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The Andersen collapse and its side effects



From Moscow, Cameron Sawyer writes: "Yes, but it is just and meet that the prostitution of a great reputation should be punished harshly. The Big Five (or Four or whatever) are paid handsomely for their names on audit statements, perhaps twice what the work would cost without such cachet? The name is a kind of guaranty to investors of the truth of the numbers upon which they base their investment decisions. Truth according to the spirit as well as the letter of generally accepted accounting principles.

If investors can t believe financial statements, the capital markets don t work at all. The Russian stock market, which is a kind of lottery, is a good example of this. Without such institutions as great accounting firms with reputations at stake, a crucial element in the believability of financial statements is lost, and millions of people are poorer as a result. The Enron and Andersen unemployed are just the tip of the iceberg how many thousands of others are unemployed because of the downtick in the whole economy which resulted from the new skepticism about audited accounting statements created by Andersen s crimes.

After this, the remaining Big Four will certainly think twice before taking big fees to cook a public company s books. And that is at it should be.

I spent five years working for a great law firm Powell, Goldstein, Frazer & Murphy of Washington and Atlanta. The role of this kind of firm in the economy is similar to that of the great accounting firms. The culture at PGF&M was such that from top to bottom and end to end of that firm, there was zero tolerance for the kind of behavior which brought down Andersen, it was beaten into us day and night that our signatures on documents (we always signed with our name, and below that FOR POWELL, GOLDSTEIN, FRAZER & MURPHY ) transformed them into a kind of gilt-edged bonds, and that any slight misstatement or distortion in even one document so signed would devalue all of the rest of the firm s work. Without such a culture, which requires a great deal of dedication and concentration, the greed of partners will eventually lead to the behavior which brought down Andersen.

Andersen has a lot of great people, and it is sad that a few malfeasants brought down the whole firm. But the firm itself is at fault for allowing its partners to think that they can whore the firm s reputation like that. In recent years, there has been a movement to run professional partnerships more and more like regular businesses, which more careful financial management, and with priorities rearranged towards more and more intense pressure to earn more and more money. The Anderson debacle, the whoreishness at the heart of the Andersen debacle, is a result of this. Let them all think again. It should not have turned out otherwise than it did, in my humble opinion.

My comment: If the lesson of crime and punishment were learned, as Cameron suggests, crime would cease to exist, but it does. Moreover, this is little comfort for all the people who lost their jobs or to the little guys like me. I read company statements and listen to the Enron congressional hearings, but I am as bewildered as many of the congressmen seem to be. I have to rely on the various government supervisory commissions to keep things under control. They do not.

Ronald Hilton - 3/28/02


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