Enron yet to be charged as Justice indicts entire Andersen firm.
Full disclosure: Andersen’s problems have given my current firm opportunities to gain new business and decreased competition on new, non-Andersen related proposals. Additionally, I am a consultant working for a Big 5 (big 4?) accounting firm.
I read Lou Dobbs commentary with interest. I think he makes some good points, but I also think he leaves out some facts that would help readers draw conclusions. To wit:[ul]
[li]Likely, the Justice Department is preparing a slam-dunk of a case against Enron, and is taking the necessary time to do so[/li][li]Andersen has prodded the Justice Department to get everything over with quickly, believing (probably rightly so) that if they can win, best to get it done fast[/li][li]However, this is not the first time Andersen has played outside the rules (Waste Management, Sunbeam). Is this a cultural problem within Andersen as a firm versus a localized problem?[/li][li]Dobbs complains that Microsoft was let off the hook (I’m not contesting that). However, should Andersen fold, there are companies in place to pick up the business tomorrow. If Microsoft folds, there may be much cheering, but the effects are far greater than simply their Redmond campus. Andersen doesn’t directly touch most people’s daily lives; MSFT does.[/li][/ul]
Am I missing anything? Actually, I’m probably missing a lot, but that’s why I’m posting. How do others feel about Andersen’s indictment, as a national firm versus an individual office? Right? Wrong? Don’t care, hand me another beer?
Please note when formulating your replies that I’m not taking a stand for or against Andersen’s indictment, nor for or against Justice’s handling of Microsoft. These issues are too complex for me to wrap myself around and form an informed opinion, and I’m not emotionally invested in any outcome. I do, however, wish to read some more back-and-forth on the Andersen indictment.
Anderson as a company has almost single-handedly damaged the reputation of the free market being better than any other monetary system. and be able to police itself. It has over the years done extensive damage both financially and in terms of infrastructure. Some examples:
New York State Welfare/Child Care Computer system. which, by out-bidding and then providing shoddy service, effectively killed Honeywell
Enron,
Global Crossing
Cisco
The federal government is right in killing Anderson with indictments, before it can do more damage to the US economy.
One thing to note about professional firms: all their value is in the people that work there. That is, unlike, say, a General Electric, there isn’t a lot of plant and equipment comprising the value of the firm.
For that reason, I suspect Andersen is through. Any professional working at Andersen with half a brain has already sent out his or her resume. I suspect many of the non-tainted partners will bail to other Big 5 (4?) accounting firms, taking clients with them.
Whether Andersen can quash the indictment or not is irrelevant. The damage is done. They’re toast. No publicly-traded company is going to want to issue financials with an Arthur Andersen audit opinion.
(Full disclosure: my wife is an auditor for one of Andersen’s competitors).
Andersen here in Australia is running around, trying madly to organise a merger with one of the other big 5 auditors, before the parent company falls on them to make history’s biggest gravestone.
It’s kind of funny that, IIRC, Arthur Andersen forced (then) Andersen Consulting to change its name. Although “Accenture” is a silly name, I imagine the latter firm is glad not to be identified with its erstwhile parent these days.
I’ve heard that the remaining Big 4 are accelerating moves to spin off their consulting arms in response to this scandal–true?
BTW, did anyone else see Andersens defiant full-page ad in the Wall Street Journal yesterday? Appropriate or inappropriate? Smart or dumb? Surprising, or to be expected?
An accounting firm remains successful by remaining boring.
Large corporations don’t like to see their accountants being used as fodder in the daily news.
Stockholders like seeing their annual reports endorsed by such accountants even less.
The market will out.
Cite for this assertion? Corporations are indeed “people”–they are defined as “legal persons”, in contrast to the “natural persons” who live and breathe and walk around. Wasn’t Exxon found guilty of criminal acts in the Valdez incident, or was that only a matter of civil charges?
Yes, but not wholly. The Big 5 have consulting arms (such as Arthur Andersen/Andersen Consulting -> Accenture). They will spin off the consulting arm. But the main body (such as Arthur Andersen) will still offer many non-audit consultative services. So while the consulting arm is spun-off, there still remains a consulting practice (Repeat disclosure: I’m a consultant at a Big 4 [to be honest] accounting firm - not its consulting arm)
Actually, the point is irrelevant in this situation. AA is not a corporation, it is a limited liability partnership. .
The partners are required to invest annually in the business and are then due a share of the profits. Many partners will be in the same boat as many of the Enron employees if AA goes down, with much of their life savings tied into their equity stake in the partnership.
Oh yeah, I forgot. Continuing on this point, though: I know that in cases of gross negligence or criminal behavior, a corporation could see authorities or litigants “pierce the corporate veil” and go after the principals themselves. Is it the same for a LLP, and is it likely in this case?
It looks like the Justice Department has targeted Andersen as a firm, against the wishes of Andersen. I’m not sure I agree with that, but then I’m not sure I disagree with it either. I’m still listening to both sides of the case and trying to make an informed decision. Individual partners or business practices do often get singled out within a firm, although litigants generally want the larger firm as a defendant, as a win will result in greater awards.
While you are correct that Andersen is indeed a limited liability partnership and not a corporation, and while I don’t have a legal cite for this, I doubt that Andersen’s organizational form matters as to whether or not the Feds can indict it criminally as an organization. A business entity’s decision to organize as a corporation or as a LLP is frequently driven by income tax treatment of the entity’s owners, given that both corporate shareholders and LLP members have a “corporate shield” against the entity’s creditors and that both corporations and LLPs are subject to federal indictments.
Having said that, you are certainly correct that many innocent Andersen partners, managers and employees, who had nothing to do with Enron and who work in Boston, LA, Detroit, Cleveland, etc. are in big trouble. If I were a partner in the tax division of Andersen in Minneapolis I’d be reading the fine print of my employment agreement with Andersen very closely to see if I could bail out to another CPA firm and take my clients with me.
I posit that this is less of a problem than many people are making it out to be. First of all, MS isn’t going to fold. Even the original remedy was structural. Secondly, even if MS folds, it would hit the users as much as it would hit the funds and institutions that are now holding MS stock.
Like D_Odds, I don’t really want to argue about whether or not Andersen deserves the death penalty (quite possibly, IMHO).
What I’m worried about is the big (albeit unintended) consequence of AA’s demise.
There will only be 4.
Nearly every public US company, and many large private companies, must have a Big 5 audit for credibility with banks, investors, rating agencies and the financial community.
It used to be the Big 8 before the merger wave of the '80s. To go down to only 4 firms who can do the task is really troubling. What kind of an oligarchy is going to emerge? Will some regional firm step up? Not likely, I’d say–the reputational barrier is just too high.
Some industries are already notorious for being hyper-sensitive to possible disclosures of competitive information through accounting firms. For many years, the big US airlines all insisted on using separate accounting firms because they wanted to keep their discretionary financial practices utterly secure from their competitors. They won’t be able to do this anymore.
AA’s death penalty will make the market for audits much less competitive.
While I find it hard to shed too big a tear for the partners, they are the ones least able to shop around. A partner has an equity stake in the firm, with possible pass-through liabilities. IANAL, so I don’t know against what the ‘limited liability’ protects and does not protect.