Farewell Arthur Andersen
March 17, 2002 6:34 AM   Subscribe

Farewell Arthur Andersen - I guess having one corporate basket case is a misfortune but two starts to look like carelessness. With tens of thousands of employees and pensions holders across the world, it's a disaster, for staff, pension holders and clients. Is this tough treatment "a gross abuse of government power" or a fitting reward for crooked practice?
posted by grahamwell (18 comments total)
Andersens excuse: “None of the destruction occurred with the knowledge, much less the consent, of senior firm management,” .. that's like a general saying his troops failure on the battlefield occured without his knowledge or consent. Its the responsibility of senior management.
posted by stbalbach at 6:58 AM on March 17, 2002

I wonder where they got that deniability defense strategy from?
posted by srboisvert at 7:37 AM on March 17, 2002

In the late 80's I worked for Hibbard Brown & Co. which was secretly run by this guy. The brokerage was regularly audited by a firm (not Arthur Andersen) that was also in Brennan's pocket. Despite the fact that he wasn't allowed to own a brokerage, the auditors would have lunch with him, while auditing Hibbard Brown (the offices were on the same floor).

This whole Arthur Andersen mess sounds like the same thing to me on a larger scale.
posted by EmergencyPenguin at 7:42 AM on March 17, 2002

Speaking as a "Big Fiver" myself (not Andersen) -- on the practice support side, not on the client service side -- I kind of waver both ways on this. Every company has its own procedures with regards to document retention, and we certainly get rid of stuff after a set amount of time -- ask anyone at any other Big Five company and they'll say the same thing. However it's pretty well known that if there's an SEC investigation going on, destruction policy is suspended for that particular client. Of course, thanks to Andersen's problems, destruction overall has been suspended at my company, and I think the others too.

As to whether Andersen survives, it depends on how things turn out with this trial. Personally I think they will, albeit at a smaller size than now. And possibly some of the overseas practices will defect -- very rare but not unheard of. That aside....auditing will never be the same after this.
posted by PeteyStock at 10:43 AM on March 17, 2002

auditing will never be the same after this.

"Being an accountant gives him that extra aura of danger."
posted by liam at 11:38 AM on March 17, 2002

Welcome to corporate darwinism... Beleive it or not, this will eventually happen to any large corporation. Megacorps are not sustainable and will sink under their own weight if allowed to do so.
posted by SpecialK at 12:02 PM on March 17, 2002

Should I shed a tear for the demise of a corporate accounting house?

I don't think so.

The partners there are already planning their exit strategy and the sharks are swimming after all the business while the little guy that works in the mailroom will end up on the unemployment line and collecting taxpayer checks.
posted by MaddCutty at 12:31 PM on March 17, 2002

Without all the partners the poor mailroom guy wouldn't have had anyone to deliver mail to, enough of the booo Mr Successful yay Mr Downtrodden, and what on earth are you talking about regards Megacorps not being sustainable, bullcrap, there are plenty of biggo companies that have been around forever
posted by zeoslap at 1:44 PM on March 17, 2002

a gross abuse of government power
may the white collar thief who uttered those words become intimately familiar with bubba love's righteous rod of justice. for say, around 20 years or so.
posted by quonsar at 4:45 PM on March 17, 2002

The problem with the big five accounting firms is that they have forgotten that the primary purpose of an audit is to provide an honest appraisal of the financial status of a company on behalf of the stockholders by an unbiased outsider.

A large part of the problem is that accounting firms are currently permitted to combine the businesses of consulting and auditing for the same customer. It is an inherent conflict of interest to be paid to give advice on how to run a business at the same time you are being paid to audit the accuracy of that advice. More than half of the $57 million Enron paid Anderson each year was for consulting. The auditing side of the house was certainly not going to jepardize the consulting income by looking too hard at the books.

Clinton's chairman of the SEC Arthur Levitt tried to ban this conflicting arrangement, but was stimied by big five lobbyist Harvey Pitt. Guess who Bush appointed chairman of the SEC. Yep, Harvey Pitt, so don't expect any substantive change soon.

In addition, the recent trend of granting enormous stock options to company officers is a perverted incentive to accentuate the good news and hide the bad news about company financials when hundreds of millions of dollars of potential personal gain are at stake. Stock options encourage the short term boosting of the stock price which is quite different from encouraging the building of a solid, profitable business.

Dishonest (though legal) accounting practices are the favorite tool for stock price manipulation. Accounting firms, lacking integrity and motivated by greed, are the accomplices in this deception. Regardless of the legal loopholes, if an audit does not provide a clear picture of the true financial status of a company, then an accounting firm is not performing its job.

Accountants used to have more integrity. " In 1915, Arthur Andersen himself took the position that the balance sheet of a steamship-company client had to reflect the costs associated with the sinking of a freighter, even though the sinking occurred after the company’s fiscal year had ended but before Andersen had signed off on its financial statements. This marked the first time an auditor had demanded such a degree of disclosure to ensure accurate reporting." You would never see such a stand for honesty today. Instead, the accountants would provide advise on how to keep the loss off the books as long as possible.

But it's not like the accountants haven't had plenty of chances to reform their evil ways learning from previous fraud cases including Waste Management, Cendant, Sunbeam, Microstrategy, etc. It appears than only a catastrophe like the total disintegration of Anderson will get their attention.

