February 25, 2006
The criminalization of business mindset
Peter Lattman -- whose WSJ Law Blog has quickly become essential daily reading on business law matters -- points us to this Corporate Crime Reporter article on former Enron Task Force director Andrew Weissmann, who is leaving the Justice Department for a position in the white collar criminal defense section of Jenner & Block.
As this Mary Morrison article explains in detail, Weissmann's dubious decision to prosecute American accounting icon Arthur Andersen out of business over the firm's work for Enron was an egregious breach of prosecutorial discretion. In the Corporate Crime Reporter article, Weissman is asked about his decision to prosecute Andersen:
Weissmann defends the prosecution of Andersen against a growing consensus in the defense bar that the firm should not have been prosecuted.
"The company through its choices had given the Department of Justice an 'all or nothing' ultimatum," Weissmann said. "People need to remember that Andersen had been offered a deferred prosecution agreement and rejected it."
He believes that as a result of the Andersen prosecution, more and more corporations are jumping at deferred and non-prosecution agreements when offered.
"One of the fallouts from Andersen is that corporations are much more willing to say yes to deferred prosecution agreements, because they can see what happened to Andersen," Weissmann said. "What major corporation is now going to gamble that the Justice Department is going to go away and issue a declination? That's one of the reasons you are seeing a dramatic rise in deferred prosecution agreements and non-prosecution agreements."
H'mm, let's break this reasoning down. An improper prosecution that cost people and communities in the U.S. over 30,000 jobs was really Andersen's fault because the firm didn't agree to a deferred prosecution agreement in regard to crimes that the firm did not commit. Besides, despite the cost of thousands of jobs and millions of dollars in retirement benefits, the improper prosecution was still justified because it achieved the better good of scaring other companies into selling out their employees and copping deferred prosecution agreements.
That such appalling reasoning goes unchallenged in the article is a daunting sign of our times. Prosecution of business crimes has become a game of roulette for prosecutors such as Weissmann, who play on an ugly cauldron of public cynicism, resentment, and tolerance for abusive use of governmental power to prosecute the unpopular business executive of the moment. When the frightening loss of thousands of jobs and the destruction of careers and families is glibly rationalized by a former high governmental official as merely a tolerable cost of the use of the state's awesome prosecutorial power for the better good of society, we are well on our way to a time when, as Sir Thomas warns us, we will not be able to "stand upright in the winds" of abusive state power that will blow then.
And what about the criminalization of business mindset that Weissmann reflects? Ayn Rand summed it up well with regard to her observation about socialism (courtesy of Bryan Caplan):
[T]he truth about their souls is worse than the obscene excuse you have allowed them, the excuse that the end justifies the means and that the horrors they practice are means to nobler ends. The truth is that those horrors are their ends.
Posted by Tom at February 25, 2006 6:23 AM |
I don't think the Andersen prosecution was necessarily an improper one. The jury found Andersen guilty, but the Supreme Court determined that the jury charge was flawed. The jurors themselves have said that they would have convicted Andersen even under the correct charge (although statements like that are of admittedly limited value). By the time the case returned from the Supreme Court, Andersen was long defunct so the government decided not to retry it. The Supreme Court's decision and subsequent decision not to retry Andersen is not a vindication.
Posted by: David George at February 25, 2006 8:35 AM
David, a unanimous Supreme Court in Andersen observed, among other things, that "[w]e have traditionally exercised restraint in assessing the reach of a federal criminal statute, both out of deference to the prerogatives of Congress, . . . and out of concern that ‘a fair warning should be given to the world in language that the common world will understand, of what the law intends to do if a certain line is passed.'" [citations ommitted].
Andersen was prosecuted for acts (exercise of its document retention policy) that are not a crime. Moreover, despite that limited prosecution, the indictment is filled with largely irrelevant vitriol regarding Andersen's association with Enron. By the time of trial, Andersen was already withering shell of a business and the conviction only reinforced the inevitable. Thus, your suggestion that the only reason that the case was not retried was because of Andersen's demise begs a different question -- why was the case tried in the first place given that the government had already effectively run Andersen out of business?
Posted by: Tom K at February 25, 2006 9:03 AM
The test whether a prosecution is proper or not is probable cause. There was more than probable cause viz AA, there was evidence sufficient to convict.
As others do to all other criminals, 12 jurors, 3 courts, and over 20 judges found there was sufficient evidence to convict AA.
No judge has ever suggested or implied that there was not sufficient evidence to convict AA.
Moreover, from the refusal of many individuals associated with AA to testify, we should also infer guilt on the part of the corporation.
Telling the truth takes little practice.
Posted by: Moe Levine at February 25, 2006 12:16 PM
What probable cause?
Because of the supposition that Andersen did something wrong on the Enron audit,the DOJ indicted Andersen for politely directing employees to follow a long-standing document retention policy, which is a routine audit step.
Yet long before the Andersen indictment, the government surely knew that the frauds were committed within Enron's SPEs, none of which were ever Andersen clients. Andersen partner David Duncan directed the audit team to follow routine document retention procedure before any evidence of the fraud came to light and before the SEC enquiry into the Enron SPEs (again, not Andersen clients) was initiated.
Enron Bankruptcy Examiners found widespread evidence that major financial institutions aided and abetted the frauds in the Enron SPEs by signing extensive documentation -- all fraudulent -- that asserted that the banks were "investing" in the fraudulent SPEs while at the same time the banks were accepting oral promises of repayment from Andrew Fastow. According to internal documentation at the various banks, the banks justified their failure to require written loan agreements from the Enron SPEs because in order to get its desired accounting, Enron needed to hide the facts from Andersen.
As to the trial itself, irregularities abounded.
1) Trial Court refused to allow the jury to know that Andersen had waived attorney/client privilege and had voluntarily made all Andersen papers available to both the SEC & DOJ.
2) Trial Court refused to allow the jury to know that something less that 2% of extraneous papers were destroyed. That means that in addition to the entire audit workpapers, something like 70 tons of extraneous papers were saved.
3) In response to David Duncan's testimony that the FBI had failed to correct transcripts of interviews containing "voluminous errors" as required by law, the Trial Court refused to let Andersen attorney Rusty Hardin ask on cross what the errors were, effectively gutting the right to cross-examination.
4) An FBI agent who had testified before both the grand and trial juries that "the vast majority of papers destroyed" by Andersen related to Enron, admitted on cross that she had never examined the majority of papers and on further questioning, she admitted that about 10% had something to do with Enron.
5) Trial Court ruled that it did not matter how many copies of a paper were kept, if one were destroyed, it constituted objection of justice. In one instance, the prosecution held up a memo from an Enron employee named Faldyn that the prosecution deemed embarassing to Andersen and said, "Wouldn't the SEC have liked to have seen this memo? And this is the only copy in evidence." It was the only copy in evidence... because Judge Harmon would not allow the multiple copies of the memo saved by Andersen to be admitted into evidence.
5) Trial Court ruled that the jury did not have to agree that any one employee at Andersen was guilty of a crime in order to find Andersen guilty.
6) DOJ threatened Andersen witnesses, causing Andersen attorney Rusty Hardin to file a formal complaint with the head of the DOJ Criminal Division, Michael Chertoff. As of Andersen's appeal to the 5th Circuit, there had been no response.
