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Final Accounting: Ambition, Greed, and the Fall of Arthur Andersen by Barbara Ley Toffler

 

Rating: (Recommended)

 

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Assimilated

If you think of yourself as independent, and can’t imagine a corporate culture overruling what you think is right, be sure to read Barbara Ley Toffler’s story of her life inside Arthur Andersen in her book, Final Accounting. Toffler came to Andersen as a business ethics expert. Her work was to assist Andersen clients on ethics issues, not to direct the business ethics of Andersen. This excerpt from Chapter 8, pp. 185-191 tells something about her experience:

The Cobblers Children

The cobbler's children have no shoes.

- old adage

So you’re with Arthur Andersen now. I hear they don't do anything with ethics."

John Buckley smiled as he said those words to me and the telecommunications executive I was trying to pitch, but his voice had a hard edge. As I stood among rows of spangled dresses, feathered headdresses, and rows of purple and gold plastic beads at Mardi Gras World, the place where the most fabulous costumes and floats are stored, I wished I could slip on one of the outfits, down a Chivas or two, and melt away into the steamy New Orleans night. But I was at the gala dinner for the 1998 annual conference of the Ethics Officers Association, and Buckley had me in his crosshairs. Now at Raytheon, Buckley had been at Digital Equipment Company, a client of mine during my Harvard Business School days. He was saying to all within earshot what I knew to be true, and it made me cringe.

It is often said that the cobbler's children go shoeless. It's an old line, but, in this case, a very true one. Arthur Andersen, with KPMG the first of the then-Big 6 to sell ethics consulting services, was indeed barefoot when it came to irs own conduct by the standards required by the Justice Department’s Federal Sentencing Guidelines for Organizations, and by my own standards as an "expert" in business ethics. And I, too, was getting blisters.

My job, as head of the Ethics and Responsible Business Practices group, was to sell other companies services that would help them act more responsibly. Yet I was constantly undermined in my attempts to do so by one simple fact: While we at Arthur Andersen thought it was important that you, the ethically challenged corporate client (who, more often than not, had its books audited by the Firm), get its house in order, we didn't feel the same compulsion to do any navel-gazing of our own. How do you sell as "essential" programs and services that your own firm refuses to embrace? How do you respond to the question "If this stuff is so necessary—and you're the best—how come your firm's not doing any of it?" When I pointed this out, I was seen as at best a nuisance and at worst a complainer who "simply didn't get the way things worked around here." Outside the Firm, I felt like an insincere spinmeister.

Arthur Andersen's lack of interest notwithstanding, ethics had become a hot topic almost everywhere else in the business world. By 1997,95 percent of U.S. corporations had embraced the Justice Department's Guidelines by installing some kind of ethics program, an 'ethics officer, and a "mechanism for the prevention, detection, and reporting of criminal activity" and other wrongdoing. Also, several large not-for-profit organizations, such as the United Way, were implementing such programs, having themselves been exposed for their own poor ethical practices. The ethics business had grown dramatically since I first entered the field in 1978. There was more interest in the topic than I had ever seen before, but I was having more trouble tapping into that interest than ever before, too.

One result of all this activity was the establishment of the Ethics Officers Association (EOA), a "trade group" for executives with this title. Founded in 1992 at the Bentley College Center for Business Ethics by Mike Hoffman, the Center's director, and Craig Dreilinger, a consultant, with a membership of a dozen, by 1997 the group had become an independent organization of 283 members. (As of 2002, membership had grown to more than 800 companies.) These corporate ethics officers, drawn from legal departments, internal audit departments, or managerial ranks, banded together to define and develop their function—and find new resources. The annual Ethics Officers meeting was a potential treasure trove to every business ethics consultant, a place where you could connect with just about every company in the world with an interest in ethics.

