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Archive for the ‘Scandal/ethics’ Category

Candor.  No, I’m not talking about condor, a bird.  I’m talking about clear and unbiased communication.  The Merriam-Webster definition uses the words fairness and honesty.

candor_definition_a_final

Pic credit – Merriam-Webster

Do some corporate communications appear to contain more candor than others?  Yes, based on a proposed metric.  Does this appearance prove their candor?  Those on the outside will never know.  I’ve sometimes heard that the best corporate policy is the appearance of honesty.

Rittenhouse Rankings attempts to measure candor in corporate shareholder letters for a sample of 100 companies selected from the S&P 500.  The sample group “was selected ten years ago based on industry grouping, capitalization size and financial reputations.  Candor is quantified systematically by awarding points for informative, relevant disclosure and deducting points for jargon, confusing statements and clichés.”

Recently, the Rittenhouse Rankings 2012 Candor and Corporate Culture Survey™ was released.  In the release, it is claimed that the ten most candid companies as a group earned a greater return on a stock investment than the ten least candid companies as a group.  The difference in return appears to be large.

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Pic credit – Rittenhouse Rankings

Does candor in the corporate shareholder letter prove anything about honesty in financial statements?  No, it doesn’t.  Form inferences at your own risk.  But the list of ten companies with least candor (as defined by Rittenhouse Rankings) is interesting.  You can find a list of these companies at the right IN RED.  Two or three of these companies have been mentioned in the press for alleged financial reporting difficulties.

I, of course, recommend honesty in all things.

Wouldn’t it be great if all corporate financial statements were honest and free from bias and manipulation?  What a wonderful world it would be.

Debit and credit – – David Albrecht


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empty_congress_2013_6_7

Congress in session as it passes ‘No Forced Auditor Rotation’ act.

I just received word that the U.S. House of Representatives (Congress) has passed a bill banning mandatory auditor rotation.  Before you start to think that perhaps Congress has done something great and wonderful, a few words of wisdom should be remembered.  I’m posting some of the more accurate descriptions of Congress penned throughout the centuries:

  • Suppose you were an idiot, and suppose you were a member of Congress; but I repeat myself. –Mark Twain
  • You can lead a man to Congress, but you can’t make him think. –Milton Berle
  • We have the power to do any damn fool thing we want to do, and we seem to do it about every ten minutes.” –J. William Fulbright
  • There is no distinctly American criminal class – except Congress.
    –Mark Twain
  • Being elected to Congress is regarded as being sent on a looting raid for one’s friends. –George Will
  • There is more selfishness and less principle among members of Congress than I had any conception of, before I became President of the U.S. –James K. Polk
  • When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. –P.J. O’Rourke
  • With Congress, every time they make a joke it’s a law, and every time they make a law it’s a joke. –Will Rogers
  • I don’t mind what Congress does, as long as they don’t do it in the streets and frighten the horses. –Victor Hugo
  • I have come to the conclusion that one useless man is called a disgrace, that two are called a law firm, and that three or more become a congress. –Peter Stone
  • This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer.
    –Will Rogers

My generation uses a rhetorical question whenever we spot something particularly loony, “What were you smoking?”  Well, Congress, what were you smoking when you banned auditor rotation?

Debit and credit – – David Albrecht


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Mark Twain opined, “Politicians and diapers must be changed often, and for the same reason.”  I’m guessing that Rihanna wishes he had advised her that accountants also must be changed frequently.  PCAOB please take note.

Rihanna is a popular singer whose recordings and tours have produced millions in revenues.  According to her lawsuit against Berdon, LLP and accountants Michael Mitnick and Peter Gounis.  She hired the firm in 2005 when she was young (16), famous, and newly arrived in the USA.  No kid aged 16 truly understands finances, budgeting and accounting.  I might add that few college kids taking accounting courses understand those, either.

Now facing an IRS audit and the prospect of paying back taxes and fines (I wonder if jail is in the picture), she is suing the accounting firm and the two accountants for mismanaging her finances. Note, she fired the accounting firm in 2010.

Who, on the outside, knows who is at fault here–Rihanna or her accountants?  I certainly don’t.

Rihanna, I’m sorry much of your fortune has dissipated.  In the future, I advise you to change accountants fairly frequently, and then hire someone (such as a forensic accountant) to check up on the accountant.

