The demise of Arthur Andersen in 2001/02

By Jesper Jarlbæk[1]

Some have said it was a “perfect storm” of events that lead to the demise of Arthur Andersen. A perfect storm is “the simultaneous occurrence of weather events which, taken individually, would be far less powerful than the storm resulting of their chance combination”. That, I believe, is not a correct metaphor. In my opinion, a more accurate meteorological synonym describing what brought down Arthur Andersen would be “tsunami”. A tsunami is a single event that triggers catastrophic consequences. There was just such a single event that turned the tide and condemned the Firm and its 90.000 partners and staff to history. That single event was the DOJ indictment issued in mid-March 2002.

I have titled this article “The demise of Arthur Andersen”. One of the definitions of demise is “the end or failure of something”. That Andersen effectively ended as a Firm in 2002, is something which I think everyone will agree is factually correct. So the title is meant to be objective. Some have termed the events as the “lynching” of Arthur Andersen. Again, I don’t think that is correct. Because lynching is a” group kill” according to the dictionary. And as stated, my perception is that there was no plurality of causes or events. There was an action from a single party with deadly effect.

The author of this article was an active, management level partner during the events of 2001/2002. Therefore to some degree, it is an insider’s eye witness account. However, I definitely do not purport to have a complete picture. But the knowledge I possess is sufficient to be able to repudiate some of the theories that have been put forward by people who were further from the center of the events than I was.

Events surrounding the indictment

In mid-February 2002, I was CMP of Andersen Denmark and as such I was summoned to a meeting in London which was held by Andersen’s Executive team, headed by Joe Berardino. As I recall, the meeting was attended by around 40-50 top management partners. I suppose the purpose was to give us a firsthand account of the challenges facing the Firm in the light of the Enron affair and what the 5 person Executive team was doing about it. The Firm was being beaten up every single day in the press and so we needed to have an idea about the inside story. How were we going to get out of this mess?

I recall that we were informed at the meeting that (at least) three separate investigations  either had been conducted or were in process regarding the Enron audit- 1) our own internal investigation, 2) the SEC’s investigation and 3) the US Department of Justice (DOJ)’s investigation.

At the London meeting, Joe stated that our own internal investigation had found no fault in the audit. So far, so good. (And it is a fact to this day that there never was any official finding or verdict as to faults in the audit). As I recall, Joe stated that the SEC’s investigation, whilst on-going, nevertheless had pretty much concluded the same.   We were informed that the results of our internal investigation were being held back in deference to the SEC and DOJ. The authorities were to have the privilege of announcing that the Andersen audit was not at fault.

We were also informed that the dialogue with the SEC was a good one and the tone from Berardino’s presentation as I recall it was that the SEC essentially were “ good guys” who wanted to see the Firm survive the Enron crisis. Punished yes, killed no. It is important to remember the events that had unfolded in the first few weeks of 2002, i.e. just a short time before the London meeting. The most notable was the revelation by the Firm on January 10, 2002 of the shredding of documents. The press had had an absolute feeding frenzy over this and thus the Firm’s reputation had taken a terrific beating in the global media. The market reaction to this was in itself very threatening to the Firms existence. Talk in the corridors was that Andersen management was highly worried about the ability to preserve our client portfolio and whether or not we would be re-elected at the shareholder assemblies during the spring of 2002. In every office location, OMP’s were tasked with visiting the top management of our Key clients to identify and address their concerns. Thus, Joe’s message that the SEC was not out to get us was very reassuring. Knowing that fact made it easier to speak with confidence when meeting with our clients.

The unknown factor was the DOJ. There was a key statement made by Joe Berardino that stuck in my mind because of the subsequent events; Joe said “The DOJ will never issue a criminal indictment against the Firm because that would be the end of the Firm.”

Prior to the meeting I had no idea that the DOJ could take actions that would have such drastic consequences. My knowledge of US regulatory affairs was simply not deep enough. I thought that our fight was one to keep the clients and keep the staff. In my country, the Enron story was seen as a US phenomenon; one of many “financial scandals”; no more, no less.  Our clients and our staff were not too concerned. All of the Big Five faced mounting litigation problems. Every one of them had had a client that in 2000-2002 represented an accounting scandal. Enron was just one more item on the list……or so we thought.

