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Andersen's Reputation in Shreds

The accounting firm was once considered the industry's conscience. But the Enron scandal has revealed the dark side of the profession.

January 30, 2002|RALPH FRAMMOLINO and JEFF LEEDS | TIMES STAFF WRITERS

CHICAGO — Think straight, talk straight.

That motto was coined by Arthur Edward Andersen, a Northwestern University accounting professor who made standing up for what's right the bedrock principle of the company he founded 88 years ago.

What John Wayne was to westerns, Andersen was to accounting--demanding absolute honesty and probity from employees and clients alike. Andersen's fastidiousness even extended to an employee dress code, which for years required all auditors to wear fedoras on appointments, no matter the weather.

Andersen's company grew into the world's fifth-largest accounting firm, with more than 100,000 corporate clients, $9 billion a year in revenue and 85,000 employees around the world. More than that, it helped set ethical standards for the entire profession.

"Arthur Andersen wouldn't put up with anything that wasn't complete, 100% integrity," said George R. Catlett, 84, a retired Andersen partner from Evanston, Ill. "If anybody did anything otherwise, he'd fire them. And if clients wanted him to do something he didn't agree with, he'd either try to change them or quit."

Today the Chicago-based firm, known simply as Andersen, is an emblem of accounting misdeeds, the focus of congressional investigations and the butt of presidential jokes.

Andersen vouched for financial statements that overstated Enron Corp.'s earnings by $586 million over nearly five years. It has admitted shredding documents even after the Securities and Exchange Commission began examining Enron's collapse, the largest corporate bankruptcy in U.S. history.

The scandal threatens the survival of Andersen. And because of the company's prominence, the disclosures are reverberating widely, shaking investors' confidence in the profits and losses reported by corporate America. Members of Congress and federal regulators are examining the accounting industry's practices and standards.

"The conscience of the industry, essentially, appeared to sell out," said Bill Cummings, an accounting professor at Northern Illinois University and a past president of the American Accounting Assn.'s Midwest region. "I think it's pure and simple. It's greed and the allure of the big-money clients."

Andersen's role in the Enron collapse has revealed the "dark side" of a profession whose independence has been compromised by the chase for multimillion-dollar fees, Cummings said.

Like many accounting firms these days, Andersen wore two hats at Enron. It was the company's independent auditor, responsible for ensuring that its financial statements were accurate. It was also a financial consultant, helping Enron executives devise ways of running the business more profitably and reducing its tax bill.

Andersen auditors and consultants occupied a floor of their own in the energy company's gleaming Houston headquarters. They carried Enron-issued electronic ID cards, mingled at office picnics--and even wore Enron golf shirts.

Investigators are looking at Andersen's alleged role in setting up complex transactions that inflated Enron's earnings by keeping massive debts off the company's books. Andersen has claimed that its accountants were misled by Enron.

Arthur Andersen himself wouldn't have gotten so cozy with a client, to judge from accounts of his career. The son of Norwegian immigrants, Andersen is described as crotchety, opinionated and stubborn.

Company lore has it that he lost the prized E.I. du Pont account in the 1930s over an interpretation of operating income. Du Pont executives insisted on using a more liberal definition that would lump in the value of the company's large investment in General Motors. Andersen's auditors said no, and Andersen backed them up. Du Pont found another auditor.

The episode sealed the reputation of Andersen and his firm. The company still guards that legacy jealously, said Andersen spokesman Dave Tabolt. "It's an issue that people are concerned about every day," he said.

Even now, Andersen employees can be fired for fudging a meal on an expense form or lying about their college grade-point averages, say former partners.

Before accepting a client, Andersen performs background checks on its top executives. Andersen auditors are told to summarily "leave the field"--walk away from the job--if they meet unreasonable resistance.

The firm also has shaped reforms within the accounting profession.

Firm Insisted on Tight Central Controls

Auditors perform a vital role in the nation's financial system by certifying the accuracy of profits, losses, debts and other financial data reported by companies. They are hired by a company's shareholders and its board of directors to ensure that financial statements meet federal disclosure standards.

During the 1950s and 1960s, Leonard Spacek, Andersen's successor, openly criticized the profession for tolerating what he considered a sloppy patchwork of accounting standards that left the investing public no way to compare the financial performance of different companies.

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