For more on this, please read:

Debit and credit – – David Albrecht


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Jonathan Russell, city diary editor for London’s Telegraph Group, has an interesting story on today’s Telegraph website. It is titled, “Ernst & Young ‘Covered Up Judge Bribe Case.’

My write-up is based on Russell’s story, and his story is supposedly based on court documents.  I have no personal knowledge of anything other than Russell’s story.  I am not alleging anything, only summarizing what has been reported.

Russell writes,

Mr [Cathal] Lyons was a partner with E&Y’s Russian practice when the alleged wrongdoing came to light. It was originally investigated by James Mandel, E&Y’s general counsel in Moscow. In a witness statement supplied in support of Mr Lyons’s case, Mr Mandel said he suspected the payment may have been corrupt and wrote a report to that effect.

“I had the suspicion that this payment was not a proper payment for legal fees, but was an illegal payment possibly made to facilitate a positive outcome of a tax case,” he claimed in his witness statement.

He suspected that the €120,000 payment via a Russian law firm was made to influence a 390m rouble (£8.4m) court case brought by Russian tax authorities investigating a tax avoidance scheme E&Y was using to pay its Russian partners. E&Y was later cleared of liability in the case.

Russell continues,

Mr Lyons claims that after he reported his concerns about the case to E&Y’s global head office, his medical insurance was withdrawn and he was dismissed.

In his writ he says the dismissal flowed from “personal animosity against him rising from a discussion in late 2010 between the claimant and Maz Krupski [E&Y’s director of global tax and statutory] regarding alleged corruption by the practice.”

Mr. Lyons is suing for 20 years continuance of medical support, stemming from serious injuries sustained in a 2005 automobile accident.  The medical support payments are valued at $6,000,000.

I will make an effort to retrieve relevant British court documents.

In an interesting coincidence, Jonathan Middup, partner at Ernst & Young (UK) Fraud Investigation & Dispute Services, has a piece in Friday’s growthbusiness.co.uk titled, “The UK Bribery Act One Year On.”  In this article, Middup “… looks back on the first year of the UK Bribery Act to see if the British perception of corrupt practice has changed.”

Debit and credit – – David Albrecht


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I’ve been writing about the Spanish bank crisis (“Spanish Non Sequitur” and “Followup to the Spanish Non Sequitur“) because it is related to mainstream financial reporting and auditing.  How so?

The Spanish government recently hired all of the Big 4 (still don’t know from which countries) to tidy up the financial statements from many banks in the industry.  I’ve written about how this is a novel strategy to cleaning up faulty financial statements.

In addition, this is related to the push for global accounting standards.  If IFRS doesn’t work well in a mid-size European country, then how can it work as the primary tool for regulating banks world wide?

Nathalie Tadena, of the Wall Street Journal, wrote yesterday on “Moody’s Cuts Ratings on 28 Spanish Banks.”  Moody’s has downgraded bank ratings to one notch above junk.  Ouch.  In part, this is because of Spain’s sovereign debt crisis, and in part this is because “banks … have been hollowed out by a five-year property slump that has left them exposed to hundreds of billions of dollars in loans to builders and developers.”

The U.S. has experience in dealing with bank difficulties caused by economy shaking issues in real estate. The 1980s Savings & Loan Crisis and 2008 Subprime Financial Securities Crisis come to mind.  Both American crises showed that banks easily succumb to temptation in hiding losses from investors, and that auditors are loathe to alert investors to going concern difficulties.

Spain, welcome to the club.  It is dealing with its bank crisis by hiring Big 4 audit firms to clean up the financial statements of larger banks in its banking industry.  Undiscussed, though, is why Spain is hiring the same audit firms which previously had been a party to issuing unflagged misleading financial statements.

I’m glued to the newswire looking for the next development in this story.

Debit and credit – – David Albrecht


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The auditor disciplinary arm of the Financial Reporting Council (FRC) of the UK has concluded its investigation and on June 22, 2012 announced that Ernst & Young (EY) is not to be penalized for its audit of the November 30, 2007, financial statements of Lehman Brothers Holdings Inc (LBHI).

Executive Counsel considers that there is no realistic prospect that a Tribunal would make an adverse finding against Ernst & Young LLP in the UK or Members within that firm. The investigation will therefore be closed and no further action taken.

