On Wednesday, March 14, 2012 (10th year anniversary of audit firm Arthur Andersen’s felony charges), the Chicago Tribune published an editorial titled, “Andersen Died in Vain.” As is the way with all editorials, what followed is the editor’s opinion.
Take heed, the Chicago Tribune and its editor are wrong on this. The Arthur Andersen audit firm didn’t die to accomplish a great purpose, or to make the world a better place. It died because it couldn’t survive its punishment. And if anyone or anything has ever deserved punishment, it was Andersen.
Arthur Andersen’s death was not intended to prevent defrauded investors from being victimized in the future. The death was intended to prevent Andersen from doing it again. And in that Andersen’s punishment has been successful. Its death was not in vain.
In the editorial, the Chicago Tribune does a fairly decent job of summarizing the history surrounding Andersen’s demise:
In the beginning, Andersen was a watchdog. Founder Arthur Andersen made the firm’s name stand for something nearly a century ago, when he refused a client’s demand to approve a ledger that falsely inflated profits. For decades thereafter, an auditing opinion from Andersen was the gold standard for corporate books and records. If Andersen said the numbers were solid, then investors, bankers, regulators and the public at large could count on it.
Over time, greed corrupted Andersen. Its leaders became more devoted to collecting hefty fees than keeping books straight. Clients paid a fortune for Andersen’s consulting services, making its basic function of auditing into little more than an afterthought. The firm’s most experienced accounting technicians, the sticklers who maintained its principles, saw their status plunge in the partnership’s hierarchy. As Enron ran wild, Andersen’s Professional Standards Group proved too weak to intervene. Money had trumped honest services.
Enron’s executives were able to lie about their business performance and prospects because Andersen went along. When the lies caught up with its client, instead of admitting its failure to safeguard the public trust, Andersen engaged in a cover-up. Its employees shredded not just a few Enron-related documents, but box after box, day after day, for a period of weeks.
The Enron debacle followed a series of debacles at Andersen, which had bungled audits atWaste Management Inc.and Colonial Realty Co., to name but two prior scandals that cost investors dearly. Prosecutors who previously had stopped short of bringing charges against Andersen came to believe that its leaders considered civil penalties and promises of reform to be mere speed bumps on the road to ever-greater profits.
A decade ago this month, Andersen’s brass arrived in Washington for Enron-related settlement talks — myopic, arrogant and devoid of remorse. Justice Department officials concluded that the repeat offenders across the table would offend again if they weren’t stopped.
If anything, the Tribune is underplaying the wrongdoing. Andersen was dirty, very dirty. Charged with protecting the public interest, Andersen instead unzipped its pants and metaphorically peed all over it. There ought to be a law. Shouldn’t justice prevail in the end? In this case it did.
The Tribune goes on to say,
Did Andersen’s demise serve the public interest? No.
There were thousands of innocent victims, the out-of-work employees. … [The resulting] Sarbanes-Oxley legislation … has proven to create problems, substantially raising compliance costs for law-abiding public companies, which pay more now in audit fees to Andersen’s onetime competitors.
The greatest tragedy of Andersen’s fall? It fell for nothing. What a loss for Chicago, and what a disservice to all those like Arthur Andersen himself who never would sell their integrity, at any price.
The world is worse off because Arthur Andersen and the other largest audit firms forsook their duty to investors and the American public. If Arthur Andersen had been doing the right thing in the decades preceding its death, perhaps I wouldn’t have lost much of my life’s savings in 2001-2002.
Andersen deserved its punishment. I shed no tears for it. Its death was not a tragedy. Its forsaking the public trust was the tragedy. There ought to be a special place for those who violate the public trust.
Andersen’s death means only that it was not allowed to continue making the world a worse place. A positive from its death is that there have been no Andersen audit failures since 2002.
The Chicago Tribune errs in labeling Andersen employees as victims. The employees were part of a seedy culture, and it was the culture that supported the actions which merited the punishment. The employees could have left. If anything, Andersen principals should have been banned from ever serving American capital markets as corporate officers or auditors.
The death of the Arthur Andersen audit firm marks the end of a sad chapter in American history.
Debit and credit – – David Albrecht
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David Albrecht, you’re a professor? And this is your thought process? Sad.
Andersen was made up of 85,000 global employees, the vast majority of which had nothing to do with Enron, and were hardworking individuals who, like myself loved our jobs. Proud? Damn right, fiercely so.
Culture of greed? Bullshit. Like any large corporation, there will undesirable personalities, but that’s hardly the corporate culture. It was the culture of oneness, of being able to contact any other Andersen colleague globally, and working together to get the job done, legally, ethically. (Something I never experienced in any of the other Big 5’s I worked at, which were mere franchises in each locale). Those chaps on the Enron job either did not understand the culture, or forgot where they came from, and they certainly did not represent the rest of the 85,000 around the world.
Even today, 10 years later, I am saddened by how the US government treated Andersen as a scapegoat. So they can tell the public “Hey, we did something about it, we flexed our muscle, we showed them who was boss”. But years down the road, we still see the effects of lax controls everywhere. Look at the financial and housing sectors. Look at the GFC, who answers to those?
So did Andersen die in vain? Yes, burned at the stake in some corporate witchhunt.
That’s like saying putting murderers in prison is in vain – it doesn’t bring the victim back to life, and it makes us doubt other people because we know they could be murderers.
Just ignoring a crime committed isn’t any better – at least it made people aware that they need to question audit firms, and it made audit firms aware of how closely guarded their integrity must be.
Dear Professor:
You are absolutely right about Andersen. The problem continues with the remaining firms.
The public has lost tens of billions of dollars due to reliance on vastly faulty
CPA auditor opinions.
Here is a short list:
1. PricewatershouseCoopers — AIG, Freddie Mac
2. Deloitte & Touche — Merrill Lynch, Fannie Mae, Washington Mutual, Bear
Stearns
3. Ernst & Young — Lehman Brothers, IndyMac Bank
4. KPMG — Countrywide, Wachovia
CPA auditors have been too long protected by state Boards of Accountancy, which license CPAs and CPA firms. In California, there are fewer than 5 investigators for 85,000 CPA licensees. All other states have same problem of nearly no investigators or funding. No wonder no big firm is investigated.
CPA auditor malpractice premiums are 15% of revenues — an astounding failure rate.
California may fix this failure. The State Senate Committee on Business
& Professions held a highly critical oversight hearing. Contact the committee’s consultant Bill Gage for more particulars. bill.gage@sen.ca.gov.
See our website http://www.cpawatch.org.
Sincerely,
Carl Olson
Founder, http://www.cpawatch.org
P.O. Box 6102
Woodland Hills, California 91365
818-223-8080
Perhaps the chapter has ended, but the book continues. Unfortunately, everything written so far portends a very sad ending. The corrupt get corrupter.
“The employees could have left.”
I agree. Each employee could make a choice. I made mine after 18 months at the firm.