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Mayer, Jane. The Accountants War. The New Yorker, April 22, 2002. Pg. 64.
Schwartz, John and Jonathan Glater. At Andersens Helm, A Winner of Battles Who Faces a War. The New York Times. Jan 14, 2002.
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Brown, Ken and John R. Wilke. Berardinos Hopes of Saving Andersen Were Dashed Following Indictment. The Wall Street Journal. March 28, 2002.
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This case study is a fictionalized account based on actual events that occurred at Arthur Andersen, LLP.
This case was written by Professor Paul A. Argenti and Kimberley Tait D01, with additional research by Abigail Nova D01, based on an earlier case entitled The Case of Missing Time, developed by Northwestern University in 1971. All names and organizational designations have been disguised. 2001 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Tuck School of Business at 603-646-3176.
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Hoovers Online, Andersen Overview, 2001; Wartzman, Rick After WW II, Founders Death Shook Arthur Andersen Firm, The Wall Street Journal, May 1, 2002.
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Power struggles continued between the different departments at Andersen into the 1990s. In the 1990s the problems of how to combine consulting and auditing work grew in scope as observers outside of Andersen raised questions about potential conflicts of interest at the Big Five accounting firms, all of which derived significant revenues from consulting services. A 2002 report in The Accounting Review, for example, calculated that throughout the 1990s profits from consulting at the Big Five auditors were three times those produced by auditing work 6. The ratios of an individual executives annual income were often weighted even more heavily towards consulting. The resulting incentive structure produced rewards for those workers who brought in a high volume of consulting work, not those who performed their duties well as auditors. In the best case this system advanced the careers of mediocre accountants. In the worst case, Andersen partners approved on poor auditing jobs when executives received high commissions from the consulting business generated by a companys fraudulent financial transactions. Consulting was not the only relationship between auditors and their clients that came under scrutiny in the 1990s. Individual branches of Andersen each focused on a single large client. Critics accused these offices of losing their neutrality through close associations with the companies they would audit. At Enron, for example, Andersen served not only as an external auditor, but the companys internal auditor as well. This close connection led to a situation in which Andersen accountants, acting in their capacity as independent auditors, signed off on their own internal accounting work. Andersen accountants were also often checking the work of past, or potential, employers. The cross pollination of employee pools between Andersens Houston office and Enron headquarters was an established practice. The President, Vice President, and Chief Account Officer positions were all held by former Andersen employees 7. Although the SEC would later accuse Andersen partners of actively promoting their own interest over their accounting duties in the new business climate, a large part of the changes seen in the accounting industry were simply responses to changes in business. During a period of incredible economic growth in the 1990s, new forms of assets and liabilities emerged, firms entered into joint-venture agreements, and engaged in a variety of business transactions across different markets. The public could now invest in innovative companies that had expanded beyond a focus on one or two fields to trade in multiple fields, many of which had little connection to each other. Enron, once a gas pipeline company, was considered a visionary leader in this new environment. The corporation placed a premium on novel ideas, investing in everything from broadband to pulp, and leveraging a large amount of debt to fund these projects. With the high volume of money changing hands in the bull markets, opportunities arose for some executives to divert funds for their personal use. These new strategies were unprecedented in the accounting world, and so auditors, like Andersen, had to discover new ways to monitor business effectively. Sometimes they did not succeed.
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Mayer, Jane. The Accountants War. The New Yorker, April 22, 2002. Ibid
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Not all transactions went smoothly as both the business community and auditing firms generated new functions that did not fit easily into the regulatory framework devised by the government in the 1930s. The SEC had begun to adapt, but only slowly, and during the process of changing federal oversight, the Big Five accounting firms entered into more and more political battles. Andersen found itself at odds with government regulators and eventually it came under investigation for several improper auditing jobs. Two major scandals broke at Andersen during the 1996-2001 period: Waste Management Systems and Sunbeam. Of these, Waste Management proved the most damaging. In 1998, Waste Management, an Andersen client for several decades, restated its earnings to show an overestimate of $1.4 billion over a four-year period. This was the largest restatement in American history (Enron would later reveal a $600 million errorless than half of Waste Managements inflation). The SEC investigation into this incident turned up several incriminating documents at Andersen offices. After this investigation, Andersen instituted its document retention policy that would lead to the shredding of Enron documents three years later. Sunbeam also misstated its earnings for years when that company was an Andersen client, though not to the same degree as Waste Management. In both cases, Andersen paid fines that reached hundreds of millions of dollars, but managed to escape without any official recognition of wrongdoing8. Another blow to Andersen Accounting came in August of 2000, when a lengthy arbitration process ended in the formal separation of its consulting unit to become its own, unaffiliated company. The disputes between the consulting and auditing branches of Andersen reached back almost half a century. Directly following its legal split from Andersen, the consulting firm renamed itself Accenture and launched a massive campaign to reinvent its image, purging itself of any remaining ties with Andersen by emphasizing its historically separate nature (the Accenture website credits the companys beginnings to a plan to install a computer in General Electric in 1953 without any mention of accountants). Now Accenture is a publicly owned company that specializes in fast-paced development of innovative technology solutions for its global clients9. Even with its setbacks at the end of the 1990s, Andersen did not lose its place as a major accounting firm. The company had 1,500 senior partners and retained 85,000 employees in 84 different countries at the start of 2000. At this time, hoping to prepare the company to handle any future crises, management brought in a new CEO: Joseph Berardino.
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Eichenwald, Kurt. Andersen Misread Depths of the Governments Anger. The New York Times. March 18, 2002. A-1. Accenture company website: http://www.accenture.com (Accessed 7/30/2002).
