Arthur Andersen

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~ the last words ~

Arthur E. Andersen was twenty-eight and the youngest certified public accountant in Illinois when he set up with Clarence DeLany in 1913. DeLany left in 1918 and the firm became Arthur Andersen & Co. The founder's reputation rests on a set of stories about refusing to sign things, the best known being an early client who wanted a railroad's expenses moved around and was told no by a man whose firm could not really afford to lose the fee.

The firm grew into one of the eight large audit partnerships that checked the books of most listed companies in the United States, and stayed in that set as it consolidated down to five. It was known for training. New hires went through a residential program at a campus outside Chicago, and Andersen people were recognizable to other Andersen people anywhere in the world, which is a real asset in a business whose product is a signature nobody can independently verify.

It was also known, by the late nineties, for signing off on things. The SEC settled with Andersen in June 2001 over the Waste Management audits of 1993 to 1996, for $7 million, which was the largest civil penalty it had ever obtained against a Big Five firm and came with the first antifraud injunction in more than twenty years. Sunbeam was another. The Baptist Foundation of Arizona collapsed in 1999 owing investors around $570 million, and Andersen eventually settled that for $217 million, then backed out of the settlement. It agreed to the same figure again in May 2002, on the sixth day of the trial.

Enron was the client that ended it. Andersen audited Enron and also sold it consulting work, billing roughly $25 million for the audit and $27 million for everything else in 2000, and the Houston office had staff working inside Enron's building. When the SEC opened its inquiry, Andersen employees destroyed Enron documents and deleted email. The firm was indicted for obstruction of justice on 14 March 2002 and convicted on 15 June. It surrendered its licenses to audit public companies on 31 August.

~ the record ~

~ think straight, talk straight ~

The motto came from Andersen's mother and the firm put it on everything for ninety years. What it was built to describe is a specific job: an auditor is paid by the company it is checking and is supposed to serve the people reading the numbers instead. That is a difficult position to hold at the best of times, and holding it depends entirely on the firm being willing to lose the client. By the end, Andersen was measuring its partners substantially on what they sold.

~ the consulting half walks out ~

The profitable business inside Andersen by the nineties was not auditing. It was the systems and strategy arm, Andersen Consulting, which was growing faster and paying its partners better, and which resented a profit-sharing formula that moved money toward the audit side. The two halves spent years at war inside one organization. In 1997 Andersen Consulting went to the International Chamber of Commerce for arbitration to get out.

The ruling came in August 2000. Andersen Consulting won its separation, Arthur Andersen kept about $1.2 billion held in escrow, and the arbitrator barred the consulting firm from using the Andersen name. It renamed itself Accenture on 1 January 2001. Seventeen months later the half that had kept the name and the money was gone. The half that had been thrown out of the family was carrying a new brand and none of the audit liability. Accenture is still one of the largest firms of its kind on earth.

~ the shredder ~

What Andersen was actually convicted of was persuading its own staff to destroy documents. The firm's document retention policy told employees to get rid of drafts and notes that were not part of the final audit file, and on 12 October 2001 an in-house lawyer named Nancy Temple reminded the Enron engagement team about that policy in an email. The Houston office ran the shredders hard for the next several weeks. Shredding stopped on 9 November, the day after the SEC subpoena arrived.

The prosecution's theory was that invoking a retention policy at that moment was itself the obstruction. The jury instruction defining what counted as corrupt persuasion was the problem, because it let the jury convict without finding that Andersen knew it was doing something wrong. The Supreme Court reversed the conviction 9 to 0 on 31 May 2005, in an opinion by Chief Justice Rehnquist that called the instructions flawed in several respects. The Justice Department did not retry the case.

~ what replaced the firm ~

An indictment is not a conviction, and for most defendants the distinction matters. For an audit firm it does not, because a company cannot file accounts signed by an auditor who might lose its license in the middle of the fiscal year. Clients started moving the week of the indictment and partners followed them, sometimes as whole offices walking into one of the other four firms. The overseas member practices negotiated their own exits, many of them into Ernst & Young. By the time the verdict came in June the firm had already emptied out. What is left of the legal entity still owns a conference center in St. Charles, Illinois.

The regulatory answer arrived fast. Sarbanes-Oxley passed in July 2002 and created the Public Company Accounting Oversight Board, which took the job of inspecting audit firms away from the profession itself. That model spread. Turkey set up its own version on 2 November 2011, the Public Oversight Authority, KGK, which licenses independent auditors and inspects their files, and which the European Commission later assessed as equivalent for audits from 2016 onward. Every large Turkish company on the exchange is now audited by one of four firms, and the reason there are four rather than five is a shredder in Houston.

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