I suspect this bit of CW will stick around, if for no other reason than the perception that only the Big 5/4 have the resources to perform a full audit of a large publicly-traded corporation.
I dont really know how legal it is for Auditors to reveal the figures on their books for clients to other prospective clients. there is a whole Non-disclosure issue, I believe
Big time. Now let me tell you how it works (remember, I work here):
Firm A audits Airline B’s books. In doing so, they get an intimate knowledge of how B does business.
Firm A also audits Airline C’s books. While doing so, some manager who transfered offices sees that C could streamline operations and save money by one of B’s practices. Without specifically mentioning B, perhaps without consciously thinking about B, he brings this up to his Partner in-charge (PIC). Now PIC is under immense pressure to sell his clients non-audit services. He sells consultative services to C, implementing B’s practices. B’s innovative edge is lost.
This happens anyway. Employees switch firms, auditors switch firms, espionage happens. That, IMNSHO, is why the idea is outdated and unimportant, if it is still true. It worked when auditor’s lived their life at one firm, as did corporate managers. However, corporate America can move quite sluggishly at times - startlingly so considering the innovation it is capable of at other times.
It’s just comon sense. Corporations don’t have minds, therefore they are not capable of intent. No intent, no crime.
Just because they’re legal persons doesn’t mean they’re people. Can they vote? Get a driver’s license?
From the
US Department of Justice :
BTW, the above link, which is actually entitled “Bringing Criminal Charges Against Corporations”, seems to be quite germane to this discussion.
Again, Andersen (like the other auditing firms) is NOT a corporation but a partnership. The individual partners are legally liable for the actions of the company.
Someone made a comment about not shedding a tear for the partners, but I beg to disagree. The number of partners who were involved in the Enrol situation is small – probably not as many as a dozen. Perfectly innocent people, who have lead clean and upright lives and whose professional activites have always been clean and above board, will find their personal assets and reputations on the line.
I wish there were some way to separate them out, and to pursue the guilty while leaving the innocent alone, but I suspect there’s no way to do that. The partnership bears the brunt.
I suppose one can argue that the partnership as a whole should have exercised stronger control over individual partners, but let me tell you, that’s hard to do when you have something like 2,000 partners around the world.
You’re quite right–no ethical accountant would reveal figures. D-Odds gave an example of what I meant on the operational/consulting side. I was also thinking of accounting/tax accounting practices.
There is quite a bit of gray in accounting. Do you set up two reserves for restructuring an office and bad debt or is the restructuring so immaterial (define, please) that you can put it into a non-specified reserve? Is your competitor expensing or capitalizing a class of assets for tax depreciation purposes?
Here’s an old war story about the airlines. Who owns a new 747? The airline that’s going to operate it? The lending group that puts up the $30 million (and will make very certain it has the right to reclaim that plane if the airline defaults)? The sale-leaseback shell entity which the lenders use to insulate them from liability in case the plane has disastrous mechanical failure? “Ownership,” especially for tax purposes, has a number of facets. There’s the title, there’s control, there’s right to use. The various IRS’s (remember that we’re talking about an object designed to fly in and out of jurisdictions worldwide) use different lists of aspects in determining who gets the right to depreciate a plane. Let’s say Canada says that title controls, while the US says ability to control is key, and Japan says that it wants to know who has the most economic interest in the plane (vague, huh?). By dividing these aspects, the airlines could allow 3 different entities to depreciate the plane in their own countries. Here’s the war story: one of the relevant aspects is where the plane is located on the date of transfer. Send the 747 out over the Pacific so it’s not in anyone’s airspace, and radio the pilot when the closing is over and it’s ok to exit international airspace.
All of the Big 5 are already international–do a deal anywhere in the world and get an audit report with names recognized in the US plus a few local names added on at the end–so I don’t think there’s any international firms out there ready to fill the gap either–but I’d really like to know if there are.
CK–AA is an “LLP.” This type of entity is a recent development (last 5 years) and many of the professional firms have replaced their partnership structures with LLPs or LLCs. LLPs are “limited liability” partnerships. This means (in theory–it has certainly never been tested on the scale of an AA bankruptcy) that not all partners will be personally liable for all debts of the firm to the full extent of their personal assets. I don’t know how AA’s structure is set up so I don’t know how AA will shake out.
Hard to tell in black and white, but it was a somewhat tongue-in-cheek comment (actually, I said I find it hard to shed too big a tear…). I work with similar partners in a Big 5 firm everyday. The jump in potential salary is fantastic when one becomes a partner. I feel sorrier for the senior, non-partner personnel and first year partners.
Andersen, as a firm, was told to keep its nose squeaky clean after Waste Management. The highest levels should have made it clear all the way down to the guy mopping the bathroom that Andersen needed anything and everything it signed off on to be in the white, or at the very most, the lightest gray. While there are a good deal of people at Andersen (85,000) negatively affected, I would suspect that Justice is saying that Andersen, as a firm, is negligent in setting clear guidelines and policing its policies and partners.
