Andersen case proves importance of trust Ill repute

It may have started with a little joke in a meeting about how far the auditor would let a company go. But by mid-March, the destruction of a multi-national accounting and business consulting firm was nearly complete.

Andersen Worldwide, the firm in the spotlight for its anything-goes audits of failed trading firm Enron, is almost certain to be destroyed by the revelations that Andersen auditors did not merely acquiesce in Enron’s attempts to inflate earnings and hide its own mounting debt, but were accessories to the company’s flight from justice once the financial charade could no longer be maintained.

Since the beginning of the month, an ever-longer list of large clients — public companies, investment funds, government agencies, charities — have gone to other accounting firms in the hope that they can avoid having their own reputations tarnished by an Andersen connection.

One lesson to be drawn from the firm’s sudden collapse is that once Andersen’s reputation was sullied, the flight of its customers was almost immediate. It was not Andersen’s first brush with regulatory disapproval, but its profile was too high for audit clients to ignore. The public (who are, after all, the clients’ shareholders) would thenceforth know the auditors for one thing only.

On March 14, the United States Department of Justice charged Andersen’s U.S. unit with obstruction of justice in having destroyed documents pertinent to the accounting practices at Enron. Alleging that Andersen “sought to undermine our justice system by destroying evidence relevant to the [Enron] investigations,” Assistant Attorney General Larry Thompson may have administered a killing blow to Anderson.

The U.S. criminal charges against the firm have been described both by Andersen lawyers and by outside observers as a “corporate death penalty,” and not without reason. The clients began to sever their links with Andersen as soon as the rumours of criminal charges started to circulate. Significantly, among the first organizations to cut off business with Andersen were agencies of the U.S. government. Serious criminal charges make the association unbearable for many clients.

It is generally known that Andersen has tried to stonewall investigations into its corporate conduct, pointing its finger at individual partners and managers. What is less well-known is that lawyers for Andersen also sought to arrange a deal with the U.S. Department of Justice in exchange for co-operation in the investigation into Enron. The prosecutors were unbending: Andersen was given the choice to plead guilty on obstruction of justice charges, or see the whole firm charged. Its lawyers waffled just long enough to make up the prosecutors’ minds.

There are now allegations that Andersen’s shredding of Enron documents was not restricted to the Houston office but that the firm’s headquarters in Chicago and its office in London were also part of a “cleanup.” Andersen Worldwide’s units in other countries had looked safe; they were untouched by the scandal and looked about to merge with KPMG, a mainly European-based rival, in the event Andersen’s U.S. unit went down. Now that merger may be threatened; two other Big Five rivals, Ernst & Young and Deloitte Touche Tohmatsu, recently walked away from merger talks, and the whispers were that possible legal contagion had turned them away.

It is little wonder, then, that the firm’s clients are shearing the hawsers. An audit is supposed to establish the credibility of the subject company’s books; right now, an audit by Andersen would do precisely the opposite — no matter how scrupulously the firm had handled that particular audit.

The apparent destruction of Andersen suggests we are in another phase during which public trust matters — phases that are periodic but perhaps less frequent than they should be. As we have argued before on this page, the explosion of the dot-com bubble should perhaps have been accompanied by a little more anger on the part of investors, considering the degree to which investment houses and, yes, accounting firms had stoked the fires under the dot-com craze. Perhaps investors were conscious that they had simply believed a story that was too good to be true.

On the other hand, when several highly publicized mineral exploration scams had demolished public confidence in our industry, the cries echoed in the streets. Regulators were as swift to investigate, and the industry itself moved quickly to clean up its house.

If the multi-billion-dollar industry of accounting and business consulting shows itself to be as diligent as the mining industry did a few years ago, perhaps the worst examples of bad auditing will be behind us. We can only hope.