7) Late in the trial, the prosecution admitted that they did not know what audit workpapers were, indicating that they had never bothered to look at Andersen's audit workpapers re Enron. The entire point of audit workpapers -- as was testified again & again at trial -- is to provide comprehensive documentation of all issues examined in the audit.
8) The law on witness tampering states that the prosecution must prove that the defendant "knowingly" "corruptly persuaded" others to withhold documents from an "official hearing." Under the Trial Court's jury instructions (affirmed by the 5th Circuit), persuasion was not required to be "knowingly" "corrupt" nor did it have to relate to an official hearing.
Why then did the government go after Andersen? Politicians needed a scapegoat and they needed one fast. Rather than going after KPMG which was the auditor on all the SPEs except Chewco/JEDI (which was unaudited), they went after Andersen.
Why did the government need a scapegoat? Because Enron had made massive political contributions to both Democrats and Republicans and in return had secured an SEC exemption from long-standing investor protection laws. Without the exemption, Enron could not have set up the hundreds of SPEs. The SEC (under the leadership of Arthur Levitt) had granted the exemption at the urging of the House Energy & Commerce Committee (under the leadership of Rep. Billy Tauzin (R-LA), Rep. James Greenwood (R-PA) & Rep. John Dingell (D-MI). It was these four individuals who led the attack on Andersen.
Further, trial testimony indicates that a substantial portion of "consulting fees" earned by Andersen on the Enron job were incurred because Andersen required that Enron secure advance approval from the SEC for the various SPEs before allowing Enron to set them up. Trial testimony indicates that in many cases, the SEC agreed with Enron's more aggressive accounting rather than Andersen's more conservative accounting.
Contemporary cases are reminiscent of the Andersen case. The Enron exemption demonstrates that the Abramoff scandal is but the tip of the iceberg. The DOJ's support of domestic spying shows the DOJ's contempt of the law. And witness tampering is rife in the Lay/Skilling case.
I cannot say whether Lay or Skilling are guilty of anything. If they are guilty, they lied to Andersen. But guilty or innocent, they deserve a fair trial and the DOJ's witness tampering has precluded that.
It is true that Andersen was offered a deferred prosecution and Andersen rejected it. Andersen partners rejected it knowing that the firm was to be destroyed because of their refusal to lie and plead guilty. To my knowledge, nobody at Andersen regrets the decision to speak the truth.
The Andersen indictment was nothing other than a political assassination. My husband & I were told by the top aide to Rep. Jay Inslee (D-WA) on or about 2/15/02 (weeks before the indictment)that Andersen was to be destroyed. I said, "Even though it was obviously a fraud and Andersen wasn't even the auditors where the fraud took place?" The aide shrugged and said the facts didn't matter. Rep. Inslee is a member of the House Committee on Energy & Commerce.
Posted by: Mary Ashby Morrison at February 25, 2006 2:29 PM
Marie will not like this answer because the truth hurts, but probable cause arose merely from Nancy Temple having made mention of the document retention policy.
The following also all establish probable cause
The jury could infer that within AA the communication of the policy was intended to be a signal that a government investigation was about and to start destroying a covering up--ie., one if by land and two if by sea.
The fact that AA was not following the policy, routinely, is evidence that the policy was not really the policy, but that instead the policy was false evidence created to mislead in the event of an investigation.
The conduct that AA wasn't following the policy was evidence from which a jury could conclude that the documents were still being used and not subject to the policy. Recall Mark Twain's wisdom about how hard it is too lie. AA may have needed the documents to preserve its ability to repeat prior lies and to remain consistent with prior lies. AA may also have needed the documents viz controlling Enron.
Posted by: Moe Levine at February 25, 2006 11:04 PM
Mr. Levine, I don’t like your answer either. If even a fraction of what Mr. Kirkendall and Ms. Morrison write is true, the comfort you take in probable cause – the standard is actually guilt beyond a reasonable doubt – and the court of public opinion is depressingly misplaced. What is of further concern to me is that it sounds like you work in law enforcement, and the cavalier approach you take to the truth and the rights of the citizens is frightening. What happened to the Constitution and the Rule of Law?
Posted by: Preston at February 26, 2006 7:57 AM
The allegation that Andersen was not routinely following its document retention policy is a myth, brought to you by the same folks who waited until the final days of the Andersen trial to wonder, “Just what are audit workpapers?”
The subject of audit workpapers and Andersen’s document retention policy is discussed at length in my paper referenced above. However, a few points bear repeating:
1) Auditors demand extensive documentation of all tests, decisions and conclusions in audit workpapers because the quality of an audit can only be assessed by looking at that information in view of the information provided by the client and third-party institutions (most frequently banks). Therefore the discussion of what information to ask for and how to thoroughly document it are the subject of questions and training from the first day an accountant joins a public accounting firm.
2) Just as individuals would not want duplicate copies of personal information unaccounted for outside their tax files, especially in the era of identity theft, so too do corporate clients want to be sure that duplicate copies, superceded documents & other extraneous papers are not retained outside the audit workpapers.
3) Andersen, like other public accounting firms, had a document retention policy stating that the audit workpapers should be contained in one master file. Copies of memos seeking advice from those not on the engagement team would necessarily be kept in various other files as well.
4) Andersen document retention policy stated that documentation should be complete and extraneous papers should be destroyed no later than the end of the audit, which would have been February 2001. Andresen produced e-mails from David Duncan dated March & August 2001 urging the audit team to get in compliance with the document retention policy. Because of the press of time and ongoing issues, they did not get around to this housekeeping chore.
You state the DOJ myth that Nancy Temple’s advice to be sure to be in compliance with document retention policy “intended to be a signal that a government investigation was about to start and to start destroying [evidence] of a covering [sic] up.” Further, you state that “Andersen was not following the policy routinely is evidence that the policy is not really the policy, but instead the policy was false evidence created to mislead in the event of an investigation.”
Consider this. We are in tax season, a reminder that we are all subject to IRS audit. I do not have responsibility for filing your tax returns. If I were to suggest that you make sure your tax files are in order, are you and I conspiring to obstruct justice because I am signaling you to start destroying evidence of fraudulent positions taken on your tax return? Do you consider this theory sufficient probable cause for the government to indict you and me? Surely not.
Such allegations about Andersen and Nancy Temple are no less preposterous.
Nancy Temple was a lawyer giving routine legal advice, an act specifically allowed under the obstruction statute. Yet she was being threatened with criminal prosecution.
I don’t know Nancy Temple and cannot say what she was thinking. However, two facts surely were glaringly apparent:
1) Andersen and David Duncan were being deliberately destroyed because Enron CFO Andy Fastow orchestrated frauds within entities which neither Duncan nor Andersen were ever hired to audit.
2) Andersen partners chose certain destruction rather than lie in court and plead guilty to phony charges.
Who can blame Nancy Temple for lacking faith in American “justice”?
Posted by: Mary Ashby Morrison at February 26, 2006 11:07 AM
One other fact deserves mention.
When Andersen found a mistake in accounting in Oct 2001, David Duncan asked Nancy Temple for advice on documentation. According to trial testimony Ms. Temple advised that the original schedule be retained in the workpapers with the corrected schedule on top and a memo describing the correction and its reasons all be cross-indexed. That was what David Duncan did.
Does this sound like the advice of someone trying to obstruct justice?
Posted by: Mary Ashby Morrison at February 26, 2006 11:21 AM
Nancy Temple is a Harvard educated lawyer, still practising law in Chicago, so apparently she is as cynical as I belive her to be.
