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Arthur Andersen's Fall From

Grace Is a Sad Tale of Greed and

At "Andersen U.," the lush, 150-acre campus where Arthur Andersen LLP has trained
tens of thousands of new recruits, there's a shrine to ethical accounting.
A display in the Andersen Heritage Center is devoted to yellowing press clippings of a
long-ago campaign to clean up the accounting industry by Leonard Spacek, who led the
firm from 1947 to 1963. In one, he accused Bethlehem Steel of overstating its profits in
1964 by more than 60%. In another, he bashed the Securities and Exchange Commission
for failing to crack down on companies that cooked their books, saying that at best the
regulatory agency has been "a brake on the rate of retrogression in the quality of

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developments emerge.
Go to the Called to Account page for more coverage of the Andersen trial, as
well as other issues stemming from Enron's collapse.
Did David Duncan fulfill government expectations? Join an online panel of
experts to discuss his testimony in Andersen's trial.
Read key documents relating to the Andersen case, including the
firm'sdocument-retention policy and Nancy Temple's e-mail of Oct. 12. Learn more
about Andersen's document-management prowess.
See a day-by-day recap of the trial.
Related article: How Andersen's Embrace of Consulting Changed the
Culture of the Company (3/12/02)

Now, it's the quality of Andersen's accounting that has set off an ethical crisis. Since
1993, the firm has been embroiled in a series of major accounting scandals -- from
Sunbeam Corp. toWaste Management Inc. to Enron Corp. Facing an obstruction-ofjustice charge in a Houston federal court, Andersen itself is disintegrating and will likely
be gone in a matter of months regardless of the verdict -- a humiliating end to a company

that once stood as the world's largest professional-services firm and whose 85,000
employees last year generated $9.3 billion in revenue.
Andersen's descent from conscience of the accounting industry to accused felon didn't
happen overnight. Rather, it stemmed from a series of management miscues and
compromises over the decades. As the firm grew from a close-knit partnership to a globespanning behemoth, pressure to boost profits became intense. Andersen leaders
responded by pushing partners to become salesmen -- upsetting the delicate balancing act
any auditor must perform between pleasing a client and looking out for the public
This shift saw the rise of a new breed of accountant -- such as the senior executive who
punctuated his speeches with violin music and exhorted his troops to "empathize" with
the companies whose books they checked.
Andersen spokesman Patrick Dorton acknowledges that the firm has made some mistakes
in the past, but says it was undertaking reforms. He adds: "The issues and concerns raised
affect the entire profession and not only Andersen."
Arthur Andersen himself originally built his business by putting reputation over profit. In
1914, months after the 28-year-old Northwestern University accounting professor
founded his tiny company, the president of a local railroad demanded that he approve a
peculiar transaction that would have lowered the company's expenses and boosted
earnings. Mr. Andersen, who at the time was worried about meeting his next payroll, told
the president that there was "not enough money in the city of Chicago" to make him do it,
according to a book published by the firm in 1988. The client promptly fired the
accountant, but Mr. Andersen was vindicated months later when the company filed for
Mr. Andersen lived in a bygone era. Back then, competition among accounting firms was
muted. The closest auditors came to selling was gentle networking on the boards of local
charities. What the business lacked in excitement, it made up in reliability: Under federal
laws enacted in the 1930s, public companies had to submit their financial statements to
independent auditing every year. Partners at the firms earned enough to drive a Cadillac
and join the local country club, but no one got rich being an auditor. In the late 1960s, a
mid-level Andersen partner made about $30,000, or $160,000 in today's dollars.

