Andersen Teaches the Prosecutors a Lesson

In a plot worthy of Mad Men, one firm talks back.

The other day 85,000 people woke up to news that made them feel better than they had in twelve years. They are the people who had some affiliation with Andersen, the accounting giant that fell casualty in the 2002 scandal over the fraud of Andersen's client, Enron. The smiles came when these people learned that Andersen was getting another chance: A group of Arthur Andersen alumni are bringing back the name as "Andersen Tax."

Word that Andersen is mounting a revival can make us all feel better. Andersen redux reminds us of something that goes beyond any individual brand. It is that a brand may survive a mugging by prosecutors, marketing maniacs, and their rash, lazy accomplices in the press. A brand can even survive something worse than any prosecutor: the motto that "perception is reality."

There is material in this plot worthy of Mad Men's Matthew Weiner, if not Sophocles. Long ago a mailroom clerk from Plano, Ill., studied accounting at night and managed to become a certified public accountant by age 23. In a wheeler-dealer city, Chicago, Arthur E. Andersen made his firm a model of probity: Every new employee learned his motto, "Think Straight, Talk Straight." Down the decades, thousands attended Andersen training in St. Charles, Ill. The firm expanded to become a tax, audit, and consulting giant. All the while Andersen sustained its very Midwestern culture. That culture could seem arrogant, but it was "all for one, one for all": Responsibility cannot be shirked. A small part of this story I knew personally. My brother and father became appraisers in the tax division. Meanwhile, the consulting division spun off as Accenture.

Then, of course, this mighty hero misstepped. A partner conferred the Andersen seal of approval on Enron, a company that was committing fraud. Enron shareholders lost their investments. The media and investigators identified a long list of failings: The "mark to market" accounting system, the oversight of management, and most importantly: crime. Enron execs lied, to themselves, to their internal committees, to the world. Andersen fired the partner who handled Enron, opened itself to investigation, and prepared itself to pay giant fines. As a signal of the firm's awareness of the scale of the trouble, Andersen approached another gold-seal name, Paul Volcker himself, to clean up. The idea was to save the firm. After all, more than twice as many people worked at Andersen as did at Enron. Most Andersen employees had nothing to do with Enron. Many did not even work in the tax or audit divisions.

But Michael Chertoff, assistant attorney general at the Justice Department, espied the fatal flaw of partnership heroism and determined to bring the firm down: "all for one," indeed. Somebody must pay for Enron, and Chertoff made Andersen into his own morality play. "To have failed to hold them accountable would have sent the message that large firms are held to a different standard of compliance because they are too big to fail," said Chertoff much later, in 2009, to editors at the Association of Certified Fraud Examiners. Fraud on Andersen's part was hard to prove. So, tellingly, Chertoff went after the cover-up: Andersen had shredded documents without reporting, and Chertoff contended that was a crime. "Arthur Andersen did not want to acknowledge wrongdoing in its destruction of documents relating to the Enron case," he said.

Andersen contended that the shredding was routine, not a crime. In district court, Andersen lost. In a performance as reliable as a theatrical chorus, the media echoed the prosecutors' arguments. Accenture survived. But the overall onslaught proved so intense that it forced the firm Andersen to disband in a tangle of noncompete clauses and tears, affecting all those 85,000 jobs. Thus was the employment damage double what Enron caused. Florida pensioners lost money when Enron went down, but so did Andersen pension holders. Andersen didn't precisely fall on its sword. Rather, Chertoff forced the firm onto it. In the U.S. there's always tension between the square Midwest and the more sophisticated coasts. This defeat of the ultimate Midwestern firm seemed more evidence of the inevitability of coastal victory.

As time passed, the media forgot about this morality theater. Congress passed Sarbanes-Oxley, a law that regulated business, and altered some of the standards that made Enron possible. Michael Chertoff moved on to lead the Department of Homeland Security. In 2005, the Supreme Court found against Chertoff in the above-mentioned document case 9–0, but that fact no longer mattered. The vindication of Andersen, the press thought, had come too late. Hurricane Katrina, of all events, brought a second (underreported) dramatic vindication of Chertoff's critics. Chertoff failed to act expeditiously in response to the natural disaster. Suddenly Chertoff was out, too, a casualty of scandal just like his old target.

Yet all the while, Andersen alums knew that value had been lost with the firm. So did many old clients. The St. Charles alumni quietly regrouped, starting firms elsewhere. The "A" in Andersen was a kind of scarlet letter. One such firm, led by former partner Mark Vorsat, was called WTAS – the "A" was still embedded in there, for the brotherhood. "Think straight, talk straight," Vorsatz repeated to himself. Applying Andersen values to tax work, not audit work, Vorsatz partnered with others, including HSBC, and then grew WTAS alone. The firm flourished in Europe, in part because clients, large companies worth over $200 million, knew the value of Andersen culture, whatever U.S. prosecutors had once thought.

Earlier this summer, Vorsatz moved even more boldly than Chertoff had. WTAS's European businesses were expanding fast and WTAS needed a unifying name. Internally, he proposed Andersen Tax. "Why would you do that?" he recalls partners asking him. But as the Andersen colleagues talked it over, they liked the idea. WTAS market research confirmed that, and to a surprising extent. In France, Canada, the U.K., and the U.S., polls showed more than 60 percent, and sometimes over 70 percent, said they viewed the name "Arthur Andersen" somewhat or very favorably. In each country, those polled said they were more likely to work with a firm founded by Andersen alumni if it were named Andersen. On September 2, Andersen Tax launched. Vorsatz's new structure and his statements acknowledged sins of the past. "To be clear, we are not an audit firm," Vorsatz said point blank. But the launch of this new partnership was as ambitious as Arthur Andersen himself, cgomplete with a remarkably unapologetic ad campaign by Washington Media Group ("Andersen Tax, a Name from the Past, a Firm for the Future").

What lessons can be learned from the comeback? One is that journalists and prosecutors can play villain and chorus. Another is that auditing, consulting, and tax work probably shouldn't be mixed together. A cultural shift was necessary for auditors.

Another lesson, though, is that American shame is provincial. On the continent, in Britain, and in Canada especially, the public often wonders if American prosecutors and regulators take their assaults too far. It was the Europeans who saw the value in the Midwestern culture: Thousands of foreign accountants, after all, have made the drive from O'Hare to St. Charles for training. It was The Economist magazine, for example, that recently chose to feature "the criminalization of American business" on its cover. Clients outside the U.S. helped make WTAS successful and feisty enough to be willing to lead Andersen's new charge.

The rest of the world may be correct in suspecting that Americans overreact. As The Economist reported in 2012, Sarbanes-Oxley makes it difficult for companies to list shares in the States, so that as recently as 2011 only 16 percent of initial public offerings happened here, compared with 67 percent happening in 2002, when Sarbox became law. Yet the U.S. media are slow on such stories. After all, they might damage a favored politician.

A final lesson: Quality will win out. Enron cannot make a comeback. There wasn't enough to Enron beyond its plotting and chutzpah. But Andersen talent was real, no matter how many scarlet letters were slapped on it. However it fares, you have to cross your fingers for Andersen Tax. The old-new firm is well on its way to proving some of the most important principles of all. Flawed heroes might still be heroes. Perception is not always reality.

Amity Shlaes is the author of four national bestsellers: Coolidge, The Forgotten Man, The Forgotten Man (graphic edition), and The Greedy Hand.

© Copyright 2014 National Review

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