Mike Hoffman and I go way back, having met at the First Bentley Business Ethics Conference, which he organized in 1978. Over the years we have sat on panels together, participated in discussion groups, and shared ideas as professional colleagues. Ed Petry was someone I had known professionally since the mid-1980s. So it seemed no big deal for me, as head of the Ethics Group, to call Ed and request an invitation to the annual meeting. "Ed, I'd really like to come to the New Orleans meeting," I said. "Can you put my name on this list?" There was a long pause. A very long pause. "But Arthur Andersen doesn't have an ethics program or an ethics officer," Ed said, slowly and deliberately. I could feel my face getting hot. "That's not strictly true," I stammered, launching into the spin I had developed over the past months.

And it was not technically true. Arthur Andersen did pay a lot of attention to what it called "Independence arid Ethics." Independence has been, for many years, one of the key SEC requirements for public accounting firms. What independence means for an accounting firm is the elimination, as much as possible, of real or potential conflicts of interest that might compromise the integrity of an audit. Independence relates to stock ownership or board membership of audited companies, loan and brokerage relationships, and other such activities. For example, no member of a public accounting or audit firm, be it partner or employee, could hold even one share of stock in any audit client. The reason for this is clear—to avoid any perception by the public that the way a firm conducts an audit is affected by its relationship with the client. At Arthur Andersen, this form of independence was an ingrained part of the culture.

But it wasn't that way for everyone. Accounting firms and independence got major media attention in 1999, when the newly merged firm of PricewaterhouseCoopers was found to have violated SEC independence standards by owning stock in lots of companies audited by the combined company. PwC was required to set up a $2.5 million fund to increase awareness of independence in the profession—a paltry slap on the wrist compared to Arthur Andersen's later punishment. It seems to me highly unlikely that that type of independence violation could have happened at Arthur Andersen, because of the way "independence" was defined and embedded in the firm's culture. However, other eyebrow-raising aspects of independence issues, like entertaining clients, golfing with them (often at AA's expense), and providing summer employment for clients' children, were not as ingrained. In fact, these activities, which were undertaken especially to build interdependence with the client, were always encouraged. In addition, when consulting activities grew and brought new possible conflicts of interest that could compromise auditor independence, the Firm did not—via e-mail, memo, voice mail, or additions to the Independence and Ethics binder—address the new reality.

While I was at Andersen, the point person at the Independence and Ethics Office was Sue Quinlan. Her office distributed the form we all had to sign annually listing banks we used, our mortgage holders, the investment firms we dealt with, mutual funds (though these were exempt from the ethics and independence requirements), new stock purchased, and so forth. Sue's office reviewed the documents and contacted anyone in violation of independence standards. So while Arthur Andersen didn't do anything about ethics specifically, and hadn't done anything at all to respond to the Justice Department's Federal Sentencing guidelines requirements, l was still within the bounds of truth when I responded to Ed Petry.

I arrived in New Orleans for the October conference convinced that I should probably keep a low profile, despite the fact that I was eager to see many old friends, former clients, and even a few potential new clients. Buckley quickly foiled my plan, stopping me cold with his comments. My potential client was, of course, all ears. Once again, I launched into my "not strictly true" patter, this time adding a now-standard part of my sales pitch: "And did you know that in 1987 Arthur Andersen spent $5 million developing and distributing an ethics program for undergraduate business majors?” I didn't mention the fact that the program had fizzled out in 1994 because of the Firm's partners' unwillingness to continue to fund it.

Buckley wasn't buying any of it. Perhaps Arthur Andersen's known arrogance and my own led him to delight in a small game of humiliation. Holding on to my arm (I guess so I wouldn't escape), he called over one of the PwC ethics managers and introduced us. "Why don't you tell Barbara what you all are doing over at PwC," Buckley chortled. "Maybe she could learn something." I smiled graciously and stood there awkwardly while I was instructed, utterly humiliated. It was a low moment personally, and I realized that not only did Arthur Andersen have nothing going on in the ethics field, but that everyone knew it—and thought worse of the Firm, and me, as a result.