I take comfort in probable cause because that is the standard we apply, every day, to thousands of Americans more deserving of mercy than the AAs and Lay/Skillings of the world--the thousands of poor Americans (white and black) who are far more victimized by the criminal justice system than the white rich elites about who you claim concern.
I have far more knowledge of criminal conduct by accountants than do you.
This statement "Because of the press of time and ongoing issues, they did not get around to this housekeeping chore" is a lie. They bill clients for every .1 hour, so they would have made money cleaning up the files.
The "retention" policy you describe is actually a policy to hide and conceal every action and step that took place during the audit, including all drafts, notes of telephone calls, meetings, the list is endless. The plan, design, and intent of the policy is to preclude any third party from being able to tell what happened and who knew what, when.
Posted by: Moe Levine at February 26, 2006 11:24 AM
You're scaring me, Moe.
Posted by: Preston at February 26, 2006 12:06 PM
Just because the criminal justice is in your view either corrupt of incompetent with regard to poor Americans does not justify corruption or incompetence. A better answer would be to clean up the criminal justice system.
It is true that accountants bill all aspects of the audit, including file documentation and the destruction of the "duplicate copies of old memos, old magazines and requests for charitable contributions" that David Duncan admitted destroying. But being able to bill for work does not mean that it will always be performed on a timely basis.
I concede one point. You have "far more knowledge of criminal conduct by accountants" than do I. If you know even one criminal accountant , you know more than I do. That's because most of the CPAs I know are Andersen people.
Posted by: Mary Ashby Morrison at February 26, 2006 12:16 PM
In today’s Seattle Times, Adam Geller of the Associated Press writes a column titled “Organize financial paperwork first: Here’s what to keep”. In reference to tax documents, personal papers, investment records, banking paperwork, bills, pay stubs and receipts, Mr. Gellor offers guidelines on what to save and what should be destroyed.
According to the DOJ’s theory of prosecution in Andersen, by advising people on what to save, Mr. Gellor must be signaling readers to cover up supposed criminal activities. Mr. Gellor’s advice does not differ materially from Nancy Temple’s, and the response of the Enron audit team was no different than the expected response of readers. Therefore, if the Andersen indictment is correct, Mr. Geller is also guilty of obstruction of justice.
Should Mr. Geller be indicted? Of course not. Only prosecutors with paranoid delusions would suggest such a thing. So too the indictment of Andersen.
Posted by: Mary Ashby Morrison at February 26, 2006 2:59 PM
Among the recent achievements of Arthur Andersen (a world class CPA firm that was hijacked by some "business advisors" during the 1990's):
1. Auditor for the largest bankruptcy in U.S, history, WorldCom .
2. Auditor for the second largest bankruptcy in U.S. history, Enron.
3. 1998 recipient of the largest fine ever levied against a CPA firm in the history of the SEC, $7,000,000 for its audit failures in connection with Waste Management.
4. And perhaps the least known, and perhaps the worst, in that thousands of elderly investors lost their life savings, the Baptist Foundation of Arizona (BFA).
The BFA case eerily resembles the Enron fiasco. Here is a synopsis of the Baptist Foundation of Arizona (BFA) escapade for which Arthur Andersen was the auditor (synopsis from New York State CPA Society publication The CPA Journal, July 2003) http://www.nysscpa.org/cpajournal/2003/0703/dept/d075003.htm
"Over a period of several years, the management of the Baptist Foundation of Arizona (BFA) engaged in one of the most audacious fraud schemes on record. BFA ultimately filed for bankruptcy, and thousands of elderly investors lost their life savings."
The article describes how the BFA under new leadership in 1984, started investing in the skyrocketing Arizona real estate market and at the same time, it accelerated its efforts to sell IRA-type retirement investment plans to church members, and incredibly the sale of these IRA-type investments, went from $7.2 million in 1984 to $211 million in 1985. In 1989, Arizona’s real estate bubble burst and property values declined substantially.
" BFA management was highly motivated not to show any losses and to report only positive results. Management responded to the new environment by structuring accounting transactions to mitigate the real estate losses. Management set up “independent separate corporations,” with individuals closely associated with BFA, such as former board members, controlling these new companies. Then, BFA sold property to these companies and received notes receivable that were recorded at the property’s book value, not its diminished current value. Transactions between the foundation and these corporations were designed to achieve the accounting treatment desired by management. At the time of BFA’s bankruptcy, a complex mesh of over 90 insider-controlled entities had been used to help disguise BFA’s tenuous financial condition. "
"Two of the most significant entities set up to hide BFA’s nonperforming real estate properties were ALO and New Church Ventures. A former BFA director incorporated both nonprofit entities. The entities had no employees of their own, and both organizations paid BFA substantial management fees to provide accounting, marketing, and administrative services."
"ALO’s stated purpose was to develop real estate. New Church Ventures’ purpose was to finance new Southern Baptist churches in Arizona. However, the substance of ALO’s actions was to buy and hold BFA’s overvalued real estate in exchange for notes receivable valued in the millions of dollars. By 1997, ALO had a negative net worth of $138.9 and owed BFA $70.3 million and New Church Ventures $173.6 million. The majority of New Church Ventures’ assets were receivables from the insolvent ALO. Both ALO and New Church Ventures owed BFA significant amounts of notes receivables."
"As a nonprofit company, ALO filed its financial statements each year with the Arizona Corporation Commission as required by state law. The 1996 information, available for public inspection from the Arizona Corporation Commission, showed that ALO had a negative net worth of $116 million and had been losing more than $20 million per year for several years. Payments were being made on the receivables only because of funds being obtained from either New Church Ventures, or, indirectly, from BFA itself. The audit team requested the financial statements for ALO and New Church Ventures, but management refused to release the statements. If the audit team had obtained copies of ALO’s detailed financial statements, the auditors would have discovered that ALO was insolvent."
"Arthur Andersen provided unqualified “clean” audit opinions on BFA’s financial statements from 1984 to 1997. However, the State Board of Accountancy alleged that because of the very material departures from GAAP regarding the disclosure of related parties and the recognition of losses, the firm should have issued either a qualified or an adverse opinion on the 1991 to 1994 statements and an adverse opinion on the 1995 to 1997 financial statements. The following were among the major GAAP violations alleged by the State Board of Accountancy:
Inadequate disclosure regarding ALO and New Church Ventures’ relationships, transactions, and balances (SFAS 57, Related Party Disclosures).
Inadequate disclosure of losses on notes receivables due from ALO and New Church Ventures (SFAS 5, Accounting for Contingencies)."
"Arthur Andersen, without admitting or denying any fault, settled an investors’ lawsuit for $217 million.
This settlement takes on a sad historical significance in that it represents the largest cash settlement for a nonprofit case and helped to further accelerate the demise of a once prestigious and great firm.
Also, as a condition to the court-approved arrangement, the partner and the manager on the BFA audit lost their CPA licenses to practice and a third CPA was placed on probation, requiring that his work be monitored for two years by the Arizona State Board of Accountancy."
Note - emphasis added.
Posted by: Max at February 26, 2006 6:21 PM
Max, glad to see that at least one other person pays attention to the facts.
Be assured that I work harder every day to protect and defend the Constitutional right's of defendants than anyone you know. No Enron defendant has been denied a single Constitutional right. No court, to my knowledge, has ever held that any Enron defendant has been denied any right.
