of silence to deny information about the Baptist Foundation's financial condition to the Arthur Andersen auditors." 5

a. Explain how Arthur Andersen partners involved in the Baptist Foundation audit violated the principles section of the AICPA Code of Professional Conduct.

b. Identify specific code of conduct rules that Arthur Andersen partners violated based on the information provided.