archive.today Saved from https://www.wsj.

com/articles/SB1023409436545200 search 26 Jul 2017 03:19:33 UTC

webpage capture no other snapshots from this url
All snapshots from host www.wsj.com

Webpage Screenshot share download .zip report bug or abuse donate

0%
DOW JONES, A NEWS CORP COMPANY

Home World U.S. Politics Economy Business Tech Markets Opinion Arts Life Real Estate

| LEADER (U.S.)

Arthur Andersen's Fall From Grace Is a Sad

Tale of Greed and Miscues
By Ken Brown and
Ianthe Jeanne Dugan Staff Reporters of The Wall
Street Journal
Updated June 7, 2002 12:01 a.m. ET

At "Andersen U.," the lush, 150-acre campus where Arthur

 
Andersen LLP has trained tens of thousands of new recruits, there's
a shrine to ethical accounting.

A display in the Andersen Heritage Center is devoted to yellowing

press clippings of a long-ago campaign to clean up the accounting
industry by Leonard Spacek, who led the firm from 1947 to 1963. In
one, he accused Bethlehem Steel of overstating its profits in 1964 by
more than 60%. In another, he bashed the Securities and Exchange
Commission for failing to crack down on companies that cooked
their books, saying that at best the regulatory agency has been "a
brake on the rate of retrogression in the quality of accounting."

Now, it's the quality of

CALLED TO ACCOUNT
Andersen's accounting
Have you reached a verdict?
that has set off an ethical
Who's winning the Andersen criminal
trial? Vote to register your opinion. crisis. Since 1993, the firm
Remember, you can change your vote has been embroiled in a
at any time as developments emerge.
series of major accounting
Go to the Called to Account page
for more coverage of the Andersen
scandals -- from Sunbeam
trial, as well as other issues stemming Corp. to Waste
from Enron's collapse. Management Inc. to
Did David Duncan fulfill Enron Corp. Facing an
government expectations? Join an
online panel of experts to discuss his obstruction-of-justice
testimony in Andersen's trial. charge in a Houston
Read key documents relating to federal court, Andersen
10%
the Andersen case, including the firm's
itself is disintegrating and
document-retention policy and Nancy
Temple's e-mail of Oct. 12. Learn more will likely be gone in a
about Andersen's document- matter of months
management prowess.
regardless of the verdict --
See a day-by-day recap of the trial.
a humiliating end to a
Related article: How Andersen's
company that once stood
Embrace of Consulting Changed the Most Popular Videos
Culture of the Company (3/12/02) as the world's largest
Is Kushner's
professional-services firm
Statement a Turning
and whose 85,000 Point for Trump
employees last year generated $9.3 billion in revenue. Team?

Opinion Journal:
Andersen's descent from conscience of the accounting industry to Americans Abroad:
Beware
accused felon didn't happen overnight. Rather, it stemmed from a
series of management miscues and compromises over the decades. Opinion Journal:
Robert Mueller’s
As the firm grew from a close-knit partnership to a globe-spanning
Power Play
behemoth, pressure to boost profits became intense. Andersen
China's New
leaders responded by pushing partners to become salesmen --
Nationalists
upsetting the delicate balancing act any auditor must perform
between pleasing a client and looking out for the public investor. McCain Returns to
Senate With Strong
This shift saw the rise of a new breed of accountant -- such as the Comments on
 Health Care
senior executive who punctuated his speeches with violin music and
exhorted his troops to "empathize" with the companies whose Most Popular Articles
books they checked.
Trump Won’t Say if
  He Will Fire
Andersen spokesman Patrick Dorton acknowledges that the firm Attorney General
has made some mistakes in the past, but says it was undertaking Sessions

reforms. He adds: "The issues and concerns raised affect the entire China Prepares for a
profession and not only Andersen." Crisis Along North
Korea Border