What has happened to the criminals at Enron is what happens every day to all other defendants and criminals within the criminal justice system. The government investigates. It says it is going to file charges. Defendants decide whether to plea or get indicted and go to trial. The government offer deals to get tesitmony. It threatens to charge, friends, family, co-workers. This is the system.
I guarantee that I am the only person posting on this list who supported Clinton against Ken Starr.
The elites on this list need to recall this passage from that time:
"It is doing the things a prosecutor's office should do to investigate a case thoroughly," said Joseph E. diGenova, a former special prosecutor and former U.S. attorney here. "For people who are surprised by the tactics and strategies that are used, these are the tactics and strategies that are used by the Justice Department every day."
Posted by: Moe Levine at February 26, 2006 8:42 PM
The list of audit failures on Andersen’s watch is indeed distressing. There has been appalling level of fraud in the last 10 years and even one audit failure is unacceptable. But the fact that an auditor is unable to catch a crook does not mean that the auditor is in any way dishonest. Collusions to defraud are impossible to catch until a fraud collapses of its own weight. That is because auditors ask endless questions checking for inconsistencies and in a collusion to defraud, everyone tells the same phony story using fraudulent documentation.
Anybody who has not examined the audit workpapers of Waste Management. WorldCom or Baptist has no way of knowing the cause of the audit failures. The only information available on Waste Management is the SEC’s version of events, and the government’s track record on Enron calls into question government statements regarding audits. It may be that one or more Andersen people made some mistake that was not caught in the review process. More likely scenarios include the deliberate withholding of pertinent information from the auditors, a miscommunication between the clients and Andersen or within Andersen itself or a difference of opinion regarding what constitutes a material amount requiring an adjustment to the books. Or it may be that the government was no more competent and/or honest than they were in the Enron case. We simply don’t know the facts. Waste Management took place when the SEC had a political agenda, namely to ban accounting firms from providing systems work to audit clients.
The SEC has the power to destroy any public accounting firm. Consequently, if a firm wants to survive, it will settle all but the most egregious of the government’s claims regardless of the merits of the case. By the terms of the settlement, Andersen was under gag order.
What about the Baptist Foundation of Arizona? Again, without examining the audit workpapers, we don’t know much. However, the jurors in the civil case, lacking any political agenda, give some insight.
“One-third of the Maricopa County Superior Court jurors…couldn’t believe that [Andersen] agreed to a $217 million settlement. ‘A judgement would have been for a much lower amount’ [because] ‘the case was going in Andersen’s favor, and they hadn’t even put on its witnesses.’ Other jurors agreed that foundation employees, directors and officers knew of the financial fraud as early as December 1996, hid it from the auditors and were primarily to blame.”
At WorldCom, the frauds were booked in amounts just under audit scope. The WorldCom internal auditor who discovered the fraud has stated that even after she suspected the fraud, it took her a long time to figure out how it worked from the tangled journal entries. How did WorldCom’s CFO figure out the audit scope? Did he break into audit trunks or tap into Andersen computers? These are valid questions to which I have no answer.
It may be that Andersen deserved killing for some audit, but Andersen did not deserve killing for Enron. Close examination of other Andersen cases might yield the same sort of surprising facts as in Enron. Looking at restatements without analyzing the reasons for the restatements, academic commentators have noted for the years 1997 through 2001, Andersen had the lowest rate of restatements among major accounting firms.
What about the audit failures at RiteAid, Kmart, Adelphia, Tyco, Xerox, Royal Ahern, Royal Dutch Shell, Parmalat, Yukos, Superior Bank, Aurora Foods, HealthSouth, Hayes Lemmerz, Shurgard Storage, Cutter & Buck, KrispyKreme, MicroStrategy, Inc., Critical Path, Inc., Safety-Kleen Corp., Nortel Networks, Orbital Sciences Corp. InfoSpace, Metropolitan Mortage and Securities, AOL, Computer Associates, AIG, Navistar International, NextCard, Inc, Cendant and JDS Uniphase? These restatements are similar in two respects: (1) none were clients of Arthur Andersen, and (2) there has been little mention of their auditors in the media. There are various reasons for the restatements; without a review of the audit workpapers, it would be irresponsible to make a judgment on the quality of the audits.
These restatements were not insignificant. Xerox admitted that its income was overstated by $1.42 billion or 52.3% after an earlier restatement reducing income by $207 million or 11.4% for the same period. Yukos has been accused of omitting tax liabilities variously described of between $5 – 24.5 billion from its financial statements. Royal Dutch Shell confessed that its oil and gas reserves were approximately 25% lower than previously stated. JDS Uniphase Corp. restated quarterly results from a $1.3 billion loss to a whopping $41.9 billion loss.
Looking at the various frauds, one can see that they tend to be committed within industries that have plunged after a bubble, with executives reacting by committing fraud. Thus, telecom companies and Arizona real estate were fertile grounds for fraud and those accounting firms who had a higher concentration of clients in those fields suffered a higher rate of restatements. In addition to its bubble due to excess capacity, telecom presents unique audit problems. I am no auditor, but just how do you audit excess broadband capacity? What with computer viruses and other computer manipulations, it seems the potential for fraud in such companies is almost unlimited.
All in all, auditing in today’s climate is no safer than Russian roulette.
Posted by: Mary Ashby Morrison at February 26, 2006 9:37 PM
You have to give Moe credit - despite routinely having his head handed to him, he still comes back fighting. He's like the Black Knight. "It's a mere scratch!"
Posted by: Don Mynack at February 27, 2006 9:29 AM
thank you for the compliment. if one fights the federal government everyday, as I do, there are very very few wins or victories--you have to be a "Black Knight"
As for accounting fraud, it happens, often, because of core problems in the profession. Contrary to popular myth, accountants do not count cash--that is easy and material fraud for a public company involving cash is almost impossible. Instead, over the last 75 years, public accountants have developed a series of tools that can be used fraudulently and have spent most of their professional life showing clients how to manipulate such.
Let me give you an example of the world I know, bank accounting. It is impossible to manipulate the cash position of a bank. Accordingly, accountants came up with the concept of loan loss reserves--which are estimates or guesses of loans going bad in the future, which are an incredible tool for manipulating a banks finances.
To understand such one must understand that all any reserve does is convert present shareholder into future income. If one doesn't understand how a reserve does this, you need to get off this list and take some accounting.
This means that, whenever possible, management wants to create reserves, which will boost future income and future compensation based on compensation schemes that reward "future income."
Now, in the history of the world, no bank has ever explained this in a annual statement.
Until the SEC release in First Chicago and Citicorps breach of the treaty in 1987, the accountants and bankers were engaged in a overt conspiracy to fix reserves. Every fall there was a meeting of all the big banks and their accountants to set the loan loss reserves for the year. This honor among thieves was driven by the fact that Chase's president and Citicorp's president and other bank presidentss were in a nuclear arms race over manipulation of reserves, that had to stop. If Chase played with its reserves, then Citicorp and its accountants had to match the scheme or their earnings would lag earnings that had been manipulated. I have debriefed accountants who attended these meetings.
It is only when you understand how accounting works and how tools like reserves work that you can begin to understand accounting fraud.
