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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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ã 2003 Hopkins and Company, LLC The
recommendation rating for this book appeared in the July 2003
issue of Executive
Times URL
for this review: http://www.hopkinsandcompany.com/Books/Final
Accounting.htm For
Reprint Permission, Contact: Hopkins
& Company, LLC • 723 North Kenilworth Avenue • Oak Park, IL 60302 E-mail: books@hopkinsandcompany.com |
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