Arthur Andersen himself originally built his business by putting Working From
Home? The Boss
reputation over profit. In 1914, months after the 28-year-old
Wants You Back in
Northwestern University accounting professor founded his tiny the Office
company, the president of a local railroad demanded that he approve
Opinion: Mueller Is
a peculiar transaction that would have lowered the company's Trumping Congress
expenses and boosted earnings. Mr. Andersen, who at the time was
worried about meeting his next payroll, told the president that there Michael Kors Shops
for Glamour, Buys
was "not enough money in the city of Chicago" to make him do it,
Jimmy Choo for
according to a book published by the firm in 1988. The client $1.2 Billion

promptly fired the accountant, but Mr. Andersen was vindicated

months later when the company filed for bankruptcy.

Mr. Andersen lived in a bygone era. Back then, competition among

accounting firms was muted. The closest auditors came to selling
was gentle networking on the boards of local charities. What the
business lacked in excitement, it made up in reliability: Under
federal laws enacted in the 1930s, public companies had to submit
their financial statements to independent auditing every year.
Partners at the firms earned enough to drive a Cadillac and join the

20% local country club, but no one got rich being an auditor. In the late
1960s, a mid-level Andersen partner made about $30,000, or
$160,000 in today's dollars.

Daniel Malachuk joined Arthur Andersen in 1970, fresh out of the

Navy with a master's degree in finance. Flying to Chicago for his
orientation, he remembers being met by a driver holding a cryptic
"Arthur An" sign -- a nod to federal rules at the time that barred
advertising. He was driven to the campus of the newly opened
Andersen U., officially known as the Center for Professional
Education, located on the Fox River about 40 miles from the firm's
Chicago headquarters. The former college campus had a one-hole
golf course, running trails and gourmet food prepared by the same
company that cooked for the Chicago Bears.

Tradition was everywhere. The heavy wooden doors that marked

the entrance to the campus's main building matched those that
once stood outside Arthur Andersen's own office and dozens of
flags, which represented every country that had students training at
the center, hung in the lobby. New hires, known as "green beans,"
recited the founder's motto, "Think straight, talk straight." And they
learned Andersen's "four cornerstones" -- provide good service to
the client; produce quality audits; manage staff well; and produce
profits for the firm.

 
Over the ensuing 30 years, Mr. Malachuk saw the firm change to the
point that making profits eventually dwarfed all else. He and other
partners joked that the four cornerstones were really "three pebbles
and a boulder."

Seeds for Demise

Although nobody knew it at the time, the seeds for Arthur
Andersen's eventual demise were sown in 1950, when the firm
introduced the "Glickiac" to the world. Named after its inventor, an
Andersen engineer named Joseph Glickauf, the clunky device
created a sensation by demonstrating that computers weren't just
for scientists: Companies could use them to automate their
bookkeeping. This ushered in an entirely new business. Rather than
just audit the books, Andersen would set up the computers clients
needed to keep the books. It wasn't long before Andersen boasted by
far the largest technology practice of any accounting firm, raking in
huge profits.

The flood of money introduced a new element of tension into the

partnership. Under rules set by the auditors who ran the firm, all of
the profits from all the practice areas had to go into one big pot to be
divided among partners. But since the average consultant brought
 in more money than the average auditor, the consulting side
complained the arrangement was unfair.

30% The week after New Year's Day in 1989, at a world-wide meeting of
the firm in Dallas, the consultants finally made their break. They
won an agreement to separate into two units -- Arthur Andersen
and Andersen Consulting -- under a Geneva-based parent company
known as Andersen Worldwide SC. But most importantly, the
accounting side agreed to make the profit-sharing more equitable.
Under a complex formula, the less profitable of the two firms would
get a check for a small portion of the profits of the more profitable
one.

The implications for the auditors were grim: Growth in the

traditional accounting business was slowing because of competition,
and audit fees were in a tailspin. Despite grueling hours,
accountants' salaries were lagging behind those of other
professionals such as lawyers and investment bankers. And they
bridled at the thought of being eclipsed by the swashbuckling
consultants. Under the accounting side's top partner, Richard
Measelle, Arthur Andersen fought back. "It was a matter of pride,"
Mr. Measelle says.