The Enron fraud was very simple. It had a low credit rating. Nonetheless, it borrowed billions to finance a bunch of stupid stuff--water plants in Brazil and India and stuff, about $15 billion worth. Basically, all these poor investments needed to be written off and the debt hidden. Lay, Skilling, and all the others thus, with AA, used the tools available to: (1) manipulate income, by saying that stuff that had been sold was "income" when it wasn't (e.g., Nigerian barges) or (2) hide debt--off balance sheet, special purpose entities.
Fastow was in charge of the fraud. He knew the scope and extent of the problems which is why he was also taking cash for himself (he doubted he would be succesful). Skilling grabbed his stock option money. Lay stupidly believed Fastow and Skilling that the scheme would work, so he never cashed out.
Posted by: Moe Levine at February 27, 2006 11:37 AM
Regarding your statement "What about the Baptist Foundation of Arizona? Again, without examining the audit workpapers, we don’t know much."
The Arizona State Board of Public Accountancy reviewed the work done by Arthur Andersen and indicated that because of the very material departures from GAAP regarding the disclosure of related parties and the recognition of losses, Arthur Andersen should have issued either a qualified or an adverse opinion on the 1991 to 1994 statements and an adverse opinion on the 1995 to 1997 financial statements (Arthur Andersen had issued a "clean" opinion on all of the financial statements). The Arthur Andersen partner and the manager on the BFA audit lost their CPA licenses to practice and a third CPA was placed on probation, requiring that his work be monitored for two years by the Arizona State Board of Accountancy".
Regarding the last four paragraphs of your previous post where you are seemingly linking together the concept of "restatements" as regards Enron and Arthur Andersen and "restatements of some 31 other companies for which Arthur Andersen was not the auditor. The problem at Enron was not a "restatement" problem, the problem was the total worthlessness of the financial statements. Enron's audited financial statements for the year ended 12/31/00 on which Arthur Andersen gave a "clean" opinion showed a stockholders equity of $11.4 billion and the 10-Q filing for the quarter ended 6/30/01, on which Arthur Andersen signed off, showed a stockholders equity of $11.7 billion, five months later on December 2, 2001 Enron filed for bankruptcy and the $11.7 billion stockholders equity was worthless, it was in reality a massive negative number - hardly what you would classify as a "restatement" issue.
The idea that Arthur Andersen had no idea of what was going on would be difficult to believe. Sharon Watkins, in a written letter to Ken Lay in August 2001, before any of Enron's problems had been made public, laid out the entire situation and incredibly predicted exactly what would happen when she made her now famous statement "I am incredibly nervous that we will implode in a wave of accounting scandals".
A few of Ms. Watkins comments, again made in August 2001, before anything regarding Enron had been made public, are as follows:
"To the layman on the street, it will look like we recognized funds flow of $800 million from merchant asset sales in 1999 by selling to a vehicle (Condor) that we capitalized with a promise of Enron stock in later years. Is that really funds flow or is it cash from equity issuance? "
"We have recognized over $550 million of fair value gains on stocks via our swaps with Raptor. Much of that stock has declined significantly — Avici by 98 percent from $178 million, to $5 million; the New Power Company by 80 percent from $40 a share, to $6 a share. The value in the swaps won't be there for Raptor, so once again Enron will issue stock to offset these losses. Raptor is an LJM entity. It sure looks to the layman on the street that we are hiding losses in a related company and will compensate that company with Enron stock in the future."
"we booked the Condor and Raptor deals in 1999 and 2000, we enjoyed wonderfully high stock price, many executives sold stock, we then try and reverse or fix the deals in 2001, and it's a bit like robbing the bank in one year and trying to pay it back two years later. Nice try, but investors were hurt, they bought at $70 and $80 a share looking for $120 a share and now they're at $38 or worse. We are under too much scrutiny and there are probably one or two disgruntled "redeployed" employees who know enough about the "funny" accounting to get us in trouble."
"I realize that we have had a lot of smart people looking at this and a lot of accountants including AA & Co. have blessed the accounting treatment. None of that will protect Enron if these transactions are ever disclosed in the bright light of day. (Please review the late 90's problems of Waste Management — where AA paid $130 million plus in litigation re questionable accounting practices.)"
"The overriding basic principle of accounting is that if you explain the "accounting treatment" to a man in the street, would you influence his investing decisions? Would he sell or buy the stock based on a thorough understanding of the facts? If so, you best present it correctly and/or change the accounting."
"My concern is that the footnotes don't adequately explain the transactions. If adequately explained, the investor would know that the "entities" described in our related party footnote are thinly capitalized, the equity holders have no skin in the game, and all the value in the entities comes from the underlying value of the derivatives (unfortunately in this case, a big loss) AND Enron stock and N/P. Looking at the stock we swapped, I also don't believe any other company would have entered into the equity derivative transactions with us at the same prices or without substantial premiums from Enron. In other words, the $500 million in revenue in 2000 would have been much lower. How much lower?"
"Summary of Raptor Oddities"
"1. The accounting treatment looks questionable.
a. Enron booked a $500 million gain from equity derivatives from a related party.
b. That related party is thinly capitalized with no party at risk except Enron.
c. It appears Enron has supported an income statement gain by a contribution of its own shares."
2. The equity derivative transactions do not appear to be at arms length.
a. Enron hedged New Power, Hanover and Avici with the related party at what now appears to be the peak of the market. New Power and Avici have fallen away significantly since. The related party was unable to lay off this risk. This fact pattern is once again very negative for Enron.
b. I don't think any other unrelated company would have entered into these transactions at these prices. What else is going on here? What was the compensation to the related party to induce it to enter into such transactions?
3. There is a veil of secrecy around LJM and Raptor. Employees question our accounting propriety consistently and constantly. This alone is cause for concern.
a. Jeff McMahon was highly vexed over the inherent conflicts of LJM. He complained mightily to Jeff Skilling and laid out five steps he thought should be taken if he was to remain as treasurer. Three days later, Skilling offered him the C.E.O. spot at Enron Industrial Markets and never addressed the five steps with him.
b. Cliff Baxter complained mightily to Skilling and all who would listen about the inappropriateness of our transactions with LJM.
c. I have heard one manager-level employee from the principal investments group say, "I know it would be devastating to all of us, but I wish we would get caught. We're such a crooked company."
(End of Sharon Watkins quotes)
Ms. Watkins (a former Arthur Andersen employee) also expressed her concerns to her old Arthur Andersen boss, audit partner Jim Hecker.
It appears that just about everyone knew what was going on at Enron and a great part of it was a willful manipulation of the Enron financial statements to keep the investing public from knowing the financial problems that Enron was having.
Posted by: Max at February 27, 2006 9:37 PM
You are correct that Sharon Watkins notified Jim Hecker at AA in August 2001. And Hecker notified the relevant people at AA.
Sharon Watkins also notified Ken Lay who engaged Enron's lawyers to investigate the allegations. I do not recall whether the law firm, Vinson & Elkins, questioned AA but I do understand that AA stepped back from the situation so that the law firm could investigate.
Meanwhile, if you were an auditor, what would you do? I would rush to look at what information the audit workpapers contained. AA did so. In those audit workpapers, they had copies of the documents showing investments in the 2nd tier of SPEs (Raptor, Condor, etc.)audited by KPMG, plus Chewco/JEDI. Many of these investors were legitimate. Among those investors were banks -- Citigroup, JPMorgan Chase, Bank of America, CreditSuisse First Boston, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto Dominion, Royal Bank of Scotland, Barclays, BT/Deutsche, and Merrill Lynch.