It's true that the collapse of Anderson will cause disruption in the lives of thousands of employees. However, the audits still have to go on, and so most of those employees will find jobs with other firms. Sure it seems unfair to that so many have to suffer for the acts of a few, but we never seem to worry about that when a family becomes destitute because the breadwinner is jailed for a crime. Harsh punishment is sometimes necessary to prevent harm to even more innocent victims in the future.
posted by JackFlash at 6:54 PM on March 17, 2002

Welcome to corporate darwinism... Beleive it or not, this will eventually happen to any large corporation. Megacorps are not sustainable and will sink under their own weight if allowed to do so

Gee, I don't see GM, GE, Microsoft, et al collapsing anytime soon!!! Exactly what leads you to believe this, SpecialK?
posted by PeteyStock at 8:44 PM on March 17, 2002

The auditing side of the house was certainly not going to jepardize the consulting income by looking too hard at the books.

Put more charitably, the auditors are more likely to trust things their own firm has done, and thus be more likely to gloss over them. That's just human nature. Same result, though.
posted by kindall at 10:18 PM on March 17, 2002

What Jackflash said

I'll quote from BW Online since they make the case far more eloquently:

1. "Lynn E. Turner, former chief accountant for the SEC and now a professor at Colorado State University, calculates that in the past half-dozen years investors have lost close to $200 billion in earnings restatements and lost market capitalization following audit failures. And the pace seems to be accelerating. Between 1997 and 2000, the number of restatements doubled, from 116 to 233."

2. "That accountants have become increasingly dependent on consulting is clear. In 1993, 31% of the industry's fees came from consulting. By 1999, that had jumped to 51%. In 2001, for example, PricewaterhouseCoopers earned only 40% of its worldwide fees from auditing, 29% coming from management consulting and most of the rest from tax and corporate finance work..... More telling, in a study of the first 563 companies to file financials after Feb. 5, 2001, the University of Illinois' Bailey found that on average, for every dollar of audit fees, clients paid their independent accountants $2.69 for nonaudit consulting."

3. Year 2000 consulting fees to Anderson from Enron: $27 million
Year 2000 audit fees to Anderson from Enron in 2000: $25

I think the following two problems have gotten the accounting firms badly compromised in spirit, if not in act:

1) Unusual level of dependence of consulting revenue from the same client. Arthur Levitt tried to do something about it, but he didnt succeed.

2) The regular processon of audits from accounting firms joining client companies (I dont think there is any data about that). I am not suggesting that it should be outlawed (as BW did in that article), but I do think that there should be a period of 1-2 years before an auditor is allowed to join a client company.

It would however be a pity if AC goes out of business. I am sure there is a lot of good people there. I think it is more likely that it would get bought out (assuming they can arrive at some kind of deal so that the damages are capped out at something managable).
posted by justlooking at 11:54 PM on March 17, 2002

Maybe it's relevant to point out that one major error made in(?) Enron is having effect outside of the company and what an effect ! Eventually an handful of people, with their probably criminal behavior have affected thousand of people not directly under their control and not taking any direct benefit from the crime itself.

Of course I'm talking about the people that will likely be laid-off from ArthA , probably from Accenture and surely from Enron.

So supposing that we are fair, they fired people should have some kind of severance payment and damage compensation, because the unlawful behavior of their management damaged them by taking their job away.

Who should pay ?

I hear somebody saying "let's have the wrongdoers pay". That's ok if their money isn't in some exotic tax paradise.

It's probably better to have some kind of insurance, paid in full by employer that guarantees employed people from unlawful behavior of their management.

Dunno if such a law already exists ..any clue ?
posted by elpapacito at 8:02 AM on March 18, 2002

Auditors should have professional indemnity insurance, but I doubt if it will cover the scale of this collapse.

What interests me (ex Arthurs - I'll come clean) is the scale of it - and I doubt we've seen the end. Every single AA client is now going to have its books examined minutely. How many 'Enron lites' are there out there? - we're about to find out. The 'final four' are going to be hyper-conservative from this point forward. I'm sure there are plenty of sleepless CFOs right now.

Anyone out there got a view from the inside?
posted by grahamwell at 10:07 AM on March 18, 2002

AA has insurance. Most very large insurance companies carry it. But media has been speculating that it wont be enough.
posted by justlooking at 10:20 AM on March 18, 2002

Relevant story in today's NYT. (reg. reqd.).

After I read the story, I started feeling kinda bad about AC. I suspect most other consulting companies may have ended up doing the same under the circumstances.

PS: Dont quite know what was wrong with me as I was posting the previous msg. AA should read AC. and 'insurance' should read 'accounting' . Sorry about that.
posted by justlooking at 11:22 AM on March 18, 2002

Jackflash wrote:

Clinton's chairman of the SEC Arthur Levitt tried to ban this conflicting arrangement, but was stimied by big five lobbyist Harvey Pitt. Guess who Bush appointed chairman of the SEC. Yep, Harvey Pitt, so don't expect any substantive change soon.

If anyone is interested in checking out who else Harvey L. Pitt may have represented while in private practice, checkout the FFHSJ site that has a bio.
posted by tdca at 1:05 AM on March 19, 2002

« Older Six months that changed a year   |   Newer »

This thread has been archived and is closed to new comments