To make sure auditors weren't just auditing, they began to be judged

on how much new business they brought in. A superb auditor "who
could not get a lick of business" was secure in the 1970s, says Mr.
Measelle, who held the top post until 1997. But now, "their job
security was a lot less."
 

Mr. Measelle believed he could boost sales while maintaining high

auditing standards. But, he isn't sure both parts of his message got
through. "I have to admit that there was this feeling that the No. 1
thing was to make your numbers and to make money," Mr. Measelle
said, but "that wasn't what we were trying to do."

To cap costs, Andersen began requiring partners to retire at 56

years of age, enforcing a policy that was long overlooked. This made
way for less-expensive -- and less-experienced -- partners. It created
more revenue per partner -- in recent years, average partners made
around $600,000 -- but left fewer partners overseeing audits.

"Though most auditors at Arthur Andersen are competent and

honest," a longtime audit partner says, "a whole new breed was not
steeped in new training and was far more focused on selling."

The auditors and the consultants competed fiercely, turning the

annual race for profits into a devilish sport. In 1993, Arthur
Andersen's cost-cutting efforts and some sales success combined
with a weak market for the consultants to make the race even closer
than usual. With just a few months left in the firm's fiscal year, the
warring sides were neck and neck. So each swept around the office
for expenses they could cut, revenue they could post. The auditors
won -- and to commemorate drew up a poster that showed Mr.

40%
Measelle driving a car that was leaving Andersen Consulting in its
dust.

In this competitive environment, Steve Samek emerged as a force

within Andersen. A product of the gritty Chicago suburb of Cicero,
Mr. Samek graduated from Southern Illinois University with an
accounting degree and made partner at 32. Like most Andersen
partners, he was clean-cut with a haircut looking as if it hadn't
changed since he was six years old. But unlike many, Mr. Samek had
a flair for the dramatic and loved the public stage. By the end of the
decade, he would be running Andersen's entire U.S. operation and
giving as many as 100 speeches a year.

As an auditor, he sometimes approved aggressive accounting tactics.

In the early 1990s, Mr. Samek picked up a potentially lucrative client,
a fast-growing restaurant chain called Boston Chicken. In auditing
its books, he allowed the chain to keep details of losses at its
struggling franchisees off its own financial statements as it groomed
for a public offering. The IPO was a resounding success, soaring
143% in its first day of trading, and, for a time, Boston Chicken was a
marquee client. Mr. Samek was rewarded for his work, getting
praised in an internal performance review for turning "a $50,000
audit fee into a $3 million full-service engagement."
 The system eventually collapsed and the company, by then called
Boston Market Corp., filed for bankruptcy protection in 1998.
 
Andersen had helped create a "facade of corporate solvency,"
according to a pending lawsuit filed last year in Phoenix federal
district court by the company's bankruptcy trustee.

Mr. Samek, who left the account before the 1993 IPO, points out that
the SEC approved of the accounting before the company went
public. Mr. Dorton, the Andersen spokesman, says the lawsuit has
no merit and that Boston Chicken's risky business plan was widely
discussed in part because the company's financial statements had
the appropriate disclosures.

Mr. Samek, now 49, rose

Counting The Days
The history of Arthur Andersen
1 9 1 3 Arthur Andersen (left), a 28-year-
old accounting professor, co-founds
Andersen, DeLany & Co.
1 9 1 4 Mr. Andersen tells a client "there
isn't enough money in the city of
Chicago" to make him sign off on a
dubious transaction.
quickly. In 1989, five years
after he made partner, he
was named to run a large
portion of the firm's
Chicago auditing practice
overseeing about 350
people. In 1996, he became
the firm's world-wide