Naive, stupid, co-opted, or simply stubborn, I kept plugging away. There was also the annual Business Ethics Conference sponsored by the Conference Board. I had been one of the speakers at the Board's first conference in 1988, leading two discussion sessions in which actors performed scenes from plays dealing with ethical issues in business. It was a great success, and yielded numerous opportunities for my firm. In the ensuing years I had chaired panel discussions and served as a speaker. As a source of potential new business clients, the Conference Board's Business Ethics Conference was right up there.

Earlier that year, in February 1998, I had called Jeff Kaplan, a New York attorney who was serving as coordinator for the ethics conference, and requested a spot somewhere on the May program. Jeff was blunt. Only speakers from companies with recognized ethics programs could appear on the conference roster, and yes, some independent "experts" would also speak, but I wasn't an independent expert anymore.

"There is a way you can speak next year at the 1999 conference," said Jeff. "Arthur Andersen can sponsor the Conference Board's Ethics Conference—$20,000 will take care of it—and then you can be on the program." (I'm not sure about the ethics of an ethics conference selling speaking slots, but given the land of slippery slopes I was living in. I didn’t lose much sleep over it.)  Spending $20,000 for what could be a client gold mine seemed like a no-brainer for me, but it would take a bite out of our group's budget. So I set up a meeting with Joe Berardino, who as head of audit for North America, could approve an expenditure in the name of the Firm. Sponsoring the conference would be prestigious for the Firm, I said, and I felt it was critical for Arthur Andersen to be seen as a leader in business ethics. I also told him how embarrassing it was for us to be considered deficient in this area. We were, after all, a place that thought straight and talked straight, right?

Joe's answer was short, to the point, and as smoothly dismissive as ever. "The Firm's not interested in supporting an ethics conference. If you want to do it, take it out of your budget." In the overall Arthur Andersen budget, an expenditure of $20,000 would have been negligible (or, to use a pet accounting phrase, "not material"). But there was no further discussion. He just turned me down flat. For me, $20,000 was a big deal, and I knew that my decision to spend money on something the Firm did not stand behind was likely to come back to haunt me. But I decided to do it anyway, partly because I really thought I could drum up business and partly to soothe my own bruised ego. These were, after all, my people, most of whom, I thought, respected me and my past work. Maybe the Firm—and I, by association—would look like players again if we sponsored the conference. I called Jeff Kaplan back and said we were in.

Our group appeared at the 1999 conference in full force. I was relieved—and inwardly troubled—to seethe name Arthur Andersen splashed all over the conference literature. It felt hypocritical, but I was desperate for the exposure. At least the 150 or so companies there, more than half of which were in the Fortune 500, knew we were in the game. Yet we were pretty limited in what we could actually say, since presentation of client projects by consultants was strictly taboo. We did manage to get one of our clients onto a panel to talk about a project we'd done with them, but otherwise, we were simply the money folks. I learned that lesson all too well during the final session when the moderator, a longtime competitor of mine, responded to my raised hand with a sardonic quip that made me wince: "Sure, Barbara, take the floor. You paid for it."

If an experienced and talented executive like Toffler, with strong beliefs, compromised herself in the strong Andersen culture, what do you think happened with those who were aspiring to become partners? Toffler lays out their stories in detail. Later in the book (pp. 252-3), she reflects on her own experience: “I basically went along with the culture. I didn’t break any laws or violate regulations, but I certainly compromised many of my values. Some of that was the money talking, but some of it was the fact that if you hang around a place long enough, you inevitably start to act like most of the people around you.” Read Final Accounting to hear one perspective about Arthur Andersen. Think about what happened to Toffler, and look at your current work situation, and decide if the people around you are acting in ways that are consistent with your values. Then, decide what changes, if any, you want to make in your worklife.

Steve Hopkins, June 21, 2003

 

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The recommendation rating for this book appeared in the July 2003 issue of Executive Times

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