ARTHUR ANDERSEN – The Excellent

“Tales of the excellent can lift the ambition of the living.”

David Brooks (2015).

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Choosing the maiden candidate for our Tales of the Excellent in Accounting and Audit series was not difficult.? Yet we understand why this choice might be pleasantly amazing to some and shocking to others.? The name Arthur Andersen has become a contronym with awe-inspiring contradictions.? That makes it remarkable, indeed. Our assessment is that Arthur Andersen – the person, the firm and the people – were Excellent. It came to mind easily as a historic tragic example of the absence of institutional confident advocacy in the accounting profession.? We believe that if the profession had institutionally mounted responsible courageous advocacy for the industry at the time, Arthur Andersen would not have collapsed.? The profession is constrained by institutional decorum, understandably, and so would not streak out to public advocacy. One unremarked lesson from the Arthur Andersen collapse is that accounting as a profession, accountants, and auditors, need confident advocacy.? It is incontrovertible that Arthur Andersen had profound influence on our civilization.? This is no time for apportioning blame for what happened Arthur Andersen.? We want to focus on the lessons for the future, and to collectively “speak out on behalf of the most underappreciated group … accountants [and auditors],” because Audit is Trustworthy!

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Tales of the Excellent in Accounting and Audit is an element the “Audit is Trustworthy” advocacy initiative for restoring trust in audit.? The purpose is to remind modern society of the profound excellence of accounting and auditing and the people who embody their sublime affordances that have historically nurtured society and nation building by producing the ballast of trust on which civilization survived, thrives, and prospers.? Their heroic role has been largely unremarked, only tangentially noted in society’s psyche as “credence goods.”

Arthur Andersen is a contranym with awe-inspiring contradictions.? Therefore, the asymmetric notion that everything Arthur Andersen is only synonymous with villainy is a callous misanthropic denial of our humanity, its inherent potential for excellence and the inalienability of that potential which guarantees that there will always be a few good people at any time.? There is no group, culture or society where one hundred percent of the people are irredeemably bad.? That notion is also unfair to the innocent in the whole Enron/Andersen saga – the thousands of accountants and auditors who had nothing to do, directly or indirectly, with the Enron infamy, whose only fault is that they happened to be in the Arthur Andersen vintage when it all happened. At the least they deserve banal justice. As I have written before, “perfection is not the measure of the verity of any professional practice or person.”

We allow that many will disagree with our choice of the Excellent here.? If you do not agree with us about Arthur Andersen the firm, what about Arthur Andersen the person, who made sacrifices to build the firm and contributed immensely to the progress of our profession and civilization? And also, what about Arthur Andersen the people, the thousands innocent professionals who knew nothing about Enron??

To be sure, one needs to be an iconoclast uninformed by history to disagree with the assertion that Arthur Andersen deserves this acclamation.? ?We agree that what happened at Enron, corruption borne of aimless greed, deserves moral revulsion, societal indignation and market resistance, but it should not be in an irrationally extravagant manner that denies the evident human excellence found in Arthur Andersen.

Arthur Andersen the firm was a stable of literally thousands of topflight respectable professionals, best in breed in our profession.? I would not insensitively discredit and write off the multitude of good professionals in the firm and lump all of them into one invidious group-guilt because of a few bad apples. Arthur Andersen people were so excellent that my generation enjoyed the shrewdly astute competition that played out in our contemporary peerage.?

We should not ignore the incommensurability between the professionalism of the innocent and the villainy of the bad apples. Even though “fish rots from the head,” the diligent, the wise and prudent mothers in my native bucolic village (Umuoni Ihittaforukwu, Ekwereazu, Nigeria) would exercise practical wisdom to unhurriedly inspect each fish and salvage the unrotten body and tail; some would even carefully clean the rotting head and salvage the fresh parts, thus providing needed nutrition for their families.? They would not impetuously discard the entire fish. ?In the case of Arthur Andersen that prudence was egregiously lacking; the collapse was not just unnecessary, it was undeserved.? It reproached our hallowed profession and etched an indelible invidious ignominy on the face of accounting.