1 9 1 8 The firm, now called Arthur head of auditing, with

Andersen & Co., starts a "management-
information consulting" practice.
1 9 4 7 Mr. Andersen dies. Leonard Spacek
steps in as managing partner, preventing
50%
the firm from dissolving.
1 9 5 4 Andersen consultants help
General Electric automate its payroll
using the Glickiac computer (right), the
first commercial use of the computer in
the U.S.
1 9 5 9 For the first time, the firm admits
partners from outside the U.S.
1 9 7 9 Andersen becomes the world's
largest professional-services firm.
1 9 8 9 The accounting and consulting
practices break into separate companies
under a Swiss parent.
1 9 9 8 Andersen agrees to pay $75 million
to settle shareholder suits arising from
an accounting scandal at Waste
Management. (See article.)
2000 An arbitrator rules that Andersen
Consulting can break free entirely by
paying just $1 billion and changing its
name. The new moniker: Accenture.
(See article.)
May 2001 Andersen pays $110 million
to settle shareholders' claims related to
accounting scandal at Sunbeam. (S e e
article.)
  February 2002 Andersen agrees to
pay $10.3 million to settle shareholders'
lawsuits related to Boston Market
bankruptcy. (See article.)
March Andersen agrees to pay $217
million to settle a lawsuit stemming
from the collapse of the Baptist
Foundation of Arizona, later withdraws
offer, but then, in a turnabout a week
into trial, agrees to pay a $217 million
settlement again. (See article.)
May 6 Andersen trial for obstruction of
justice begins (left). (See article.)
(Complete coverage.)
indirect responsibility for
40,000 people. In the
spring of 1998, he was put
in charge of all of
Andersen's U.S.
operations, which account
for about half of the firm's
revenue.
Mr. Samek gave rousing
speeches designed to
inspire the auditors to sell
everything from tax
services to consulting
work to their clients. In
one speech, Mr. Samek
was accompanied by a
violinist who played as he
told auditors to think of
themselves as maestros.
In another he stood in awe
at the pace of change in
technology. Using a pen as
a prop, Mr. Samek said
that if jets had evolved as
rapidly as computers, "a
747 would be size of this
pen, could fly around
world in two seconds and
use three cents of fuel."
Some senior partners
regarded the sermons as
gibberish but others saw
him as a kindred soul.
"He was auditor
extraordinaire," says Tom
Nelson, a former partner
who says he, too, aspired

Source: WSJ research beyond the "boring"

confines of accounting.

Mr. Samek says the partners who criticized him were those who
refused to change their ways. Accountants "tend to be a bit more
dry," he says. "I tend to be a little different, a little more visual, right
brain versus left brain, a little bit more creative."

Even as Mr. Samek tried to inspire the troops, problems with

Andersen's audits began to mount. Andersen paid investors $110
million for its botched audits of Sunbeam, the home appliance
 maker that was caught artificially boosting revenues by offering
retailers incentives to accept more product than they could sell. And
60%
in 1997, client Waste Management Inc. had the largest earnings
restatement to date, wiping out $1.7 billion in profits that it pulled in
through the 1990s.

'Rainmaker'
The lead auditor on Waste Management was Robert Allgyer, who
was known inside the firm as "the Rainmaker" for his success in
cross-selling extra services to auditing clients. He was clearly
successful at selling to Waste Management, which paid $17.8 million
in fees unrelated to the audit between 1991 and 1997, against audit
fees of $7.5 million. But he was also signing off on drastically
inaccurate books. Among other things, the fast-growing trash
hauler wasn't properly writing off the value of assets such as garbage
trucks as they aged, a ruse that pumped up reported profits.

The SEC's acting commissioner, Laura Unger, concluded that the

agency had the "smoking gun" it was looking for to prove that the
lure of consulting fees compromised auditor independence. The
SEC filed suit in March 2002, accusing six former Waste
Management executives of fraud. It alleges that Mr. Allgyer's
judgment was skewed by consulting fees, in particular a $3.7 million
"strategic overview" of Waste Management operations. The project
lasted for 11 months, but the client didn't adopt the
recommendations. One former Waste Management board member
later described the project as a "boondoggle."
 