Daniel Malachuk joined Arthur Andersen in 1970, fresh out of the Navy with a master's
degree in finance. Flying to Chicago for his orientation, he remembers being met by a
driver holding a cryptic "Arthur An" sign -- a nod to federal rules at the time that barred
advertising. He was driven to the campus of the newly opened Andersen U., officially
known as the Center for Professional Education, located on the Fox River about 40 miles
from the firm's Chicago headquarters. The former college campus had a one-hole golf
course, running trails and gourmet food prepared by the same company that cooked for
the Chicago Bears.
Tradition was everywhere. The heavy wooden doors that marked the entrance to the
campus's main building matched those that once stood outside Arthur Andersen's own
office and dozens of flags, which represented every country that had students training at
the center, hung in the lobby. New hires, known as "green beans," recited the founder's
motto, "Think straight, talk straight." And they learned Andersen's "four cornerstones" -provide good service to the client; produce quality audits; manage staff well; and produce
profits for the firm.
Over the ensuing 30 years, Mr. Malachuk saw the firm change to the point that making
profits eventually dwarfed all else. He and other partners joked that the four cornerstones
were really "three pebbles and a boulder."

Seeds for Demise

Although nobody knew it at the time, the seeds for Arthur Andersen's eventual demise
were sown in 1950, when the firm introduced the "Glickiac" to the world. Named after its
inventor, an Andersen engineer named Joseph Glickauf, the clunky device created a
sensation by demonstrating that computers weren't just for scientists: Companies could
use them to automate their bookkeeping. This ushered in an entirely new business. Rather
than just audit the books, Andersen would set up the computers clients needed to keep the
books. It wasn't long before Andersen boasted by far the largest technology practice of
any accounting firm, raking in huge profits.
The flood of money introduced a new element of tension into the partnership. Under rules
set by the auditors who ran the firm, all of the profits from all the practice areas had to go
into one big pot to be divided among partners. But since the average consultant brought
in more money than the average auditor, the consulting side complained the arrangement
was unfair.

The week after New Year's Day in 1989, at a world-wide meeting of the firm in Dallas,
the consultants finally made their break. They won an agreement to separate into two
units -- Arthur Andersen and Andersen Consulting -- under a Geneva-based parent
company known as Andersen Worldwide SC. But most importantly, the accounting side
agreed to make the profit-sharing more equitable. Under a complex formula, the less
profitable of the two firms would get a check for a small portion of the profits of the more
profitable one.
The implications for the auditors were grim: Growth in the traditional accounting
business was slowing because of competition, and audit fees were in a tailspin. Despite
grueling hours, accountants' salaries were lagging behind those of other professionals
such as lawyers and investment bankers. And they bridled at the thought of being
eclipsed by the swashbuckling consultants. Under the accounting side's top partner,
Richard Measelle, Arthur Andersen fought back. "It was a matter of pride," Mr. Measelle
To make sure auditors weren't just auditing, they began to be judged on how much new
business they brought in. A superb auditor "who could not get a lick of business" was
secure in the 1970s, says Mr. Measelle, who held the top post until 1997. But now, "their
job security was a lot less."
Mr. Measelle believed he could boost sales while maintaining high auditing standards.
But, he isn't sure both parts of his message got through. "I have to admit that there was
this feeling that the No. 1 thing was to make your numbers and to make money," Mr.
Measelle said, but "that wasn't what we were trying to do."
To cap costs, Andersen began requiring partners to retire at 56 years of age, enforcing a
policy that was long overlooked. This made way for less-expensive -- and lessexperienced -- partners. It created more revenue per partner -- in recent years, average
partners made around $600,000 -- but left fewer partners overseeing audits.
"Though most auditors at Arthur Andersen are competent and honest," a longtime audit
partner says, "a whole new breed was not steeped in new training and was far more
focused on selling."
The auditors and the consultants competed fiercely, turning the annual race for profits
into a devilish sport. In 1993, Arthur Andersen's cost-cutting efforts and some sales
success combined with a weak market for the consultants to make the race even closer