Coupled with an earlier announcement from the Securities and Exchange Commission (SEC) of the US that no legal proceedings are likely to be initiated against EY or its employees, this marks the end of one the darkest chapters in recent accounting and auditing history.

Although EY will not be penalized for failing to alert investors to LBHI’s sophisticated scheme to manipulate its financial statements, it has embarrassed itself and shamed all of us in the accounting and auditing industry.

EY has showed itself to be no better than Arthur Andersen.  Ernst & Young, shame on you. 

The FRC is the regulator and standard-setter in the UK responsible for corporate governance and financial reporting as well as the audit, accounting and actuarial professions.  It is not a governmental unit, but a private organization.  It operates in the public interest.

The FRC operates in a manner similar to the Financial Accounting Standards Board (FASB) and Public Company Accounting Oversight Board (PCAOB) of the US.

A unit of the FRC, Accountancy and Actuarial Discipline Board (“AADB”), has investigated Ernst & Young over the LBHI matter.  This is its summary of the investigation:

  1. On 10th June 2010 the Accountancy and Actuarial Discipline Board (“AADB”) considered the matter of Lehman Brothers (“Lehmans”) and decided, pursuant to paragraph 5(8) of the AADB Accountancy Scheme (“the Scheme”), that the matter should be investigated by the AADB.
  2. Lehman Brothers Holdings Inc. (“LBHI”) sought Chapter 11 protection in the United States of America on 15thSeptember 2008. The US Bankruptcy Court nominated an Examiner, Anton R. Valukas, who published his report into Lehmans’ collapse on 11th March 2010. The report made criticisms of Lehmans’ auditor, Ernst & Young, for failing to question and challenge improper or inadequate disclosures in Lehmans’ financial statements. The Examiner’s criticisms specifically related to the use by Lehmans of transactions known as Repo 105 and Repo 108 transactions. The report did not specify whether the criticisms related to the primary auditor of LBHI, which was Ernst & Young in New York, or Ernst & Young generally.
  3. Repo 105s and Repo 108s were used by Lehmans to raise short term funds and, by virtue of compliance with US Financial Accounting Standard 140 (“FAS140”) which requires certain transactions to be treated as sales instead of financing transactions, enabled Lehmans to reduce its balance sheet and leverage ratios. The Examiner found that whilst the use of Repo 105/ 108 transactions may not have been inherently improper its sole function as employed by Lehmans was balance sheet manipulation.
  4. The scope of the AADB investigation was as follows:“The conduct of Members and a Member Firm in relation to: (a) the preparation and audits of the financial statements of Lehman Brothers Holdings Inc.and UK operations including Lehman Brothers International (Europe) for the year ended 30th November 2007;and (b) the use and accounting treatment of transactions known as “Repo 105s” and “Repo 108s” by Lehman Brothers Holdings Inc. and UK operations including Lehman Brothers International (Europe).”
  1. The focus of the investigation was the audit by Ernst & Young LLP in the UK (“EYUK”) of Lehman Brothers International (Europe) (“LBIE”) and of Repo 105 and Repo 108 transactions which were conducted through LBIE.  EYUK audited the trial balance of LBIE prepared under US GAAP for consolidation into LBHI’s consolidated financial statements. The audit of LBIE’s trial balance formed the basis of a ‘Specific Scope Conclusion’ to Ernst & Young in New York.
  2. In the course of the investigation, the investigation team obtained and reviewed EYUK’s audit files; hard copy documentation; information from EYUK staff members’ laptops and emails, and information from other regulators. The team also interviewed EYUK audit team staff and former members of staff of Lehmans.

Debit and credit – – David Albrecht


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Following journalists and bloggers has become part of my daily routine.  I pay attention to what is written and to its impact.  In accounting, there tends not to be too much impact, because regulators, corporate executives and audit firm managers seem impervious to what other people say.  They always do what they darn well want to.

Dena Aubin, David Ingram and Sarah N. Lynch, however, have been able to see the power of their pens.

Dena Aubin is a journalist for Reuters who writes on auditing.  David Ingram is a Reuters journalist who writes on lobbying and business.  Sarah N. Lynch is a financial regulatory reporter.  In various combinations, they have partnered on an interesting series of articles:

In today’s post I’ll write about the first and third of their series.