Truth and fairness are the core ethos of accounting and auditing that guide our actions in everything.? But in dealing with Arthur Andersen and its people this ethos was not brough to bear. We failed Arthur Andersen and its people when we failed to espouse fairness.? Fairness requires that you are given “opportunities to challenge decisions that harm you,” ?while unfairness is when “there is no questioning, no right to see the evidence that knocked you down,” Stone (2020).[1]? The thousands of good people at Arthur Andersen who were knocked down by evidence they did not see to defend themselves were, therefore, treated with differential standard of justice, in other words, with unfairness, contrary to the ethos that accounting and audit espouse. ?It is pertinent to note that when auditors act unfairly in the theory and practice of counting, accounting and auditing, audits fail.? This is the root cause of audit failures.? The absence of truth and fairness guarantees that the pursuit of the telos of audit will fail. It needs courage and the calculative virtue of prudence to avert it.?

Fairness, well understood with a deep communal sensibility, would dictate that we spared the reputation of the innocent in Arthur Andersen without yielding to impetuous market heuristics.? There were not a few good women and men in Arthur Andersen, there was an army of them.? They are still part of the excellence of the profession today, wherever they may be.? They held the forte when it mattered most and, in pursuit of public interest, defended the accounting promise not to lead society into trusting the untrustworthy.? Unfortunately, the dominant negativity bias of society does not allow us to acclaim the good deeds of accountants and auditors, rather we focus on the bad and ignore our blessings, such as the blessings represented by the brilliant minds in the stable of Arthur Andersen who did not lead society and the markets to trust the untrustworthy.? The great benefit they conferred on mankind remains unremarked because of what Tierney and Baumeister (2019)[2] called “the power of bad” or negativity bias:

“it [power of bad] distorts your perception of people and risks … it distorts our emotions and our view of the world.? It has made the luckiest people in history feel cursed.”

The pursuit of trust is in the DNA of accountants and auditors.? Though exogenous factors may bruise a few individual accountants, the systemic core value of trust is “unawed and uninfluenced” by the deviations of a few rotten apples in our midst.? We are not defined by failures which are essentially corrective rumbling strips on the path of progress; the failures are instructive and formative for auditors and society.?

When the space shuttle Challenger crashed NASA was not shut down nor did America halt the space missions.? Later the space shuttle Columbia also crashed. The lessons of these cumulative failures, and others not streaked to the public, have made NASA more experienced and scientifically stronger for innovation, because they were not demonized to cause learning disability. Instead, the rational tolerance for the space mission failures catalyzed innovation resulting in a vibrant space industry in America today. ??So too with audit failures; auditors as innovators ought not be demonized when failures occur – every innovation happens on inherent errabilities.? Audit failures should not be catastrophized, and overdramatized by society in a manner that relegates auditors to supine passivity and slinking to obscurity, discouraging innovation.? We should have courage to only learnedly argue about failures.

Viewed through the prism of the history of our civilization, one can see that accounting and auditors have conferred great benefits to mankind undisturbed by their failures in our history.? Abstract accounting and abstract audit could not have powered our epic civilization.? Great women and men, responsible professionals called accountants and auditors, driven by public interest, the kind of people found in the stable of Arthur Andersen, with conative pursuit of the telos of accounting and auditing, sedulously did – they collectively produced the trust substrate for civilization.? It is profound.

A grateful society ought to be beholden to them, and not be captiously retributive for transient aberrations, or generalize the villainy of a few bad apples and suggest that “all” auditors are untrustworthy, a notion that cannot withstand a rigorous scientific examination.? If you apply that cynically invidious standard across the board, you would literally be writing off the entire population of accountants and auditors because there is not an audit firm, accounting function, internal audit department, audit-general office, that has not had some failure.? And what would happen to the healthcare industry where the US FDA said there were over 100,000 medication errors in one year, some fatal (audit failures are much less).? Should America have shut down such centers of medical excellence as world’s No. 1, MD Anderson Cancer Cener of University of Texas in Houston, or declare that every doctor, pharmacist and nurse is a villain, ignoring centuries of dedicated work doing no harm to society? Should America shut down the Boeing Company now for its ongoing scandals.? What happened at Enron is not sufficient reason to impetuously destroy a firm like Andersen in a market economy.? It is not surprising that the US Supreme Court saw it fit to overturn the invidious guilty verdict (though belatedly) that had destroyed the firm.? If the Supreme Court decision was timeous, Andersen would still be here today.? If failure is a reason to ditch professional firms, which one would be standing today, in all professional fields?? Eisenberg and Jonathan (2004)[3] surveyed financial restatements on Wall Street to determine if Arthur Andersen was different from other big accounting firms and concluded thus:

“… we find no evidence that Andersen’s performance significantly differed from that of other large accounting firms.”

All the big accounting firms are well represented on the “List of Biggest Accounting Scandals,” (Wikimedia, 2024).[4]? If the impatient invidious retribution that collapsed Arthur Andersen is applied to these other big firms all would be gone.? But we need these firms with their imperfections, justified by cost-benefit considerations – their presence in the market provides huge net benefit, not the least of which is the steadying influence that they exert in times of crisis.? We shall, therefore, advocate for them in times of crisis and undeserved retributions, and when they stumble, we give a helping hand, never again shall we “break their crushed reed nor extinguish their smoldering wick” in moments of trouble, just to prove that audit ought to be perfect because it cannot be.? In faithful support we will bring responsible confident advocacy to bear.? Big 4, our centers of excellence, the formative cauldron in which we are made, yes, not only Big 4, but Big 10 and every practicing firm, and all accountants and auditors, should be assured of the institutional support of the profession and the supporting voices of individuals in the profession, and of course, in the society, who understand that accountants and auditors are underappreciated for all they do for society. ?The profession engaging in self-abnegation or being excessively self-reproachful to salve public opinion is not the courageous response that we need in times of crisis.? There is failure in everything we do, not only in auditing.

It is time for us as a society to rethink our impetuous and timorous attitude to failures.? A confident society should humanize and embrace failures to cultivate “psychological safety” to make failures productive.? Fear of imperfection could be a societal learning disability, a warning sign of looming entropic retrogression, in a social sense.?

One need not be a meliorist to believe that a modern cosmopolitan and confident free and learning society as we have today ought to have sufficient pain threshold necessary for rational tolerance for the discomfort of audit failures in order not to squander the learning opportunities implicit in them.? Any notion that Arthur Andersen is unworthy, and that audit is untrustworthy, of acclamation because of fleeting failures, would be an amoral misanthropic attempt at the inversion of the history of our civilization’s ride on the trust that accountants and auditors produce.

According to William M. Sullivan (2005):[5]

“Arthur Andersen’s namesake, an accounting professor and dean at Northwestern University’s fledgling business school, founded his firm as a start-up in 1912. Andersen encouraged the best of his students to join the firm, which specialized in auditing publicly held companies in the booming financial center of Chicago. From the start, Andersen sought to instill high standards of probity as the hallmark of both the nascent accounting profession and his firm, insisting that those standards would give both enterprises public stature and significance. Throughout its history, the firm prided itself on choosing not only the brightest accounting talent, but also those most evidently committed to a high-minded view of the profession. So seriously was this aim taken that even as a global organization with tens of thousands of professional employees, only partners, not human resource personnel, did the final interviewing and selecting of new hires.”

Arthur Andersen innovations influenced and powered management science applications in organizations and prospered our civilization as reported by INFORMS (n.d.):[6]

“Arthur Andersen was one of America’s preeminent “Big Eight” accounting firms in the 20th?century. During their peak, the company was among the many that actively promoted operations research and management science methods in new industries. … under the initial leadership and vision of David B. Hertz [who] joined Arthur Andersen in 1957 … developed and published several novel methods and techniques … Their group’s impact went beyond OR/MS for accounting as their methods have since been generalized in other areas. … In addition to societal involvement and leadership, Arthur Andersen persons were active authors of management science articles … marked a growing acceptance of MS in accounting … The published Arthur Andersen work in?Operations Research?expanded to such areas as the economic theory of the firm for management decisions, use of the Poisson distribution to model sales data, and industrial inventory planning. There was an active presence on the societal side as well … Many Arthur Andersen persons continued to influence the community after their time at the company … In 1989, … “Andersen Consulting” changed its name to “Accenture”, a play on the phrase “Accent on the future”. Through these transitions, the Arthur Andersen legacy has remained evident. The company’s network of practitioners across the United States and within professional societies helped pioneer OR/MS in the financial industry and promote solutions in new spaces.”