than usual. With just a few months left in the firm's fiscal year, the warring sides were
neck and neck. So each swept around the office for expenses they could cut, revenue they
could post. The auditors won -- and to commemorate drew up a poster that showed Mr.
Measelle driving a car that was leaving Andersen Consulting in its dust.
In this competitive environment, Steve Samek emerged as a force within Andersen. A
product of the gritty Chicago suburb of Cicero, Mr. Samek graduated from Southern
Illinois University with an accounting degree and made partner at 32. Like most
Andersen partners, he was clean-cut with a haircut looking as if it hadn't changed since he
was six years old. But unlike many, Mr. Samek had a flair for the dramatic and loved the
public stage. By the end of the decade, he would be running Andersen's entire U.S.
operation and giving as many as 100 speeches a year.
As an auditor, he sometimes approved aggressive accounting tactics. In the early 1990s,
Mr. Samek picked up a potentially lucrative client, a fast-growing restaurant chain called
Boston Chicken. In auditing its books, he allowed the chain to keep details of losses at its
struggling franchisees off its own financial statements as it groomed for a public offering.
The IPO was a resounding success, soaring 143% in its first day of trading, and, for a
time, Boston Chicken was a marquee client. Mr. Samek was rewarded for his work,
getting praised in an internal performance review for turning "a $50,000 audit fee into a
$3 million full-service engagement."
The system eventually collapsed and the company, by then called Boston Market Corp.,
filed for bankruptcy protection in 1998. Andersen had helped create a "facade of
corporate solvency," according to a pending lawsuit filed last year in Phoenix federal
district court by the company's bankruptcy trustee.
Mr. Samek, who left the account before the 1993 IPO, points out that the SEC approved
of the accounting before the company went public. Mr. Dorton, the Andersen spokesman,
says the lawsuit has no merit and that Boston Chicken's risky business plan was widely
discussed in part because the company's financial statements had the appropriate

Counting The Days

The history of Arthur Andersen

1913 Arthur Andersen (left), a 28-year-old accounting professor, co-founds Andersen, DeLany
& Co.
1914 Mr. Andersen tells a client "there isn't enough money in the city of Chicago" to make him
sign off on a dubious transaction.
1918 The firm, now called Arthur Andersen & Co., starts a "management- information
consulting" practice.
1947 Mr. Andersen dies. Leonard Spacek steps in as managing partner, preventing the firm from
1954 Andersen consultants help General Electric automate its payroll using the Glickiac
computer (right), the first commercial use of the computer in the U.S.
1959 For the first time, the firm admits partners from outside the U.S.
1979 Andersen becomes the world's largest professional-services firm.
1989 The accounting and consulting practices break into separate companies under a Swiss
1998 Andersen agrees to pay $75 million to settle shareholder suits arising from an accounting
scandal at Waste Management. (See article.)
2000 An arbitrator rules that Andersen Consulting can break free entirely by paying just $1
billion and changing its name. The new moniker: Accenture. (See article.)
May 2001 Andersen pays $110 million to settle shareholders' claims related to accounting
scandal at Sunbeam. (See article.)
February 2002 Andersen agrees to pay $10.3 million to settle shareholders' lawsuits related to
Boston Market bankruptcy. (See article.)
March Andersen agrees to pay $217 million to settle a lawsuit stemming from the collapse of
the Baptist Foundation of Arizona, later withdraws offer, but then, in a turnabout a week into

trial, agrees to pay a $217 million settlement again. (See article.)

May 6 Andersen trial for obstruction of justice begins (left). (See article.) (Complete
Source: WSJ research