Mr. Allgyer, who is retired, declines to comment. The waste hauler

says its accounting problems are a thing of the past. The former
executives said the charges were false. Andersen said at the time
"there was no independence violation and the SEC had no case to
make one."

Soon enough, Andersen executives had another crisis to take their

minds off Waste Management. Efforts to expand the accounting side
of the business were petering out. By 1997, auditing and tax work
brought in $1.8 billion, up just 12.5% from 1993, according to
Bowman's Accounting Report, an industry newsletter.

Andersen Consulting, meanwhile, had rebounded strongly, more

than doubling revenue to $3.1 billion during the period as companies
around the world went on a spending spree to upgrade their
computer systems. The consultants were now bringing in 58% of the
overall firm's revenues, and subsidizing the accountants to the tune
of about $150 million a year -- and complaining bitterly about it.

After a showdown in San Francisco in December 1997, Andersen

Consulting partners voted unanimously to split off entirely. They
filed an arbitration claim with the International Chamber of
Commerce. The old Andersen had been building its own consulting
practice, but it couldn't make up for the revenue it was about to lose.
70%

Mr. Samek turned up the heat. After being named the top partner in
1998, he shocked many auditors with something he called his "2X"
strategy. Partners should bring in two times their revenues in work
outside their area of practice. That meant that if an auditor brought
the firm $2 million a year policing a company's books, he should
bring in an additional $4 million in nonaudit services, such as tax
advice and technology consulting. Auditors were judged against "2X"
on newly revamped performance reviews.

The strategy was a centerpiece of Mr. Samek's hard-covered internal

manual called "U.S. Strategy," an 80-plus-page tome that included
advice on how to "empathize" with clients. Former partners say Mr.
Samek left long voicemail messages advising them to read the book
repeatedly to make sure the concepts were drilled into their heads.

One longtime audit partner says the stress was intense. "I've never
had a problem selling audit work. Tax work sold itself. But getting
into new things and consulting and selling was very challenging," he
says.

Andersen by now was implementing a strategy to sell more audit

work by handling far more than the traditional, once-a-year
external audit of the public books. Now, it was pitching clients to
 outsource their internal bookkeeping operations.

 
Critics such as Arthur Levitt, at the time the chairman of the SEC,
worried that the practice would hurt the quality of the audit,
because it removed a separate function that served as a second
opinion. In effect, accounting firms would be checking their own
work. Still, Arthur Andersen persevered -- and ultimately took the
concept a step further, pioneering the "integrated audit," which
would mingle not only internal and external audits but a whole
package of services ranging from tax strategy to advice on
corporate-finance issues.

Andersen's laboratory was Enron, an audit client since 1986.

Andersen in the mid-1990s hired Enron's entire team of 40 internal
auditors, added its own people and opened an office in Enron's
Houston headquarters that was as big as some regional Arthur
Andersen offices. With more than 150 people on-site, Andersen staff
attended Enron meetings and helped shape new businesses,
according to current and former Andersen and Enron employees.

The experiment came at a time when Andersen was becoming

increasingly decentralized, with more and more power residing with
local "office managing partners," each with their own revenue
targets and balance sheets. At the same time, several members of
the "Professional Standards Group" -- a panel of internal experts
who handled tricky accounting questions -- had been moved from
the Chicago headquarters to local offices to give clients quicker
80%
answers.

The thrust of both moves was to make it harder for auditors to fight
back against clients who wanted to test the limits of accepted
accounting standards. Enron, for example, represented just a small
fraction of Andersen's revenues. But to David Duncan, who served
as the lead auditor to the energy company, it was his livelihood.

Enron became so powerful that one Houston-based member of the

Professional Standards Group complained that his advice against
certain accounting practices was being ignored. The audit partner,
Carl Bass, told Mr. Duncan that Enron should take a $30 million to
$50 million accounting charge for a specific transaction. "The team
apparently does not want to go back to the client on this," Mr. Bass
said in a December 1999 e-mail to a colleague in Chicago that was
obtained by congressional investigators. Four months later, Mr.
Bass was removed from his Enron oversight role in response to
complaints by Enron's chief accounting officer at the time, Richard
A. Causey, about Mr. Bass's resistance to the company's financial-
reporting practices. Mr. Causey's attorney didn't return calls
seeking comment.