In the course of the audit, Andersen sent out standard confirmation letters to all banks having any ties to Enron requesting confirmation of bank balances and disclosure of any loans, loan guarantees or contigent liablities. The banks above did not disclose that the disguised loans.
Further, in conjunction with some of the sales that turned out to be bogus, when Andersen wondered whether about whether the buyer was legit, they requested that the buyers represent that they were not related in any way to Enron or the banks who did business with the SPEs.
Looking at these documents in the face of Ms. Wadkins concerns, any auditor would worry but for Ms. Watkins concerns to be correct, all these banks would have to be complicit in fraud. That is a lot to swallow.
If AA had pulled its audit opinion on the basis of Ms. Watkins' concerns, and the concerns turned out to be groundless, the AA would have irreparably harmed Enron, its shareholders & retirees. For such an error, AA would have been deservably destroyed.
As to Baptist, the case is very troubling. It was used as a springboard for AZ's Attorney General to be elected governor. One other fact documented & footnoted in my paper which can be accessed above is that representatives of the Final 4 accounting firms met with Rep. Billy Tauzin, then chairman of the House Committee on Energy & Commerce and they jointly agreed to "push AA off the bridge." When politics is involved, anything can happen. The AZ Board may be 100% correct. But they also could be mistaken. At the very least, the jurors ' statements bring up a question.
The Andersen case is important for 2 reasons:
1) Nothing has changed. In fact, Citigroup & JPMorgan Chase have admitted to govt. investigators that they helped "at least" 10 other corporations commit Enron-style frauds.
2) Enron is unusual in that there is so much evidence available in the public domain.
Looking at that evidence, as well as other cases, one must question whether facts, presumption of innocence & the rule of law are remotely relevant in today's America.
Posted by: Mary Ashby Morrison at February 28, 2006 11:31 AM
Two additional points.
To paraphrase one of your tried and true statements "Without examining the audit workpapers, we don’t know much."
I may be wrong, but I feel pretty confident that you have not "examined" the Arthur Andersen workpapers. Yet you state " [AA] In those audit workpapers, they had copies of the documents showing investments in the 2nd tier of SPEs (Raptor, Condor, etc.)audited by KPMG, plus Chewco/JEDI. Many of these investors were legitimate. Among those investors were banks -- Citigroup, JPMorgan Chase, Bank of America, CreditSuisse First Boston, Royal Bank of Canada, Canadian Imperial Bank of Commerce, Toronto Dominion, Royal Bank of Scotland, Barclays, BT/Deutsche, and Merrill Lynch."
"In the course of the audit, Andersen sent out standard confirmation letters to all banks having any ties to Enron requesting confirmation of bank balances and disclosure of any loans, loan guarantees or contigent liablities. The banks above did not disclose that the disguised loans."
"Further, in conjunction with some of the sales that turned out to be bogus, when Andersen wondered whether about whether the buyer was legit, they requested that the buyers represent that they were not related in any way to Enron or the banks who did business with the SPEs."
Perhaps a better characterization of the above would be that "I think they had in the workpapers" or "they should have in the workpapers" or "I hope they had in the workpapers".
If I am incorrect, and you have personally examined the Arthur Andersen workpapers, then I apologize for my "doubting" failures.
As you suggested, if Arthur Andersen had pulled its audit opinion on the basis of Ms. Watkins' concerns and their own knowledge of events, the Enron shareholders and retirees may have been saved $ billions and it is just possible that Arthur Andersen would still be in business today.
One additional point, the hypothesizing about the SEC might have been out to get Arthur Andersen, the Attorney General of Arizona using Arthur Andersen in the BFA case for political purposes, Rep. Billy Tauzin and the "Gang of Four" pushing Arthur Andersen off the bridge, and "When politics is involved, anything can happen" does not, in my opinion add anything of substance to your arguments. These kind of statements present a kind of paranoid "everybody is out to get Arthur Andersen" type of view of the world.
Posted by: Max at February 28, 2006 2:35 PM
I have not looked at the Andersen audit workpapers. All of that information was found in the Enron Bankruptcy Reports which were cited in my paper.
Frankly, I lack the imagination to dream up this stuff. Everything I found was found in the public domain -- Enron Bankruptcy Reports, various congressional & senate reports, various quotes from newspapers. The first information I had of Enron's exemption came from a Stephen Labaton story in the NYTimes & is confirmed by the congressional record as cited in a congressional report.
The meeting of Billy Tauzin with the representatives of the Final Four was cited from a Jackie Spinner article in the Washington Post. A lot of Final 4 CPAs have read my papers. Only one other person has asked aboutthat meeting, a retired high-unit Coopers partner. I told him other info I had heard but was not in the public domain & suggested he check his sources at PwC. The retired partner e-amailed me back within hours & said he had confirmation of everything I had heard.
How do you explain this? In all the governmental reports, the Powers Report, the Neil Batson Enron Bankruptcy report, there was hundreds of pages of discussion of the Enron SPEs. Yet not one of these reports managed to mention that AA was not the auditor of those SPEs. The only official report to mention this fact is the Harrison Goldin Enron Bankruptcy Report which evaluates the KPMG audit of the LJM SPEs as well as the PwC fairness opinions of the Raptors & Rythms/Swap Sub transactions which AA required before allowing the transactions to go forward.
The SEC spent months studying the SPEs. How could they not know who the auditors were. Did they look at the audit report but were for some reason unable to read the name on the report? Did they review the audit workpapers but not know whose audit workpapers they were looking at? Did they talk to the auditors but not know who they were talking to?
The Powers Report blamed AA. In addition to failing to mention that AA was never the auditor of the @#$% SPEs, the Powers Report stated, "Although [Andersen] reviewed the [Chewco] transaction at the time it occurred, we do not know what information the firm [AA] received of what advice it provided." The only relevant facts regarding the quality of the audit are (1) the information sought by the auditor & (2) the information received by the auditor. By their own admission, The Powers Commission lacked the relevant facts to form a valid conclusion.
If the auditor fails to ask the right questions, it is the auditor's fault. However, if the auditor asks all the right questions but gets fraudulent documentation backed up by 3rd party confirmations, what are you going to do?
In the paper attached to this posting I describe the process of figuring out that AA was not the auditors of the SPEs. I then called Andersen & asked them if they had been the auditors of any of Enron's SPEs. They said no. That confirmation is the only information I have received from inside Andersen.
I don't blame you for doubting. If John Grisham had written this as a novel I wouldn't think it at all realistic. Read the paper. Check the cites.
I gave a speech today and a gentleman stood & told me he was General Counsel for Snohomish County Public Utility District, which is embroiled with at least one suit with Enron for overcharging on electricity. He said that the PUD had also filed suit against all of the banks named above.
There was also a comment about the facts being widely known at Enron. I have read at least one place (I don't remember the exact cite) that Fastow kept a tight lid on all info, was dictatorial to those who worked for him and threatened folks with being fired if they talked to AA folks. So I am guessing that when AA asked questions, those employees working for Fastow said they did't know & directed them to talk to Fastow or Kopper.
The Enron Bankruptcy Examiners repeatedly said that vital information was kept from AA by both Enron officers and the various banks.
Sharon Wadkins was a VP who had recently started working for Fastow when she approached Hecker (who was not on the Enron engagement) and Lay. Yet she herself did not seem overly confident of the info she had heard.