So I left the London meeting feeling that the internal investigation had revealed no audit failure, that the SEC was  “on our side” and that the DOJ while apparently possessing a deadly weapon I did not know of before the meeting, would not use it. After all, a significant part of academia and the press was already concerned by the fact the “Big Five” firms made up a public accounting oligopoly completely dominating the world’s financial markets; no-one wanted that number reduced to four. Certainly not the SEC.

It was a little more than two weeks later when I joined a global leadership conference call. It was a Thursday, late in the evening; I sat in the Copenhagen office, alone at my desk, looking out over a dark harbor listening to the message from management. The message was dumbfounding. Firm management had received an informal notice from the DOJ that within one week, they would issue a criminal indictment against the Firm.  I could not believe my ears. The “death sentence” that Joe Berardino had said would never be issued, was going to be issued. It was strange feeling, knowing that I had responsibility for 450 jobs in Denmark, and that I, at that moment, was the only one in Denmark that now knew those jobs were in grave danger. What followed in Denmark was a crash course in crisis management which fortunately turned out better than anyone could have hoped or expected; but that is another story and not a topic for this article.

On March 15, 2002, the DOJ unsealed a criminal obstruction of justice indictment against Andersen. It turned out that Joe’s prediction of what would happen if the DOJ did what they did was entirely accurate. Three weeks after the conference call, on March 26^th, 2002, Joe resigned as CEO. The US clients of the Firm began deserting in droves; no Board member of a public company was going to suggest re-electing an audit firm facing criminal charges. Two – three months later the whole Firm had entirely unraveled and everyone had gone their separate ways. I attended a top management meeting in Paris in May 2002 where the dissolution protocols were mutually agreed, and when I walked out of the room, that was the last I ever saw of the Firm. It was a very unceremonious end to a glorious firm.  It took months before everyone on the outside realized that the Firm really was dead. Like a Titanic gone below the waves, there were people in rowing boats still scouring the horizon for the lost vessel. No-one could believe that such a large and proud firm could simply vanish so quickly. But for those on the bridge, who had experienced the sinking, the truth was clear.

Why was the Firm indicted?

So why did the DOJ issue the indictment?  They, too, must have realized that it would kill one of the Big Five firms. They, too, must have known that the action would set in motion an irreversible, uncontrollable chain of events leading to a massive loss of jobs and economic value.

For years the AA alumni speculated on the DOJ’s motives. From many sides there was suspicion that the DOJ’s actions were politically motivated. I don’t think anyone thought that these suspicions would ever be confirmed. But in the International Herald Tribune newspaper a truly remarkable article was published on 2^nd March 2007. The article referred to a dinner held in Paris in late 2006 where senator Oxley (of Sarbanes-Oxley fame) was quoted as saying:

The Andersen prosecution was “a White House decision,” Oxley said. “They had to really look tough and so they decided at the highest levels they were just going to give the death penalty to Arthur Andersen.”

And the apparent reason for this?

“I remember it was in the Cabinet Room and you could see the pressure he (George Bush)  was under because the Democrats were pressing his relationship with ‘Kenny boy” — a reference to Kenneth Lay, the chief executive of Enron.

What is my own take on this? President Clinton had been plagued for years during his administration by the “Whitewater” scandal. President George W. Bush was going to make sure that his administration did not suffer the same fate regarding Enron. In the US domestic political game, Arthur Andersen was a small, expendable pawn.

My personal conclusion is that there was one cause, just one, that sealed the fate of the firm. And it had nothing to do with a lot of the other events, actions and calamities that can be told about the Firm during its last five years of existence. The cause was the DOJ criminal indictment.

One of the huge ironies of the Enron case is that it was another Big Five firm that carried out the audits where the fraud took place. So if the DOJ was out to kill someone to help the President, they could be accused of killing the wrong firm!

As is well known the US Supreme Court reversed the decision by the Court of Appeals by a 9-0 ruling in 2005. So what? The Firm cannot be resurrected, and according to US law it isn’t really possible to hold the Government accountable for the economic damage inflicted on the Firm and its partners; damage which can reasonably be assessed to exceed USD 10 billion. Tough luck!

External stakeholder perspectives.

The Enron audit; facts and fiction: Anyone wanting an in-depth analysis of all the myths surrounding Arthur Andersen and the audit of Enron should read the excellent papers published by Mary J. Morrison(“Rush to Judgment: The lynching of Arthur Andersen & Co.” and “Arthur Andersen & Co: The rest of the Story” .Mary’s articles will forever be silent testimony to the false press received by the Firm over the Enron scandal; silent because the media are not interested in setting the story straight on the murder of the Firm. I have a small hope that with the coming end of the Bush administration ( January 20, 2009, but who is counting ?), some day, some enterprising young journalist will embark on a journey to publish “revelations” about the misuse of power by Bush administration in this (and other) instances.