Mr. Samek, now 49, rose quickly. In 1989, five years after he made partner, he was
named to run a large portion of the firm's Chicago auditing practice overseeing about 350
people. In 1996, he became the firm's world-wide head of auditing, with indirect
responsibility for 40,000 people. In the spring of 1998, he was put in charge of all of
Andersen's U.S. operations, which account for about half of the firm's revenue.
Mr. Samek gave rousing speeches designed to inspire the auditors to sell everything from
tax services to consulting work to their clients. In one speech, Mr. Samek was
accompanied by a violinist who played as he told auditors to think of themselves as
maestros. In another he stood in awe at the pace of change in technology. Using a pen as
a prop, Mr. Samek said that if jets had evolved as rapidly as computers, "a 747 would be
size of this pen, could fly around world in two seconds and use three cents of fuel."
Some senior partners regarded the sermons as gibberish but others saw him as a kindred
"He was auditor extraordinaire," says Tom Nelson, a former partner who says he, too,
aspired beyond the "boring" confines of accounting.
Mr. Samek says the partners who criticized him were those who refused to change their
ways. Accountants "tend to be a bit more dry," he says. "I tend to be a little different, a
little more visual, right brain versus left brain, a little bit more creative."
Even as Mr. Samek tried to inspire the troops, problems with Andersen's audits began to
mount. Andersen paid investors $110 million for its botched audits of Sunbeam, the home
appliance maker that was caught artificially boosting revenues by offering retailers
incentives to accept more product than they could sell. And in 1997, client Waste
Management Inc. had the largest earnings restatement to date, wiping out $1.7 billion in
profits that it pulled in through the 1990s.

The lead auditor on Waste Management was Robert Allgyer, who was known inside the
firm as "the Rainmaker" for his success in cross-selling extra services to auditing clients.
He was clearly successful at selling to Waste Management, which paid $17.8 million in
fees unrelated to the audit between 1991 and 1997, against audit fees of $7.5 million. But
he was also signing off on drastically inaccurate books. Among other things, the fastgrowing trash hauler wasn't properly writing off the value of assets such as garbage
trucks as they aged, a ruse that pumped up reported profits.
The SEC's acting commissioner, Laura Unger, concluded that the agency had the
"smoking gun" it was looking for to prove that the lure of consulting fees compromised
auditor independence. The SEC filed suit in March 2002, accusing six former Waste
Management executives of fraud. It alleges that Mr. Allgyer's judgment was skewed by
consulting fees, in particular a $3.7 million "strategic overview" of Waste Management
operations. The project lasted for 11 months, but the client didn't adopt the
recommendations. One former Waste Management board member later described the
project as a "boondoggle."
Mr. Allgyer, who is retired, declines to comment. The waste hauler says its accounting
problems are a thing of the past. The former executives said the charges were false.
Andersen said at the time "there was no independence violation and the SEC had no case
to make one."
Soon enough, Andersen executives had another crisis to take their minds off Waste
Management. Efforts to expand the accounting side of the business were petering out. By
1997, auditing and tax work brought in $1.8 billion, up just 12.5% from 1993, according
to Bowman's Accounting Report, an industry newsletter.
Andersen Consulting, meanwhile, had rebounded strongly, more than doubling revenue
to $3.1 billion during the period as companies around the world went on a spending spree
to upgrade their computer systems. The consultants were now bringing in 58% of the
overall firm's revenues, and subsidizing the accountants to the tune of about $150 million
a year -- and complaining bitterly about it.
After a showdown in San Francisco in December 1997, Andersen Consulting partners
voted unanimously to split off entirely. They filed an arbitration claim with the

International Chamber of Commerce. The old Andersen had been building its own
consulting practice, but it couldn't make up for the revenue it was about to lose.
Mr. Samek turned up the heat. After being named the top partner in 1998, he shocked
many auditors with something he called his "2X" strategy. Partners should bring in two
times their revenues in work outside their area of practice. That meant that if an auditor
brought the firm $2 million a year policing a company's books, he should bring in an
additional $4 million in nonaudit services, such as tax advice and technology consulting.
Auditors were judged against "2X" on newly revamped performance reviews.
The strategy was a centerpiece of Mr. Samek's hard-covered internal manual called "U.S.
Strategy," an 80-plus-page tome that included advice on how to "empathize" with clients.
Former partners say Mr. Samek left long voicemail messages advising them to read the
book repeatedly to make sure the concepts were drilled into their heads.
One longtime audit partner says the stress was intense. "I've never had a problem selling
audit work. Tax work sold itself. But getting into new things and consulting and selling
was very challenging," he says.
Andersen by now was implementing a strategy to sell more audit work by handling far
more than the traditional, once-a-year external audit of the public books. Now, it was
pitching clients to outsource their internal bookkeeping operations.
Critics such as Arthur Levitt, at the time the chairman of the SEC, worried that the
practice would hurt the quality of the audit, because it removed a separate function that
served as a second opinion. In effect, accounting firms would be checking their own
work. Still, Arthur Andersen persevered -- and ultimately took the concept a step further,
pioneering the "integrated audit," which would mingle not only internal and external
audits but a whole package of services ranging from tax strategy to advice on corporatefinance issues.
Andersen's laboratory was Enron, an audit client since 1986. Andersen in the mid-1990s
hired Enron's entire team of 40 internal auditors, added its own people and opened an
office in Enron's Houston headquarters that was as big as some regional Arthur Andersen
offices. With more than 150 people on-site, Andersen staff attended Enron meetings and
helped shape new businesses, according to current and former Andersen and Enron