If AA had withdrawn their opinion at that point, the outcome would have been the same. Enron's bankruptcy was caused by poor investments using far too much debt. The frauds had already been committed; they only delayed the timely reporting of the debt overload.
If AA had jumped the gun and withdrawn their opinion based on one person's concerns which contradicted all the documentation and representations received by AA, it would have been unprofessional.
Ms. Wadkins was right, as we now know. But it is far easier to be a Monday morning quarterback that to call the shots on the field.
Posted by: Mary Ashby Morrison at February 28, 2006 5:51 PM
I appreciate your views and I want to make one final comment and then I will be through. We are probably boring everybody else to death with this "accounting stuff" - I think it may have been Ken Lay, who is an economist; when someone asked him why he became an economist he said he did not have a good enough personality to be an accountant.
I certainly have a lot of compassion for Arthur Andersen people who have lost their firm and their jobs, especially the retired partners who had built Arthur Andersen into one of the great CPA firms in the world, I know the demise of their firm has been a crushing blow to all of them. Unfortunately, in my opinion, Arthur Andersen and all of the other Big 5 firms got caught up in the go-go 1990's and let their desire to become consultants and business advisors override their primary function of being auditors and as the title indicates "Certified Public Accountants" and I think many of the problems that have resulted not only for Arthur Andersen but for all of the remaining Big 4 firms, can probably be traced to that decision to become consultants/business advisors.
Are the debits on the left or the right?
Posted by: Max at February 28, 2006 7:11 PM
Re: “consulting fees”, under rules promulgated by SEC Chairman Arthur Levitt, everything not part of the bare-bones audit was required to be disclosed in the financial statements as “consulting” fees.
The year 2000 Enron financials (the last year audited by AA) list $27 million “consulting” fees paid. They include:
1) $0 for financial systems design & implementation fees:
2) $4 million paid to Accenture (formerly Andersen Consulting) which was totally independent from Andersen during 2000; and
3) $23 million fees primarily related to business process and risk management, tax consulting (Enron prepared its own tax return), due diligence related to acquisitions and other activities, work performed in connection with registration statements and various statutory and other audits.
In short, the “consulting” was all audit or tax related. Under SEC regulations, many services that can only be performed by auditors must be disclosed as “consulting”. It is ironic that the SEC definition of “consulting” is itself inherently misleading.
Trial testimony indicates that a substantial portion of these “consulting” fees were generated at Enron because Andersen required Enron to secure advance SEC approval of the various SPEs before allowing Enron to set them up. Testimony further indicates that in many cases, the SEC agreed with Enron’s more aggressive accounting rather than AA’s more conservative accounting.
The bugaboo against systems work being done by the same firm as the audit should be examined. The auditor tests the financial numbers. Yet those numbers can only be produced by the accounting system. If the accounting system is garbage, the numbers will be garbage before the audit even begins. AA realized that every audit was vulnerable to systems inadequacies. That is why AA set up a division in the 50’s to help clients get adequate systems.
The entire issue about systems work or consulting implies that systems work somehow corrupts the auditor. That doesn’t make sense. Especially in a large firm, the partner shares a minescule portion of the profits on the job while shouldering 100% of the blame if something goes wrong. If you were an audit partner with your head perpetually in a noose, would you deliberately overlook something in order for other partners to get virtually all of the profits? Of course not.
The public knows almost nothing about the inherent checks & balances within audit firms. Auditors – including partners – do not sneak around with back room deals like Andy Fastow (& politicians). CPAs in public accounting sign & date every paper, every memo & every conclusion. And memos are routinely distributed to everyone on the job. Partners want everyone to know what is going on so that they can look for info inconsistent with what the client has stated , as well as for general training purposes.
Everyday conversation in public accounting revolves around whether to sign or not sign. As in: do we have enough info to sign? I think we need to test more before we sign. I am not about to sign because…
Enron, WorldCom, Baptist, Qwest were all frauds, having nothing whatsoever to do with consulting. In all these cases (Baptist was not under purview of SEC), the DOJ has charged executives of defrauding Andersen after politicians & the DOJ vilified & destroyed AA. How “enronic”.
CPAs fear & despise fraud above all else. (1) Fraud robs people of their security & future – grandparents, parents & children, much like our own families. (2) Fraud destroys faith in our financial system. (3) Fraud frames the auditor.
Andersen was first framed by those who engineered the frauds and then destroyed by an indictment based on turning the plainly-worded law upside down to criminalize innocent behavior. Prior to the indictment, Andersen was under gag order, required to remain silent in the face of a vicious campaign of character assassination, misstatement & threats against clients. Therefore Andersen was destroyed without ever being allowed to say a word. Most Americans seemed to find this entertaining & both the trial court & the 5th Circuit condoned it. As one European commented, “It is difficult to believe this could happen in any civilized country, much less the United States of America.”
The Andersen case should be of vital concern to all of us:
1) The problem has been deliberately misstated. Without a correct analysis of the problem, nothing has been fixed & we are doomed to have more Enrons. Some real solutions to the problem would include:
A) Eliminate exemptions to investor protection laws. The fact that campaign contributions buys exemptions from these laws enabled the Enron fraud.
B) Throw out the rules on SPEs and, as AA has lobbied since 1988, require mandatory consolidation of SPEs. SPE rules which required only 3% outside equity (now changed to 10%) to gain mandatory non-consolidation are dangerous for two reasons. They are misleading to investors and, as we saw in Enron, they are impossible to audit.
2) The Andersen case is an egregious abuse of power in order to cover up political influence-peddling. The fact that a company, careers and retirements of countless thousands can be destroyed without ever allowing the targets to speak ought to chill every thinking person.
Finally, a few quotes:
? “Your signature is your own. Don’t even think of signing off on something until you are comfortable that you know that facts & their ramifications. Remember that if something goes wrong, you could be called to testify in court about your signature. Act accordingly.”
? “If you don’t feel comfortable signing something, even after discussing if with the senior or manager on the job, go to a partner – any partner – to discuss your concerns. The principled refusal to sign is the single best protection for the partners and the firm.”
? “Your job is to ask the right questions. Don’t ever fear looking stupid. It’s OK if you don’t know the right answers; somebody around here will be able to give the right answers. But unless you ask the right questions, we are all dead in the water.”
? “Once we accept the job, the pricing decision is entirely separate from job management. Our job is to perform the best work humanly possible, as efficiently as possible. If the budget is blown because of some circumstance unknown when the fees were set, we will bill for the extra time. If we simply failed to correctly estimate the work entailed, we will set a more realistic fee next year. If the client doesn’t want to pay, we will resign the client. But under no circumstances will we do less than our very best work.”
? “Because of world-wide profit-sharing, the engagement partner’s share of the fees amounts to only pennies, even for the largest client in the office. I point this out to reinforce that we are not about to sign off on anything that even hints of wrongdoing.”
These are the lessons taught to so many by Andersen partners in a firm summarily executed without ever being allowed to defend itself.
Posted by: Mary Ashby Morrison at March 2, 2006 5:02 PM
Thank you Mary for articulating your thoughts. Andersen will never be fully vindicated; many people like Moe just want to believe (and have the right to believe) that Andersen is guilty. It is important to remember that Andersen was a $10 billion revenue organization, with 85000 employees worldwide. Auditors do make mistakes, but they usually occur at the acceptance of the client. The auditors problem generally is that he cannot control the behavior of his clients. If they want to misrepresent the results, he will have a hard time catching them. Thankfully almost all organizations want to do right thing; the cynic can always point to the failures and impute to all corporations.