This is the third time in a decade Arthur Andersen has been in this boat; more frequent than any other Big 5 firm. (It might just mean they are getting caught more often, though.) The top echelons owe it to the firm’s legacy and integrity to exercise greater control.
While Justice’s indictment is likely the final nail in the Andersen coffin, regardless of outcome, it wasn’t the first. Even prior to the indictment, Andersen faced a mass defection of clients and was in a poor position to win new business (not that I’m complaining about the latter - one less competitor in the marketplace for me). The liability, outside of any criminal proceedings, was going to eat Andersen alive.
Horsehockey.
- Perhaps only a dozen partners directed the destruction of documents, but no one will be able to convince me that only a dozen knew about the destruction of documents:
“Louise, I need you to get started on the Doohickey Corp. audit.”
“Sorry, Mary, I’m busy all this week shredding Enron documents for Hal.”
“Oh, right. Carry on.”
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When Andersen got the subpoena, every partner (indeed every employee) should have received a memo directing them not to destroy, or even touch, Enron-related documents.
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As for the “innocent” partners’ liability, tough. There was an easy way to avoid it - don’t become a partner. You accept the benefits of partnership, you also accept the risks. That is insanely obvious. especially to sophisticated parties like the Andersen partners.
Sua
I have a lot of sympathy for the innocent partners. Most of AA’s partners are probably hard-working, able, ethical people. When there are only 5 recongized firms to work at, all of which have pretty much the same partnership-like structures, their option to avoid the situation is to work at a second-tier shop. Nonetheless, while I sympathize, I don’t think there is a good way to let them off the hook.
AA (and those innocent partners) are facing a couple of inherent structural problems.
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The Big 5 accounting firms are freakin’ huge. It is (as other have said) impossible for the partners to know each other and to know what goes on in other offices. The model for partnerships originated in more genteel times, in England, where the partners were initmately and jointly immersed in business together. Scrupulously clear and legitimate internal policies and controls with good leadership from the top may save the other Big 4 from AA’s predicament (I mean that firms with these policies may be able to avoid the criminal charges which effectively bar them from the market and legal losses which exceed liability insurance coverage); they will not prevent scandals and non-criminal liability. PricewaterhouseCoopers was in the papers today for a smaller but less-publicized situation.
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There is always tension in applying standards developed for human conduct to entities. Nonetheless, as society is currently structured, we have to do so (and can do so by law). It would be unconscionable if a firm could avoid criminal liability by scapegoating individual employees, if the firm itself contributed to the problem (weak controls/culture) and profited from the misconduct. Where there has been egregious firm-based criminal misconduct, then the ultimate penalty must be dissolution. There is no other serious way (paying fines, being limited as to operations, doing community service do not cut it as remedies for serious crimes) to punish an entity for criminal wrongdoing–it can’t be sent to jail.
What happens when the next big criminal scandal hits another member of the Big 4? How can business function with only 3 choices? Or 2? If we have to have audits, I think we will ultimately see government control here–and that won’t stop scandals either–it will just make the government a kind of insurer of last resort. Geesh, I’d almost prefer an antitrust enforcement action to break the 5 back into 10 (this might overcome the reputational hurdle). Since the Big 5 have spun-off their consulting groups, is smaller again an option from an operational perspective?
Just because the US government says something, that doesn’t mean it’s true.
It is a well established feature of law. Corporations are legal persons, I am sure Sua can explain the genesis and operation of this, but it is a fundamental aspect of the corporation in modern economies. Every modern economy features some legal mechanism for creating such ‘legal persons,’ and attendant mechanisms for dealing with them as such. Read up on the history of the corporation.
So, just because someone objects in painfully gross ignorance, doesn’t mean there’s a real objection.
I don’t know anything about these two cases except through the media, but I can certainly see why the fedral DOJ is coming down harder on Anderson than it did on Microsoft, given the nature of the complaints against the two companies.
Microsoft is said to have engaged in anti-competitive behaviour, which effectively drove other computer companies (notably Netscape) out of the marketplace. How do you prove that? You have to call economists (who will disagree with each other). You have to call industry analysts (who may have axes to grind). You have to show that the other companies were contenders who would have been able to compete, but for the alleged anti-competitive behaviour by Microsoft, and also rebut the defence argument that it’s just sour grapes from companies with inferior products.
Also, bear in mind that we expect and want big companies to compete with each other - the argument is that Microsoft competed too hard, in unfair ways. Where is the line to be drawn? What looks like anti-competitive behaviour to one person may look like acceptable, if hard-nosed, business practices to someone else.