The Enron audit was part of a broader move by Andersen to reshape

itself into a "New Economy" powerhouse offering a wide array of
auditing services that their fast-growing clients needed.
 

The new philosophy was described in a book by Mr. Samek and two
other partners: "Cracking the Value Code -- How Successful
Businesses are Creating Wealth in the New Economy." Published by
HarperCollins in 2000, the book argues that old-fashioned
accounting failed to measure the value of intangible assets, such as
employees and business relationships. The sky-high prices of
technology stocks such as America Online , Williams Co s., and
Charles Schwab Corp. , proved accountants needed to creatively
approach hard-to-value assets. Mr. Samek discussed the philosophy
at a gathering of top business and political leaders in Davos,
Switzerland, while passing out a white paper that touted Enron as a
model company of the new economy.

Andersen cited the book's premise for opposing a proposal by the

SEC in 2000 to limit the amount of consulting work that accounting
firms could perform for their audit clients. In testimony before the
Senate Banking Committee in July 2000, Mr. Samek called the SEC
proposal "fatally flawed." He said it arrived "just as we need to take
an even more active role in making needed changes in the
measurement and reporting system in support of better
information for decision-making by corporations, investors and the
government." The Big Five accounting firms defeated the SEC
 proposal. That same year Andersen unveiled a zippy new logo, a big
90% orange ball, with only the word Andersen beneath it. The big
Andersen wooden doors were taken down all over the world.

A month after Mr. Samek's testimony, Arthur Andersen was

crushed when an arbitrator ruled that the firm wouldn't receive a
$14 billion payment it had been hoping for from the departing
partners at Andersen Consulting, now known as Accenture Ltd.
Arthur Andersen's CEO, Jim Wadia, resigned immediately.

Several top partners, including Mr. Samek, ran for the top job in a
race that became a referendum on the firm's direction. The winner
was Joseph Berardino, an understated accountant who had run the
firm's U.S. auditing operation. Mr. Samek took a marketing position
in Chicago. Mr. Berardino resigned after Andersen was indicted, and
both men, like many senior partners at Andersen, are carrying out
their first job searches since college.

-- Alexei Barrionuevo, Jonathan Weil and Bill Richards contributed to

this article.

Write to Ken Brown at ken.brown@wsj.com and Ianthe Jeanne

Dugan at ianthe.dugan@wsj.com

SHOW COMMENTS HIDE COMMENTS ()

TOP

«
 

Subscribe Sign In
U.S. Edition

WSJ Membership Customer Service Tools & Features Ads More

WSJ+ Membership Customer Center Emails & Alerts Advertise Content Partnerships
Benefits
Contact Us Guides Advertise Locally Corrections
Digital Subscription
Live Help My News Commercial Real Estate Ads Jobs at WSJ
Print Subscription
Redesign Guided Tour RSS Feeds Place a Classified Ad News Archive
Print and Digital
Subscription Notice to Subscribers Topics Sell Your Business Register for Free

Why Subscribe? Video Center Sell Your Home Reprints

Download WSJ Apps for Watchlist Recruitment & Career Ads

iOS and Android
Podcasts
Corporate Subscriptions

Professor Journal

Student Journal

n m v w y

Dow Jones Products Barron's BigCharts DJX Dow Jones Newswires Factiva Financial News Mansion Global MarketWatch

Private Markets realtor.com Risk & Compliance WSJ Conference WSJ Pro Central Banking WSJ Video WSJ Wine

Privacy Policy Cookie Policy Copyright Policy Data Policy Subscriber Agreement & Terms of Use Your Ad Choices

Copyright ©2017 Dow Jones & Company, Inc. All Rights Reserved.

100%