The above quotes are a profound history. Arthur Andersen was a great firm by decision and design.? Building auditors strong for public interest service is a solemn decision in our profession; senior partners in firms pay attention to it.? I am passionately proud of the brilliant and trusted professional colleagues I know from the Arthur Andersen vintage – I am glad that they are still part of our great profession today. “From the very beginning of the firm, Arthur Andersen insists that all his personnel get the ‘the facts behind the figures.” The probity that Professor Arthur Andersen designed and imbued into the firm’s primal DNA is in them and generationally transfers unimpaired.? As recently reported in the Wall Street Journal (2022),[7]

“Having an Arthur Andersen background makes many of them better auditors today, according to a study by academics from five universities that was published earlier this year. The researchers compared audits conducted between 2016 and 2019 by roughly 200 Arthur Andersen alumni to audits by nearly 1,500 of their peers at Big Four firms who hadn’t worked there. They found that Arthur Andersen alumni provided higher-quality audits, with fewer restatements or signs of potential earnings manipulation in the financial statements.”

These great men and women remain in the profession they see as a calling with sanctity, they continue to serve society with that pristine core value of trust.? We cannot restore trust in abstract accounting and audit without first restoring trust in brilliant people who embody the sublime affordances of the profession.

To be sure, Arthur Andersen succumbed to the overwhelming, unrelievedly invidious withering criticism and collapsed.? If the profession had not mentally dumped it, but instead provided institutional advocacy, if individual accountants and auditors had raised confident voices in advocacy to draw attention to the extent of innocence of Arthur Andersen, the firm would not have collapsed.? It was abandoned with misanthropic asperity by the society, and unfortunately by friends and foes in the sea of undeserved adversity, and there it drowned. ?Even the accounting clerisy stood by and did nothing until after the collapse when they started conducting studies that showed that Arthur Andersen was not as bad as portrayed.? ?The profession should take lessons from this: responsible confident self-advocacy matters, it is not puffery.?

The future generation may look back and decide that not mounting massive advocacy, institutional and personal, for Arthur Andersen was a dereliction of moral duty.? This should not happen again to any of our Big 4 should any get into trouble today.? Next time a big audit firm stumbles, or is finagled into audit failure, we shall rally together with vigorous advocacy. In no circumstance should a closedown of the firm be an option – we shall not gloat at the adversity of the troubled firm; we shall not balkanize it as a spoil of war as happened to Arthur Andersen.? Afterall, these big firms are our centers of excellence, the breeding ground of our best and brightest where “pragmatic muddling through” happens every day to produce innovations in accounting and audit, despite its inherent errabilities.? We should be proud of them in good and bad times.? If any one of them suffers a setback in auditing we should rally around and help explain to society that failure does not nullify such great institutions.? All that is needed is to identify the root causes of the failures and alleviate them, which does not necessitate the demise of the firms.? According to Morrison (2004):[8]

“Since the?bankruptcy?of Enron, many concluded—before sufficient facts were available to form a reasoned judgment—that Andersen was responsible for the debacle. As the facts have been uncovered, it is clear that the destruction of Andersen, the censure of the public accounting profession and the host of new regulations regarding CPAs are all based on a theory unsupported by facts.”

Rohit Deshpande, a marketing professor at Harvard Business School quoted by Mark Mauer of Wall Street Journal (2022)[9]? said that:

“It’s unclear to a lot of people whether Arthur Andersen was the principal bad actor or whether it was collateral brand damage from Enron.”