While Moe is sympathetic to the plight of some of the Andersen people, he should be reminded that:(1) 85000 people needed to find a new job; (2) the potential plaintiffs in lawsuits against Andersen will or have received less since the firm is worth less dead than it is alive; and (3) the corporations are having their audit fees increased, in part because there is less competition in the audit marketplace. The point of this brief list is that there is significant collateral damage to innocent people by the DoJ's indicting Andersen.
As a sidebar to this conversation, can you connect the indictment of Andersen with another item in the news, the government's handling of Katrina?
Yes, indeed, Michael Chertoff is at the center of both. This Harvard trained lawyer was front and center in the decision to indict Andersen. He apparently believed that indicting Andersen would be like indicting GE for polluting the Hudson. The difference is that felons cannot practice public accounting so the mere indictment put Andersen out of business. This lack of judgment plays through in the Katrina mess. While New Orleans wss flooding, Chertoff goes to a bird flu conference.
Chertoff is the worst kind of person in a leadership position; he cannot understand the consequences of his actions.
Posted by: Bob at March 3, 2006 7:56 PM
Thank you, Bob, for your thoughts.
Your assessment of Chertoff is right on the money. Not only does he not understand the consequences of his actions, he is consistent in that in the face of a crisis, he resorts to scapegoating. As we now know, FEMA Director Brown was not delegated authority by Chertoff until the relief effort was bungled.
There is indeed huge collateral damage to the prosecution of Andersen. My husband & I are just two of the thousands, including widows & those in their 80s & 90s, who lost all retirement benefits. While this hardship is significant, it is nothing compared to the demonization & obvious hatred of Andersen people. That is a difficult burden for all, but particularly heavy for widows whose memories of their husbands has been smeared or for those elderly weakened by disease.
Because of my writing, I have heard from thousands around the world. In Canada & the U.S., it was not uncommon for young children to be hazed at school because of their parents' ties to AA. Where does this kind of hatred come from?
There is no question that we all wish auditors could catch all frauds. But we cannot and should not assume all business persons are crooks just because a very few are. While it might be tempting to say, "I wish we could have administered truth serum to Andy Fastow", to catch a Fastow, auditors would have to administer truth serum to every executive being interviewed in every audit. I doubt anyone would consider that acceptable.
An egregious abuse of power, including an indictment based on an obvious misstatement of the law, erodes our respect for and confidence in our government. Speaking for myself, I knew that incompetence has always been a problem in our govt., just like any other. But I always believed that most in the govt. were trying to do the right thing.
Somewhere along the line, our govt. has morphed from leaders trying to lead the country to politicians concerned only with their own well-being, which can be summarized in two words -- reelection & power. The Andersen story shows that politicians will stop at nothing to hang onto power.
Further, one of aspects of the American character that I always admired was the willingness to listen to another point of view. Where has that disappeared to?
Since Feb 2002, I have sent info to newspapers, magazines & columnists, showing documentation (including footnotes) that AA was never the auditor of the SPEs & detailing the banks' role in the frauds. Nobody had to believe me; they could have looked for themselves. But if I got a response, it was mostly yawns. One NYTimes reporter replied, "Right or wrong, The Beast moves on." In other words, it is important for CPAs to restate earnings or amend tax returns in light of new facts but journalism or reports such as the Powers Report are exempt from such considerations.
Recently, I heard of a journalist whose findings agree with mine. But because those findings do not agree with the "accepted wisdom", he cannot find a publisher. But nothing guarantees that the accepted wisdom is right, especially when the accepted wisdom is that 85,000 in a firm are dishonest. In my experience, closed minds and sweeping generalizations do not solve problems; they create them.
There is further collateral damage. I have been told that because of Sarbanes-Oxley & the presumption of guilt that is consuming America, foreign companies are delaying plans to list on NASDAQ & NYSE, & some already listed are considering delisting.
When the indictment was announced, many AA people (& many non-AA people - clients, etc) wrote to Pres. Bush & Chertoff, protesting the injustice. One letter was written jointly by two partners -- one an Arab & one Israeli. These two gentlemen noted that while their people and countries had failed time and again to find a political solution to age-old problems, within the auspices of Arthur Andersen, they had worked together to build a practice and forge friendships within both communities. The two AA partners said that in their opinion, their communities thought Andersen exemplified the very best showcase for the U.S. because of AA's values -- empowerment of the individual, strong mentorship, constant emphasis on doing the right thing & leaving things better than when you found them. In my opinion, America needs to showcase these values rather than destroy those who exemplify them.
No company is perfect because any company is only a collection of very human individuals. And AA is no different in that regard.
But as I used to tell my classes, shooting the auditor is just shooting the messenger. The auditor is trying to connect the dots to uncover wrongdoing. If, with the benefit of hindsight, the auditor has overlooked something, we would do well to remember that auditors, like any other human being, are subject to worries about a desperately sick child, a spouse facing biopsies/surgery or failing parents. Even momentary distraction because of such worries can cause one to fail to ask the crucial question.
Basic decency requires that we give the benefit of the doubt to those willing to shoulder ethical responsibilty by signing off, despite the obvious risk that the client may not have been truthful. People who do otherwise might as well advocate lynching policemen for failing to prevent crimes or doctors for failing to heal all patients.
In an intelligent society, a crisis should be a teachable moment, where we examine what went wrong so as to prevent future problems. Those responsible for examining the problem should have some expertise in the area and should be focused on solutions rather than blame, especially to cover their own culpability. Demagogery has no place in the process & neither does rushing to judgment. Process is important & if we fail to withhold judgment until the facts are out, we are actively undermining the rule of law. Some have taken me to task for refusing to say that Lay & Skilling are guilty. If either is guilty, I certainly want them to pay the price. But I want them to be judged fairly on the facts. Otherwise, what's the point of a trial?
Before Andersen was destroyed, critics complained that CPA firms were "underauditing", as though they would risk extinction by deliberately doing a bad audit. Now the SEC & PCOAB are concerned that CPA firms are "overauditing". Of course they are. They are not allowed to help fix a client's accounting system to prevent fraud. Yet they know they face AA's fate if they fail to detect fraud, especially one that is politically enabled. As a result, many CPAs are leaving public accounting.
Our financial system cannot survive without CPAs. And in abandoning the rule of law, we have abandoned one of the core values that makes us Americans. In the big picture, these are the real casualties demonstrated by the Andersen story.
Posted by: Mary Ashby Morrison at March 4, 2006 3:27 PM
It is a pitty, when somebody stays quiet, when he does not like, what other say
Posted by: Auto Insurance at March 19, 2006 12:48 PM
Thanks for keeping me up to date on this pressing issue. It is a shame to say that I am not shocked about the corruption in both the business world and some government officials. Everyday there is a new story about how someone took advantage of another and was caught when it was too late. It looks like some proactive decisions are being made to resolve some of these issues. I can see some cash from structured settlement on its way in this issue. First, we will have to keep our ear to the ground about the developments of the court cases. Ill stay tuned for some more useful information. Thanks.
Posted by: Giana Forzareli at July 30, 2012 11:53 AM
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