The handling of the media: From my perspective, the handling of the media during the Enron scandal from November 2001 to March 2002 by Andersen was disastrous. Andersen acted in a “think straight, talk straight” manner but was completely naïve about the media.

When the scandal unfolded, Kenneth Lay and the management of Enron were unavailable for comment for weeks. They simply went into hiding. So who was left on the stage, to take the rap for US 80 billion in lost market capitalization? We were! Like lambs to the slaughter we made pathetic statements that “we will not run away from our responsibility; if we have done anything wrong we will own up to it and right the wrongs”. Very honorable; but the press really did not care about honor; they just wanted to show the crooks responsible for this calamity. And when they could not show Lay & cohorts, the real culprits, on camera they chose to show us. We, too, should have gone into hiding….. I know that would have been against the grain of the Firm, but it might have saved us. We should have made every effort to get out of the limelight, and behind the stage we should have fought to apportion the blame where it rightly belonged, namely to the Enron management & the banks who colluded to deceive us.

The collapse of Enron’s share price (of which, by the way, more than 80 % happened before the scandal made headlines) caused tremendous anger. US investors are known as bad losers. The huge anger created by the huge loss had to be directed somewhere. We were just not good enough at getting out of harm’s way. On the contrary, it seems like we walked head on into the tsunamis wave; with all the best intentions, but very ill-advised.

The Role of the “Final Four”:  From Mary Morrison’s articles and other sources, I think there is proof that the other Big Four did not act to help save the Firm; on the contrary they assured the SEC that AA’s clients could be well handled by them going forward. Apparently, in the period preceding the DOJ’s indictment, an infamous “Suicide Bridge” meeting attended by representatives of the Final Four was held. At that meeting, they agreed to “push Andersen off the bridge”[2] And indeed, after the DOJ’s indictment, the SEC made rules that aided and abetted the ”transfer” of AA clients thereby ensuring a very rapid collapse of the (US) Firm. So, if you want to put some blame on the Final Four, you can. But once again, I don’t think they could have saved the Firm by a concerted action even if they had tried. President Bush needed a scapegoat. Andersen was it.

Concluding remarks

I have never been to Houston, I never audited or advised any part of the Enron group and I was not in any way at the center of events. So my comments and observations have all the limitations caused by the above facts. I cannot and do not purport to know all the facts.

However, I was an active Partner in Arthur Andersen when the DOJ decided to kill the Firm. And I did meet personally with some of the key Andersen people during those terrible weeks in 2001/02. It is based on this that I have tried to describe how I witnessed that period.

There are many people much closer to the events back then, that have remained silent ever since 2002. I hope that this article and others can one day encourage them to give their account of the events, such that the record can be set straight. I don’t think the Firm can ever be resurrected, but it would serve us all well to work towards the legacy being as excellent as it deserves to be. So many years have now passed that a lot of the anger and frustration has subsided. The many partners and employees that suddenly had to re-invent their career have now done so and thus hopefully have also had time to reflect on events. It is therefore my hope that we can now start a process of final analysis of what actually happened.

At the very last Andersen Annual Partners meeting in New Orleans, held in October 2001 an external speaker presentation was given by Dr. Stephen H. Rhinesmith. In his speech, Rhinesmith talked about the characteristics of the global firms that would be the winners in the 21^st century. When benchmarked against this standard, Arthur Andersen came out tops. Andersen was a firm that could have been a winner in this exciting century. The Big Four, even today, have operating models that are years/decades behind Arthur Andersen. In more ways than one, the DOJ really did kill the wrong firm. That is all the more reason for working to ensure its everlasting legacy.

[1] Jesper Jarlbæk started his career with Arthur Andersen in 1974. He became an AW partner in 1986, was the Nordic ABA managing partner from 1997 and from 1999 he was also CMP Denmark. In 2002 he led the merger of the Danish Andersen firm with Deloitte in Denmark and was made Managing Partner–Advisory Services. In 2005, he resigned to become professional Board member and “business angel” working with companies in Denmark, the UK and the US.

[2] Ref: Mary J. Morrison; ” Rush to judgment: The lynching of Arthur Andersen”, p 18.