Andersen: One Player in a Big Drama
By Steven Pearlstein
Washington Post Staff Writer
Friday, March 15, 2002; Page E01
It is possible to view the indictment of Arthur Andersen as the simple story of a few rogue document-shredders in the firm's Houston office, or an act in the larger Enron drama, or a turning point in a morality play at one of the world's great accounting firms. There are those here in Washington who see it as the first of a five-part series on the corruption of the accounting profession.
But in the broadest sense, Andersen may be seen as just one tragic character in the boom-and-bust saga of the 1990s -- a victim as much as a protagonist in the unfolding drama of cheap capital, fast fortunes and stock-price addiction. It is the story not just of Andersen and Enron but Global Crossing and MicroStrategy, WorldCom and Qwest, the dot-com bust and the two-year bear market and even the global recession.
In Andersen's case, the path toward criminal indictment began on Wall Street, which by the mid-1990s was awash in money looking to be profitably invested: A surge in retirement savings of baby boomers; a tidal wave of investment capital from overseas investors unimpressed with opportunities at home; hordes of cash generated by newly efficient and profitable U.S. corporations.
In time, this excess supply drove stock and bond prices through the roof, encouraging companies to rush out with new offerings to soak up the billions of dollars. And with their inflated shares, companies found they had a sought-after currency with which to buy other companies, secure loans, pay back creditors and compensate employees. In time, the stock-fueled demand drove up the price of everything from Park Avenue condos to the wages of hamburger flippers at McDonald's.
For Andersen, Wall Street's boom presented both challenge and opportunity. In attracting and retaining key professionals, firms like Andersen compete with investment banks, consulting and law firms and large corporations. And by the late 1990s, the compensation for this talent was soaring. MBAs right out of the best business schools could command six-figure packages while top partners came to believe they deserved nothing less than seven.
To pay these salaries, accounting firms had not only to find more business, they also had to find a business more profitable than the corporate audits and tax-return preparations that had been their bread and butter. The key was consulting services -- advice on everything from taxes and technology to management systems, pricing and corporate strategy. The pressure to cross-sell consulting work could be enormous. Bonuses, promotions and standing within the firms often depended on it. And the most natural clients for these services were the very same corporations whose books they were auditing.
To the industry's critics, it looked as though an unhealthy, if unspoken, set of rules began to govern the relationship between companies and their auditors. Auditors who balked at aggressive accounting understood -- or were made to understand -- that they might jeopardize non-audit contracts that now represent more than half of accounting firm revenue. And corporate finance officers used the consulting contracts to involve accounting firms in helping to structure some of the deals that are the subject of shareholder lawsuits and Securities and Exchange Commission investigation. As long as the stock price continued to rise and businesses grew, the questionable accounting had no practical consequences for the companies or their auditors.
Industry officials bristle at suggestions that these consulting arrangements amount to a subtle form of mutual extortion. The insights gleaned by accountants in their consulting work, they argue, make them better and more knowledgeable auditors.
But in corporate boardrooms and on Capitol Hill, there is a growing consensus that the consulting contracts offer too much of a threat to auditor independence. "Strong public interest in fair and accurate financial reporting demands nothing less than an independent auditing voice of unquestionable integrity," said former Fed chairman Paul A. Volcker this week, proposing that Andersen split off its accounting arm.
The Big Five accounting firms not only came to accept the more creative accounting moves of the late 1990s, they also turned them into new products that they marketed to other companies. Accounting partners were featured speakers at seminars on "structured finance" and "special purpose entities." And when government regulators, or even the industry's own internal rule-writers, threatened to curb some practices, the Big Five lobbied heavily and successfully against them.
The house of cards built on this foundation of easy money and financial engineering started to crumble two years ago this month, with the dramatic turn in the highflying Nasdaq Stock Market. The effects are still rippling through the economy. In the telecom sector in particular -- where more than $2 trillion in paper wealth has now disappeared -- it could be a year or more before all losses are taken and the painful restructuring is completed. The full extent of losses are yet to be revealed on the books of banks, insurance companies, pension funds and other big lenders. The number of investigations recently launched by the SEC suggest that more accounting scandals, involving other firms, are almost certain to follow.
It is an exaggeration to say that the economic boom of the late 1990s was merely an accounting mirage. Most of the companies that rode the boom up had innovative products to sell, solid management teams and ample funding. And most came a cropper not because their stock prices fell or questionable accounting was revealed, but because of a sudden turn in the economic realities underlying their businesses.
At the same time, it is clear that the accountants and other professionals -- the bankers and the lawyers -- acted as enablers in the boom-and-bust process. The boom was longer and stronger because of the financial obfuscation in which they willingly, and profitably, participated. And the bust is likely to be be equally exaggerated as investors and lenders express their lack of confidence in corporate financial statements and the professionals who stand behind them.
© 2002 The Washington Post Company |