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Schwartz, John and Jonathan Glater. At Andersens Helm, A Winner of Battles Who Faces a War. The New York Times. Jan 14, 2002. Brown, Ken. Berardino, Picked to Lead Audit Firm Back to its Roots, Faces Bigger Task. The Wall Street Journal. January 14, 2002.
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By 2001, the accounting industry bore little resemblance to 1913s art of bookkeeping. Auditors faced unprecedented pressure. They monitored businesses that did not fit into established categories. And as technology evolved and information became quickly accessible and transmittable, accountants had greater capacity to add new services to their work, including consulting duties. The potential existed for a reshuffling of auditing practice not only at Andersen, but across every firm in the industry. When sweeping change did occur, it occurred with Arthur Andersen in the media spotlight as a symbol of the failures of the accounting industry.
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they had never previously questioned who audited the books of the companies on which they relied for services, employment, or returns on their investments. Instead, the average citizen relied on a regulatory structure in place at the SEC to protect against fraudulent bookkeeping practices. This infrastructure had failed them. Worse, many Americans believed that the private auditors charged with enforcing accounting standards had joined forces with the very companies who were abusing these standards. To these critics, Andersen executives had committed a double betrayal, both collecting illegal profits and neglecting their duties as watchdogs. Andersen was not alone in questionable auditor/ client relations; the accounting industry as a whole had undergone substantial changes through the 1990s. Andersen was alone, however, in its link to the Enron debacle and in bearing the brunt of Americans outrage over what had happened. The investors to whom Andersens corporate clients responded would soon demand stricter inspection of accounting procedures. Some would ask for a separation from Andersen. For the first time, a major auditing firms reputation with the American public would have a direct impact on the future of the company. And Andersen, by November of 2001 was ill-prepared to handle this new constituency.
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Herrick, Thaddeus. Were Enron, Andersen Too Close?. The Wall Street Journal. January 21, 2002.
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the transaction. Over a period of several years Duncan, on Enrons behalf, petitioned to have Bass removed from the case. Bass was eventually removed from the PSG12. After the complaint about Bass, in February of 2001, executives at Andersen once again expressed serious reservations about Enron as a client. And once again the Houston office persuaded top officials not to terminate the contract. By this time the errors that would lead to Enrons bankruptcy later that year had already accumulated. Congressional investigators would later find that Enron had used outside partnerships owned by Enron executives, like those uncovered in Bass review, to hide millions of dollars of debt. In spite of Duncans insistence on keeping the Enron account, Andersen headquarters still believed that something had gone wrong in the Houston bookkeeping. On October 12th, 2001, ten days before the SEC announced its investigation of Enron, Nancy Temple sent out an e-mail that reminded employees of the companys document retention policy. This policy had begun several years earlier after the Waste Management investigation, in which the SEC had uncovered wrongdoing at Andersen using evidence pulled from its Waste Management files. These incriminating files had resulted in a nearly $300 million fine for Andersen. Following Temples e-mail, in accordance with company policy, employees began to shred documents, including documents relating to the Enron case. On October 22nd, 2001, the SEC publicly announced its probe into Enrons financial transactions. The internal debates at Andersen over these transactions, debates which began in 1999 and continued up to the SEC announcement, indicate that the accounting firm knew that its own role in the energy companys financial trouble might be called into question. If any doubt remained over whether Enrons scandal would reach the auditors, Enron executives settled the matter on October 31st by convening a special committee to investigate Andersens accounting failures. In spite of Andersen headquarters early realization that their Houston office could come under attack for its treatment of the Enron accounts, almost everyone else at the company remained in the dark about the problem. Branches outside of Houston received little or no preparation for Octobers crisis. In fact, employees at Arthur Andersen described their preparation as virtually non-existent. Doug DeRito, the Atlanta partner at Andersen, went so far as to request Berardinos resignation. He was angered by the lack of any internal information flow and declared My ability to survive financially [through Enron] is at stake, and I have zero details13. On November 8th, 2001, Enron restated its finances back to 1997, revealing a $586 million loss. The companys stock plummeted, and the finger pointing began in earnest. Enron disavowed its books and blamed Andersens poor accounting standards for allowing millions of dollars worth of improper transactions to pass without anyone sounding an alarm. Enron
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Brown, Ken, Ianthe Jeanne Dugan, Cassell Bryan-Low. Berardinos Resignation Leaves Andersens Drama Unresolved. The Wall Street Journal. March 27, 2002.
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had made many unwise business deals. Company officials insisted, though, that the error hadnt been theirs alone, but their accountants as well. Arthur Andersen had worked hard over the last century to develop a positive reputation among corporate clients like Enron (See Exhibit 1-2). The firm served these clients not only through external auditing services, but consulting and internal auditing work as well and oversaw transactions of billions of dollars in the fast-paced financial world of the 1990s. When companies that had hired Andersen as an accountant started to fail, however, the close auditor/ client relationships that first attracted clients to Andersen began to appear too close. Federal investigators would soon attempt to separate out acceptable company practices from compromising ones in the much-changed accounting world of 2001. And Arthur Andersen would be at the center of this debate.
1. How does the changing environment for business affect Arthur Andersens ability to communicate in this situation? 2. Where is the firm most vulnerable, from a communications standpoint? 3. Who needs to be involved in discussions about how to communicate in the face of the SEC investigation of Andersen? 4. What role will Joe Berardino need to play in this situation? 5. What advice would you give Mr. Berardino if you had received his call from Tokyo instead of David Talbot?