In  “Ernst & Young tightropes between audit, advocacy,” Aubin and Ingram write about Washington Council Ernst & Young (WCEY) and reactions to their activities.  Aubin and Ingram report that WCEY (a unit of Ernst and Young) provides lobbying services valued at $12 million per year.  WCEY does enough business that I had become aware of its existence.  Some of its clients also engage Ernst & Young to audit their financial statements.

And that’s the rub.  It is a violation of both common sense and professional ethics that I find shocking.

Aubin and Ingram reported that Senators Carl Levin and Jack Reed were now expressing concern.  Aubin and Ingram were unable to receive public comment from the SEC and PCAOB on the issue.

On March 8, I was skeptical that anything would happen to dissuade Ernst & Young from this practice.

On Friday, May 4, I received a pleasant surprise.  In “Ernst, clients, cut auditing ties-records.”  Ingram and Aubin report that an examination of reports filed under the Lobbying Disclosure Act revealed that some of Ernst’s audit clients were no longer lobbying clients.  None of the companies, nor Ernst & Young, would comment on the relationship changes.

However, the cause and effect seems obvious.   The first story apparently showed enough light on the Ernst & Young lobbying activity that it changed what it was doing.

Congratulations Dena and Dave!

Also included in the article are comments from the SEC:

The chief accountant for the U.S. Securities and Exchange Commission, James Kroeker, speaking at a financial reporting conference at Baruch College in New York on Thursday, said SEC rules state an auditor should not act in an advocacy role for a company it audits and lobbying would be inconsistent with that.

Kroeker did not mention any audit firms by name.

He said: “If you think about lobbying in the traditional sense, you would say, ‘wouldn’t somebody that’s lobbying be placing themselves in a position to be an advocate?'”

Asked whether the SEC was looking into E&Y’s lobbying activities, an official in the agency’s enforcement division declined to comment because its investigations are not public.

“We are aware of it and we are cognizant of what the rules are,” said Howard Scheck, chief accountant of the SEC’s division of enforcement, on the sidelines of Thursday’s conference.

“If there’s a violation that we find, we’ll certainly do something about that,” he said, without referring to E&Y.

I’m impressed with these journalists, Aubin, Ingram and Lynch.  Their articles have shown original fact finding, effective organization, and a steady flow from start to finish.  I’m adding them to the list of business journalists whom I follow.

Debit and credit – – David Albrecht


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Now I’ve seen everything.

I’m quoting from the Minneapolis StarTribune and the Shakopee (MN) Patch.  On April 25, 2012, Paul Walsh reports in “Business teacher’s boss sticks up for him in fraud sentencing; he’s fired anyway,” and Lisa Baumann reports in, “Accounting Chair at Minnesota School of Business-Shakopee Sentenced for Fraud,” that Joseph W. Traxler (64) has been sentenced to a five year prison term after pleading guilty to committing an $8 million fraud.  He was also ordered to pay more than $5 million in restitution.

After leaving the company where he committed the fraud, in 2009 Traxler moved on to the Minnesota School of Business in Shakopee, where he became accounting department chair.  He started a forensic accounting program at the school, and was teaching the fraud course.  By doing so, he disproved the old adage, ‘those who can’t do, teach’.  He not only could do, but he was popular and considered a very good teacher.

Quoting from Baumann:

Minnesota School of Business (MSB)-Shakopee’s accounting department chair was sentenced Tuesday to five years in prison for his role in defrauding banks to the tune of roughtly $8 million …

Joseph W. Traxler, 64, was senior vice president and chief financial officer for the Centennial Mortgage and Funding Inc. mortgage company in Bloomington in 2007 and 2008. Traxler, of Bloomington, was sentenced in federal court in Minneapolis.

Although Minnesota School of Business-Shakopee officials declined to comment to Patch on the matter Wednesday morning, MSB officials issued a statement later in the day saying Traxler was terminated on Wednesday.

He had joined the staff of MSB-Shakopee in 2009 and had been teaching classes, including one on fraud. Under Traxler’s direction, the school began offering a Forensic Accounting Program in January – designed to provide students with the knowledge, technical skills and professional habits to pursue a career helping businesses detect and prevent fraud.

