When retirees Kenneth and Judith Balfour decided to invest the bulk of their savings in the Baptist Foundation of Arizona in 1999, they noted that it was audited by one of the nation's leading accounting firms, Arthur Andersen LLP.

That "was one of the selling points," Kenneth Balfour recalled. "Everyone knows Arthur Andersen."

The foundation claimed to pay high interest rates on retirement accounts while helping Southern Baptist ministries. But after the Balfours invested $99,000 they earned from the sale of an auto-lube business, the foundation collapsed and they and thousands of others lost hundreds of millions of dollars.

State regulators allege that the Baptist foundation was perpetrating a fraud and that Arthur Andersen, which signed off on the BFA's financial statements year after year, ignored a series of warning signs. Ultimately, regulators allege, Andersen became "a full participant in hiding the fraud."

An Andersen spokeswoman said it wasn't the auditor's job to find fraud. "We were hired to make sure their books balanced," Linda Rizer said.

To an investigator for the Arizona State Board of Accountancy, the case had a ring of familiarity.

During the 1980s, Arthur Andersen had audited Charles Keating's Lincoln Savings and Loan, which became a symbol of the nation's savings-and-loan crisis when it failed in 1989 at an eventual cost to taxpayers of $2.9 billion.

The lead partner on Andersen's disputed 1985 audit of Lincoln was Jay S. Ozer, who also served as lead auditor of the Baptist Foundation of Arizona.

Andersen paid tens of millions of dollars to settle claims by federal regulators and private investors over its work for Keating.

Arizona regulators settled for a payment of $562,000 -- and a pledge that each of Andersen's Arizona-based auditors would take 40 hours of continuing professional education. The settlement did not sanction any Andersen auditor by name, and the firm denied that its people had done anything wrong.

A December 2000 report by an investigator for the Arizona board said, "The many readily recognizable similarities lead to the conclusion that violations by Ozer in the 1985 Lincoln audit were essentially repeated in the 1995-1997 BFA audits."

This time, the Arizona board is talking about much stiffer sanctions: In a complaint filed last year , it said Ozer and two other Arthur Andersen accountants could lose their licenses and the firm could be liable for restitution of $600 million.

Lawyers for BFA investors and the state tried to question Ozer about his work at an August deposition, but he invoked his Fifth Amendment right against self-incrimination.

An attorney for Ozer, who retired last year, said he denies the allegations in the Baptist Foundation case and says they will be "hotly contested." As for Lincoln Savings, "neither the Arizona Board of Accountancy nor any other government agency found that Mr. Ozer violated any auditing standards during audits of Lincoln Savings, and no proceedings were ever instituted against him with regard to that matter," attorney Brad D. Brian wrote in a letter to The Washington Post.

In "a long and distinguished career," Brian added, Ozer "earned an outstanding reputation in his field."

Accounting executives have long argued that the threat of legal liability keeps them honest. Arizona regulators, however, allege that as the warning signs at the Baptist Foundation of Arizona multiplied, Arthur Andersen "engaged in a full cover-up."

A woman who resigned from her job as a BFA accounting manager gave an Andersen manager "a detailed road map of the fraud" in a 1997 meeting and warned that a group of employees had concluded that the BFA's senior management was not being honest with the audit firm, regulators alleged. Though the former BFA manager gave Andersen the names of other employees who left the BFA, Andersen made no effort to contact them, the complaint said.

Andersen discounted a tip to its Chicago headquarters alleging fraud at the BFA and it continued to vouch for the foundation after the Phoenix New Times newspaper published a series of articles in 1998 alleging irregularities at the BFA, according to the complaint.

When BFA lawyers enlisted Andersen to advise the nonprofit foundation on its vulnerability to Internal Revenue Service scrutiny, an Andersen employee spotted potential trouble. The Andersen tax manager drafted an "opinion of exposures" in January 1998 saying "The BIG issue" -- which involved the BFA's claim to tax-exempt status -- "could affect our audit opinion and should be addressed."

Then, an Andersen partner directed that the reference to the "BIG issue" be deleted from the report, according to the state complaint.

Andersen has denied the charges and refused to discuss the case in detail. In a statement to The Washington Post, the firm said "the focus should be on indicted senior BFA leadership who designed a complex scheme . . . to mislead their investors and auditors."

Three BFA insiders pleaded guilty to felonies this spring, and five others -- including the foundation's former president -- are fighting criminal charges.

Michael Piccarreta, a lawyer for the former president, said no fraud took place, adding that the accusers "certainly don't let the truth get in the way of a good story." Piccarreta said everything former president William Pierre Crotts did "was in good faith and in an attempt to benefit the foundation."

When the BFA sought bankruptcy protection in November 1999, it estimated it had no more than $260 million in assets to pay off $590 million of obligations to investors. Authorities tell investors they are likely to recoup less than half of their money over five years as the foundation's assets are liquidated.

With the collapse of their interest-bearing BFA investments, the Balfours said they lost almost half of their income. They have since come out of retirement. Judith, 66, a former high school secretary, has worked as a census worker and a bus dispatcher, and the two of them hit the road for a while to help a relative clear Colorado land of prairie dogs.

Harry Jay Freeman of Sun City, Ariz., 56, and his wife, Nita, lost $140,000 -- the bulk of their life savings -- in the BFA collapse. But he is more anguished over his decision to put his elderly, ailing parents' savings into the foundation, too -- the last chunk just days before the state forced the BFA to stop accepting new investments.

"They're pretty much destitute now," he said.

"How can this happen?" Freeman asked. Arthur Andersen "is supposed to be one of the most respected auditors in the world. . . . I'm a steamfitter, and if I couldn't do my job any better than these folks . . . I couldn't hold a job," he said.

Kenneth and Judith Balfour, who came out of retirement after the collapse of a foundation they invested in, do yard work for a friend in Colorado.Harry Jay Freeman lost money in the BFA collapse, as did his parents, Catherine and Charles Peck, behind him.Customers seek to withdraw funds from the failing Lincoln S&L in 1989.