When Government Demands a Business Scapegoat

Published April 22, 2014

It remains one of the greatest travesties in the history of American business: In 2001, the 85,000 employees of one of the world’s largest accounting firms began losing their jobs. Their employer had become tainted by its loose association with Enron Corp., a financial house of cards that was imploding and taking with it billions of dollars in employee pensions and shareholder investments.

In 2002, accounting firm Arthur Andersen was convicted of charges related to Enron’s fraudulent practices. The charges had nothing to do with the quality of their auditing – or any of Enron’s illicit practices. The conviction was appealed, and in 2005, the U.S. Supreme Court struck it down in a unanimous vote. But the damage had already been done.

To date, despite millions of records being subpoenaed, there is no evidence Arthur Andersen ever did anything wrong. Still, perceptions are everything: Most people are not aware that the accounting firm, which led the industry in establishing strict, high standards, became a government scapegoat.

When I speak to groups across the country, I ask the following questions. Below are the typical responses I receive – and the actual facts.

1. What do you remember about Arthur Andersen?

Typical Response: They were the ones that helped facilitate the Enron fraud. They deserved what they got.

Fact: Arthur Andersen was the largest and most prestigious firm in the country. It was considered the gold standard of the accounting profession by the business community.

2. For what was Arthur Andersen indicted?

Typical Response: They messed up the audit of Enron and signed off on false financial statements.

Fact: They were indicted for shredding documents. These documents were drafts and other items that do not support the final audit product. All accounting firms establish policies for routinely shredding such documents.

3. How long was it between the Enron blowup and when Arthur Andersen went out of business?

Typical Response: One to three years.

Fact: The largest accounting firm in the world was gone in 90 days.

4. Was the indictment upheld?

Typical Response: Yes, that is why they went out of business.

Fact: No. The Supreme Court overruled the lower court in a 9-0 decision, and came to the conclusion within weeks, making it one of their quickest decisions ever.

5. How many people lost their jobs as a result of the false accusations?

Typical Response: Have no idea, but the partners got what they deserved.

Fact: Eighty-five thousand people lost their jobs and only a few thousand were partners. Most were staff people and clericals who made modest sums of money.

6. Who benefited from Arthur Andersen going out of business?

Typical Response: Everyone – we finally got rid of those crooks and made a statement to the rest of business to operate ethically.

Facts: It was not the Arthur Andersen people; they lost their jobs. It was not the clients; they had to go through the stress and expense of finding a new auditing firm. It was not the business world in general: It now has fewer firms from which to choose and rates increased. It was their competitors who benefited– they got Andersen’s best people and clients and were able to increase their rates and profitability.

7. What accounting firms now have ex Arthur Andersen partners playing leadership roles in their firms?

Typical Response: None

Facts: The “big four,” all the large middle-tier firms and many small firms have former Arthur Andersen partners in leadership positions. Many members of the new Public Company Accounting Oversight Board (PCAOB), which oversees these firms, now have former Arthur Andersen people involved in reviewing the quality of these firms.

Larry Katzen is author of “And You Thought Accountants were Boring – My Life Inside Arthur Andersen” (www.LarryRKatzen.com). He worked at Arthur Andersen from 1967 to 2002, rising through the ranks to become a partner at age 30. His new memoir details the government’s unjust persecution of a company known for maintaining the highest standards.