The accounting firm BDO Seidman LLP released documents yesterday that it said prove it warned William H. Webster about serious problems at a company where he chaired the audit committee before the company fired BDO as auditor.
The warning has become one of the central issues in the debate over Webster's fitness to remain as chairman of the new board created to oversee the accounting industry. Webster, who has headed both the FBI and the CIA, has said he would resign if the controversy impeded the accounting oversight board's work.
Webster's recent appointment and the process that led to it have become the subject of government investigations since it was reported that, before the vote, Securities and Exchange Commission Chairman Harvey L. Pitt failed to tell other commissioners about Webster's role at U.S. Technologies, a company that is now virtually insolvent.
President Bush yesterday praised Webster as "a decent, honorable public servant" and said, "I know he can do that job." Noting an internal SEC investigation of the matter, Bush said, "We'll see what that says."
When companies dismiss their auditors, they are required to tell the SEC if the auditors had first warned them about a lack of adequate internal controls. U.S. Technologies fired BDO in August 2001 and mentioned no such warning when it reported the change in auditors to the SEC.
Then, BDO wrote a letter to the SEC saying it had warned the audit committee on July 13, 2001, that the company lacked "the internal controls necessary" to "develop reliable financial statements." U.S Technologies filed an amended report with the SEC confirming BDO's letter.
But when Webster was asked about the matter after his appointment to head the accounting oversight board, he said he did not recall receiving such a warning from BDO until after U.S. Technologies dismissed the auditor.
BDO yesterday released a portion of a document it said it sent to the audit committee in advance of the July 13, 2001, meeting, which was meant to review the results of the annual audit. The document identified three "material weaknesses in internal control," involving such issues as flawed document retention and a failure to record significant transactions on a timely basis.
BDO also released what it said were notes taken during the July 13 discussion by one of the BDO auditors. The typed notes said a member of the BDO audit team discussed "material weaknesses in internal accounting control." The notes went on to repeat the issues cited in the earlier document.
Most of the notes were blacked out. BDO said it released the documents with permission from U.S. Technologies, which insisted on the redactions. The company agreed to the release of the document after BDO filed a lawsuit seeking to be released from confidentiality obligations so it could "deny and refute the false and misleading statements" attributed to Webster in The Washington Post.
Webster did not return calls seeking comment yesterday. In a recent interview, he said, "The only question I could see that's of any importance is whether we fired BDO because they warned us about something, and that is completely not the case."
Webster said in recent interviews that the company fired BDO because it was taking too long to complete its work and was charging too much money.
BDO General Counsel Scott M. Univer said the charges were appropriate given the amount of work involved. "The audit proceeded as quickly as it could under very difficult circumstances," Univer said. "The circumstances were difficult because the records were in disarray."
Arthur Maxwell, who served with Webster on the audit committee, said he believed that another participant in the meeting took notes that "will not reflect many of those items" in the BDO notes. That participant, an attorney for U.S. Technologies, did not return calls.
U.S. Technologies chief executive C. Gregory Earls, who was also listed as participating in the meeting, said neither he nor any member of the audit committee recalled receiving the BDO report in advance of the meeting or hearing BDO address the internal control problems during the meeting. But he did not rule out the possibility that BDO issued those warnings.
"The point is, here . . . no one regarded it as being some earthshaking event. It was simply our auditors making some recommendations to our accounting department," Earls said. "We did all the things that they recommended," he added.
If Webster didn't recall such an important warning, "then he doesn't understand what an audit committee is supposed to do and he should not be on this panel," said Nell Minow, editor of the Corporate Library, a Web site on corporate governance. "An 'I don't remember' response is a per se violation of the duty of care" that directors assume when they join a corporate board, she said.