News & Politics

Prosecutors' Failure in Andersen Case

Some of the most important issues that ought to be raised at the trial of Arthur Andersen LLP aren't being addressed.
It's now a regular feature on business pages: big companies revising recent earning reports to readjust profits downward and losses upward. This scandal broke when Enron's stock collapsed and its accountants, Arthur Andersen LLP, came under scrutiny for their role in the meltdown. Andersen is now on trial in federal court, but according to Tony Tinker, a professor of accounting at the City of New York's Baruch College and editor of the journal, Critical Perspectives on Accounting, the trial isn't addressing the fundamental issues behind Enron's demise and the ongoing malaise on Wall Street: the absence of rigorous controls that Andersen should have used for its clients and to check its own work. Steven Rosenfeld interviewed Tinker for What are the issues that ought to be raised in the Andersen trial -- the ones that we’re actually not hearing about but are most important?

Tony Tinker: The great farce here is concerning the system of internal control and internal audit, because it would appear that Andersen is contending that on its own staff, at the most senior levels, it had a senior partner who was a rogue partner; that acted on his own and in violation of Andersen’s policy, or unbeknown, at least, to Andersen. This is an absurd defense and the fact that they seem to be getting away with it only is an indication of the rather weak, I assume lawyer-based, prosecution.

Andersen has been in the business of audit and internal audit for many years, where it sells the clients fairly watertight systems of check and internal control to ensure precisely against rogue operators. We’ve got many cases in auditing history of enormous, million-dollar failures as a result of rogue operators, and this is not the first time we’ve encountered it and we know how to deal with it; that if you don’t have proper controls over executive decision-making, you’re likely to find businesses and corporations compromised in a severe way.

TP.c: Your thoughts are that what was happening at Andersen, rather than being the exception, might have been more indicative of the rule.

Tinker: Well it was not an oversight, one suspects. It was a way, again, of doing business, because by going easy in the audit and allowing a senior partner at Andersen a free hand to keep a client happy, Andersen found that a lucrative way of operating. I assume that this was really what was going on. It’s not as if they didn’t know how to control that partner; it’s that they chose not to, because, after all these are specialists.

This is a firm that specializes in internal control and internal audit [within the client company] and external audit [for shareholders and regulators]. Indeed, it was responsible, as I recall, of installing the system of internal audit and control in Enron. They were serving as their internal auditors as well as their external auditors. So to be deficient on these areas is laughable. And the fact that the prosecutors seem to have missed this one is really outrageous. They just need to haul out some of Andersen’s own literature in promoting their internal control processes to highlight how implausible this defense is.

TP.c: So what is the impact for the public when these issues are not addressed?

Tinker: The net effect is that as we’ve seen in Enron, auditing is done inadequately in a lax manner -- one suspects the ulterior motive was it was a lucrative business that the auditors didn’t want to spoil because of their management-advisory connections. And the consequence is that -- from the point of view of investors, employees, and the public generally in terms of the blight that this whole fiasco has created in terms of the economy -- these sort of things add up to a massive economic impact on the daily lives of people.

TP.c: Enron’s collapse was lightning-fast. Andersen, in contrast, seems to be imploding slowly. But it does mean that there will be four major U.S. accounting firms, not five, in the near-distant future. What does that mean for the current financial landscape?

Tinker: It really doesn’t bode very well. Remembering that Andersen by no means was the worst of the bunch. One suspects that any one of the other four, if the music had stopped and caught them at the wrong time, they could be in the dock as easily as Andersen. Indeed, there’s a lot of good reason to believe that, in many ways, Andersen’s practices were superior to their survivors.

So the future does not bode well, especially even as five, these large firms exhibited all the abusive tendencies of a monopoly, or an oligopoly. They worked together, through their various trade associations. They spoke with one voice, in so many ways, in both Congress and the Bush administration. It’s going to be even easier with four than five to perpetuate what is firstly third-rate auditing activity ... but also other ways in which they perpetuate conflicts of interest by compromising part of the regulatory and political realm, and through their own business practices, where they do a sloppy job on auditing in order to feather their bed on consulting, tax work, other forms of money making.

TP.c: These firms were politically powerful before. Does that mean we are not likely to see any meaningful political response to re-regulate these industries or the sectors that might have led to the current blight on Wall Street?

Tinker: It really doesn’t look as though there’s going to be any reform at all. In fact, the complaint, ironically, from the business community is if anything [Security and Exchange Commission Chairman] Harvey Pitt is behind the initiatives of even the accounting profession in trying to ... it [the accounting profession] is trying to clean up things somewhat to try to make clear that audits are still worth something. Some of them are spinning off their management consulting interests, as a clear way of shedding some of the conflicts of interest.

The SEC under Pitt has not even been willing to endorse that with any enthusiasm. The result seems to be that we will continue in a blighted economy, one that can’t be boiled down just to Andersen. But as in the ’29 crash, it’s a number of factors including this kind of mistrust of public information about corporations that can contribute to an economic malaise. We seem to have returned there and most of these people don’t seem to be cognizant or even interested in our history in these sorts of affairs.

Tony Tinker is a professor of accounting at Baruch College at the City University of New York and editor of the journal, Critical Perspectives on Accounting.
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