Now toss in the fast-paced rate of technological change - did the “browser war” really matter, in the long run, in light of rapid changes in the computer and software industries? In other words, even if Microsoft did things rough, did the consumer really suffer? Maybe a single browser system was the natural outcome, just as MSWindows is now industry standard. (Says Northern Piper, posting with Netscape™ from his iMac™ 
). If there was no harm to the consumers, is it really worth the DOJ going all the way on it?
Compare that to the allegation against Anderson: wilful destruction of documents to obstruct justice. Both the nature of the offence and the proof required are pretty straightforward.
Obstruction is an extremely serious criminal offence, because it has the potential to undermine the criminal justice system (and the public’s faith therein). It’s also wilful, unlike the anti-competitive behaviour. If proven, obstrution means that the accused consciously took steps to prevent the justice system from working.
As well, the mode of proof is pretty straightforward, at least in this case. The prosecution will have to prove:
a) that relevant documents were shredded,
b) the people who directed the shredding did so knowing that the SEC had issued some sort of order. (From my reading of the papers, it sounds like an SEC order short of a subpoena, but marking the initial stages of an investigation - maybe Sua or Manny can help explain?), and
c) that the people who gave the order to shred were acting on behalf of Anderson LLP.
I’m not saying that’s going to be a simple prosecution, nor that it’s a slam dunk for the DOJ. But I’d sure find it easier to explain this one to a jury than the anti-trust one against Microsoft.
capacitor wrote:
Bullpuckey.
Honeywell was killed because one day, out of the blue, its CEO/chief stockholder declared that they were getting out of the computer business, with no rhyme or reason.
(I heard this in the high-tech rumor mill, so it Must Be True [TM].)
Honeywell was ready to set up the new system I was talking about. It was recommended by auditors (non-Andersen of course)that Honeywell set up the system. It would be the biggest contract that Honeywell had. But IBM, with Arthur Andersen Consulting, lobbied, and somehow won the bid. IBM provided inferior hardware (1990 computers in 1997), and Andersen provided woefully inferior programming (supposed to be 4 phases, they didn’t even finish three). The resulting system was so bad that NYC decided on its own to implement its own system from scratch. Meanwhile, Child Welfare and ACS never got off the old system. And meanwhile, tracer, Honeywell ahd no other contracts to fall back on.
And Ryan, to paraphrase “Ususal Suspects”, you don’t believe in the US government, but you should believe Collunsbury.
So if it were a well established feature of law that 2+2=5, would that make it true?
Well, if the law said “2+2=5”, then it would be true that the law says 2+2=5. I think what we have here is an argument between someone who is expressing an opinion about what the law ought to be, and a bunch of people explaining what the law is.
What the law is is that corporations are considered “artificial persons”, with some (though not all) of the rights and duties of living persons, including being subject to criminal prosecution.
You can argue about whether or not that particular aspect of the legal system is just or fair or “makes sense”–I am not sure “making sense” is used as a standard in these things–but there’s no point in arguing about what the law in fact is.
IANAL.
Anderson is a partnership as mentioned previusly. One reason why corporations pay outrageously high fees to be audited by the Big 5 is because the partners put their own money on the line to guarantee that the results will comply with the laws, regulations and practices of the land.
Corporations can also go to Bob’s Accounting and get their books done for a fraction of the price. Bob may stand behind his accounting, but Bob also lives in a trailer down by the river. Are the shareholders happy for Bob to perform due diligence, or do the corporations pay more for the insurance that the partners stand behind the work?
In this case the ultimate owners of Enron, that is the bond and stock holders (not option holders), can and should be able to sue the Anderson partners for gross incompetence.
Anderson (or the US legal entity) is toast even without the DOJ indictment. There is too much unknown liability for anyone to take over Anderson’s assets and liabilities. The same is true for Enron, and the reason why Barings was not bailed out.
[My you do like tilting at windmills, don’t you.
In terms of the law, yes it would.
Law is an artificial, if sometimes organically arrived at set of enforceable (as opposed to unenforceable conventions) principles and rules for conducting social relations.
AFAIR(ecall), the idea of fictive legal persons with many but not all of the rights and duties of real legal persons, or actual legal persons, goes right back to old Roman Law. The idea of the corporation more or less in its present form, again AFAIR, goes back to the 17th century.
It has proven to be a powerful legal vehicle. You may, arguing from apparent ignorance of the history, both legal and economic, feel that this is ‘wierd’ or somehow wrong, but you’re arguing against centuries of proven legal and economic fact. Now, I learned this history in terms of economic theory, so my understanding of both historical and legal detials is a bit short.(*)
However, considering that ongoing Pit thread, I imagine you’ll not shy away from objecting to yet more estabished fact.
(*: Aside, calling Minty Green and Sua Sponte, we have a legal wrangle in aisle seven, we have a legal wrangle in aisle seven.)