A careful reading of the wordings of the Lessons Learned from Enron’s Collapse: Auditing the Accounting Industry strongly suggests that the lawmakers understand that Arthur Andersen does not share as much blame in the collapse of Enron.? The report made it clear that the corrupt Enron Board and management were primarily responsible for the collapse.? Arthur Andersen the auditors were blamed for failure to detect.? The rot that ate Enron was not caused by the auditors, as shown here:

We have found substantial evidence of illegal activity by Enron and its management. And this activity served to deceive the public about Enron’s financial condition … allowed these same executives to enrich themselves … We have also found that Enron’s auditor, Andersen, knew or should have known or should have discovered the fraudulent nature of the Fastow transactions … the Enron debacle is an old fashioned example of theft by insiders and a failure of those responsible for them to prevent that theft,” (US Congress, 2002).[10]

?In concatenation of reasoning, therefore, Arthur Andersen – the person, the firm and the people – were excellent and, therefore, again, worthy of being in a tale of the excellent to “lift the ambition of the living.”? Like the judicious women of Umuoni who salvaged fresh parts of rotting fish, we should not throw away everything Arthur Andersen with incommensurate irrational cynical bitterness.

Despite the contretemps of failures, accounting and auditors continue to strongly, reassuringly produce the trust that functioning societies need.? Arthur Andersen was part of this history.? According to Winston Churchill, “Success is stumbling from failure to failure with no loss of enthusiasm.”?

May we not be depressed by failure.? With courage and understanding we can humanize failures, embrace them, make them productive for the future.? That is the contemporary sentiment of learning societies where people live and work in psychologically safe environments that tolerate failures and encourage deliberate learning.? Failure is so important to progress that when systems are performing flawlessly wise managers design “deliberate failures” into the system to occasionally disrupt and force everyone to think differently for a moment.? There is some blessing in every failure.

Therefore, to society and the markets I say, be assured, be calm, because, despite its imperfections, Audit is Trustworthy!

And Arthur Andersen was Excellent.

READ MORE HERE: https://www.dhirubhai.net/pulse/audit-trustworthy-confident-mantric-riposte-failure-christian-szafe/

REFERENCES:

[1] Stone, D. A. (2020). Counting: How we use numbers to decide what matters. New York, NY: Liveright Publishing Corporation.

[2] Tierney, J., & Baumeister, R. F. (2019). The power of bad: How the negativity effect rules US and how we can rule it. Penguin Press.

[3] Eisenberg, Theodore and Macey, Jonathan R., "Was Arthur Andersen Different? An Empirical Examination of Major Accounting Firm Audits of Large Clients" (2004). Cornell Law Faculty Publications. Paper 365. https://scholarship.law.cornell.edu/facpub/365

[4] Wikimedia Foundation. (2024, May 22). Accounting scandals. Wikipedia. https://en.wikipedia.org/wiki/Accounting_scandals

[5] Sullivan, W. M. (2005). Markets vs. professions: Value added? Daedalus, 134(3), 19–26. https://doi.org/10.1162/0011526054622150?

[6] Informs. (n.d.). Arthur Andersen & Co.. INFORMS. https://www.informs.org/Explore/History-of-O.R.-Excellence/Non-Academic-Institutions/Arthur-Andersen-Co

[7] Maurer, M. (2022, September 1). Arthur Andersen left complicated legacy. Wall Street Journal.?

[8] Morrison, M. A. (2004). Rush to judgment: The Lynching of Arthur Andersen & Co.. Critical Perspectives on Accounting, 15(3), 335–375. https://doi.org/10.1016/j.cpa.2004.01.001?

[9] Maurer, M. (2022, September 1). Arthur Andersen left complicated legacy. Wall Street Journal.?

[10] COMMITTEE ON ENERGY AND COMMERCE HOUSE OF REPRESENTATIVES. (2002). Lessons Learned from Enron’s Collapse: Auditing the Accounting Industry. Hearing Before the Committee on Energy and Commerce, One Hundred Seventh Congress, Second Session. February 6, 2002. Serial No. 107–83. U.S. Government Printing Office.