Global Policy Forum

By Marcia Hughes

When Enron collapsed because of fraud, no-one thought it could get any worse. But then WorldCom collapsed. The demise of the telecoms giant has now overtaken the energy trader as the biggest bankruptcy in US history. The crisis has brought chaos to the markets and shaken the foundations of the world financial systems. One name is at the heart of both scandals - Andersen. It signed off the accounts of both WorldCom and Enron, companies whose billion dollar profits were built on lies. And there are a string of other accounting scandals that have Andersen's name attached to them.

Andersen has a history where it has bowed to management and caved in to powerful entrepreneurs. It has repeatedly ignored warnings from whistleblowers. Now its past history has come back to haunt it. Over the years, it seems the firm became far removed from the moral principles of its founder Arthur Andersen.

In the early 1900s in Chicago, Arthur Andersen set out to establish an accounting firm where staff would think straight and talk straight. Only when company accounts were deemed fair and accurate would they be signed off by his auditors. He wanted his auditors to be the trusted policemen of people's savings. The firm claimed the highest standards and would lose business rather than sign off misleading accounts. Andersen traded on this reputation.

Richard Measelle, who was the managing partner of Andersen from 1989 to 1997, recalls the principles he instilled in his staff. "Arthur Andersen told his partners that they needed to focus more on the needs of the public, rather than making a good living. And I think this idea of taking tough stands from a professional standpoint and fulfilling professional responsibilities was the legacy he left the firm ". But over the years that legacy seems to have been eroded.

In the early 1980s, it worked for John DeLorean, a maverick businessman who set up a car company to fulfil his dream of building a futuristic sports car. Andersen were the auditors. But he managed to divert $17m of company money via a Panamanian company. Andersen appeared to ignore warnings of fraud. Nearly £80m of UK government money were lost. Andersen was banned by the then-Prime Minister Margaret Thatcher from doing any more public sector work in Britain and was made to pay nearly $60m to the government and investors.

It was beginning to look as if Andersen was the watchdog too scared to bite the hand that fed it. DeLorean had paid Andersen $500,000 a year for auditing the books. In the 1990s, one of the crown jewels in Andersen's client list was Waste Management in Chicago, the largest waste disposal company in the United States. But in 1993 Waste Management bosses came up with a plan to pump up their profits. They said their rubbish trucks lasted longer than they did. This meant that the company refused to properly record the expenses of running the business which made the company look much more profitable. For the scam to work, the bosses at Waste Management needed Andersen to sign off the accounts. Andersen ended up caving into management and signed off the dishonest accounts for four years. During Waste Management's fraud they were paid $7.5m for the auditing business and an additional $12m extra for consulting work. In 1998, new management discovered the fraud. Profits had been overstated by $1.7bn. Waste Management's share price collapsed and investors lost $6bn.

The US stockmarket regulator, the Securities and Exchange Commission, fined Andersen a record $7m and put an anti fraud injunction against Andersen - its first against an accounting firm in 20 years. Thomas Newkirk, associate director of enforcement at the SEC, says: " We're talking about several years of mistakes and misconduct here, not just an isolated incident ". They cite the involvement of senior staff as one reason they took the matter so seriously. "It involved not only the engagement partner but it also went further up in the firm", says Thomas Newkirk. Then there was the Baptist Foundation of Arizona - BFA - another Andersen client who defrauded investors. Once again, Andersen turned a blind eye. They were warned about the fraud, two years before the BFA went bust.

But Andersen continued signing off BFA's books until the foundation collapsed in 1999. It was the largest bankruptcy of a non-profit making organisation in the US. It caused 13,000 investors to lose nearly $600m. This year Andersen agreed an out of court settlement - and its biggest payout yet, for for $217m. Dee Griebel, a financial adviser from Phoenix says: "The Enron bankruptcy was the same type of thing as the Baptist Foundation, it was just more zeros. There's the same hiding of debt, the same overstatement of profits, the same easiness of spotting it once you looked". A year ago, Andersen was on the brink and couldn't afford another mistake. But it was too late. Andersen had tolerated Enron's policy to set up a network of secretive companies in which the energy giant would hide its ballooning debts. The network was about to collapse.

Andersen realised it had made a simple accounting mistake - one so serious it had to disclose. The company was forced to face down its client. Enron went bust and Andersen's fate was sealed. As Andersen staff started covering their tracks, the US Justice Department prosecuted Andersen for obstructing justice. Andersen was forced to sell off its worldwide partnerships. And then as the guilty verdict was announced the SEC banned Andersen from auditing altogether. Since Enron a string of new Andersen accounting scandals have come out. WorldCom has topped them all in size and simplicity. From next month, Andersen is effectively out of business for good. It will never issue another misleading audit statement again.

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