It is no secret that many in business are challenged ethically and legally.  If anything, business professors are much less ethical than the typical business professional.  I’ve seen some auditing profs who were real stinkers.

I should add that for me, it is important to live an honorable life.  I recognize that many choose to live a life with occasional dishonor.  Education is about the student, not about the professor.  I have seen far too many professor colleagues who either have forgotten this, or never learned it.

Debit and credit – – David Albrecht


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Anton Valukas is a Chicago attorney who as alternated stints as a federal attorney with the Justice Department prosecuting white collar criminals, with a law practice defending white collar criminals.  He is well known for serving as court appointed bankruptcy examiner in the bankruptcy of Lehman Brothers.  After an 18 month investigation, his team published a nine volume, 2200 page report.

Valukas carefully documents how Lehman Brothers engaged in Repo 105 & 108 transactions to improve the appearance of the company’s liquidity on its balance sheets.  Valukas concludes that there are reasonable grounds for the government to purse litigation against Lehman Brothers executives.  The State of New York has already filed a civil fraud lawsuit against Ernst & Young for its part in what is alleged as accounting fraud.

On Sunday, April 22, 2012,  Steve Kroft interviewed Valukas on the popular CBS show, 60 Minutes. The following clip from the interview is a CBS teaser or advertisement for the show.

In the short clip, Valukas says the only reason for Lehman Brothers to engage in Repo 105 transactions was to impact the leverage numbers on the company’s balance sheet.

The entire 60 Minutes segment, “The Case Against Lehman Brothers,” can be viewed by clicking on the following link:

http://www.cbsnews.com/video/watch/?id=7406224n 

The transcript of the segment is available at the 60 Minutes site.

A key exchange between Kroft and Valukas is,

Steve Kroft: Did these quarterly reports represent to investors a fair, accurate picture of the company’s financial condition?

Anton Valukas: In our opinion, they did not.

Steve Kroft: And isn’t that against the law?

Anton Valukas: It certainly, in our opinion, was against civil law if you will. There were colorable claims that this was a fraud, yes.

By colorable claims Valukus means there is sufficient evidence for the Justice Department or the Securities and Exchange Commission to bring charges against top Lehman executives, including CEO Richard Fuld, for overseeing and certifying misleading financial statements, and against Lehman’s accountant, Ernst and Young, for failing to challenge Lehman’s numbers.

Anton Valukas: They’d fudged the numbers.

At the end of the segment, Kroft speculates that the reason the SEC has not filed any suits is because it does not have a winnable case, given that it had personnel on premise3s at Lehman, and these personnel were aware that Repo transactions were going on.  Valukis wonders if the personnel had the expertise to fully comprehend what was going on.

Debit and credit- – David Albrecht


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Yesterday a story broke about eleven Secret Service agents hiring prostitutes in Columbia.  Today, Forbes contributor Robert W. Wood writes, “When Prostitutes Service Secret Service Are They Tax Deductible?”   Good question.

Are the agents using their per diem to finance the activity?  Reimbursable expense?  If using per diem, should the reallocation for prostitute fees need to be reported as additional income?

Eleven agents? Were there eleven women?  Did they need to rent a bus or a couple of vans?  Does use of a government van require being reported as additional income?  Does use of a government supplied hotel room require being reported as additional income?

This brings back memories of so many SEC employees and their pornography viewing habits while on the job. Has the Secret Service outdone the SEC?

Debit and credit –  – David Albrecht


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It’s the first weekend in April, and the Augusta National Golf Club us hosting the Masters Golf Tournament.

This years, there is substantial interest in Augusta National membership.  It is a private golf club with an exclusive membership.  It did not admit its first member of African descent until 1990, and it has yet to admit its first woman.  National political leaders such as President Barak Obama, Mitt Romney and Newt Tingerich believe it is time for open its membership.

In this short clip, Augusta National charman Billy Payne is tight lipped in answering media questions about its membership.

I’d like to point out that Augusta National does not admit accountants as members. It is high time.

Accountants are key members of both society and the economy.  Moreover, accountants and their firms wield significant influence in the world of business.  It is time for Augusta National to end its discrimination against accountants.

For further information, visit the web site for Accountants Love Augusta National Golf Club, at http://accountantswouldlovetojointaugustanational.com.

Debit and credit –  – David Albrecht


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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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