The experiment came at a time when Andersen was becoming increasingly decentralized,
with more and more power residing with local "office managing partners," each with
their own revenue targets and balance sheets. At the same time, several members of the
"Professional Standards Group" -- a panel of internal experts who handled tricky
accounting questions -- had been moved from the Chicago headquarters to local offices to
give clients quicker answers.
The thrust of both moves was to make it harder for auditors to fight back against clients
who wanted to test the limits of accepted accounting standards. Enron, for example,
represented just a small fraction of Andersen's revenues. But to David Duncan, who
served as the lead auditor to the energy company, it was his livelihood.
Enron became so powerful that one Houston-based member of the Professional Standards
Group complained that his advice against certain accounting practices was being ignored.
The audit partner, Carl Bass, told Mr. Duncan that Enron should take a $30 million to $50
million accounting charge for a specific transaction. "The team apparently does not want
to go back to the client on this," Mr. Bass said in a December 1999 e-mail to a colleague
in Chicago that was obtained by congressional investigators. Four months later, Mr. Bass
was removed from his Enron oversight role in response to complaints by Enron's chief
accounting officer at the time, Richard A. Causey, about Mr. Bass's resistance to the
company's financial-reporting practices. Mr. Causey's attorney didn't return calls seeking
The Enron audit was part of a broader move by Andersen to reshape itself into a "New
Economy" powerhouse offering a wide array of auditing services that their fast-growing
clients needed.
The new philosophy was described in a book by Mr. Samek and two other partners:
"Cracking the Value Code -- How Successful Businesses are Creating Wealth in the New
Economy." Published by HarperCollins in 2000, the book argues that old-fashioned
accounting failed to measure the value of intangible assets, such as employees and
business relationships. The sky-high prices of technology stocks such as America
Online,Williams Cos., and Charles Schwab Corp., proved accountants needed to
creatively approach hard-to-value assets. Mr. Samek discussed the philosophy at a
gathering of top business and political leaders in Davos, Switzerland, while passing out a
white paper that touted Enron as a model company of the new economy.

Andersen cited the book's premise for opposing a proposal by the SEC in 2000 to limit
the amount of consulting work that accounting firms could perform for their audit clients.
In testimony before the Senate Banking Committee in July 2000, Mr. Samek called the
SEC proposal "fatally flawed." He said it arrived "just as we need to take an even more
active role in making needed changes in the measurement and reporting system in
support of better information for decision-making by corporations, investors and the
government." The Big Five accounting firms defeated the SEC proposal. That same year
Andersen unveiled a zippy new logo, a big orange ball, with only the word Andersen
beneath it. The big Andersen wooden doors were taken down all over the world.
A month after Mr. Samek's testimony, Arthur Andersen was crushed when an arbitrator
ruled that the firm wouldn't receive a $14 billion payment it had been hoping for from the
departing partners at Andersen Consulting, now known as Accenture Ltd. Arthur
Andersen's CEO, Jim Wadia, resigned immediately.
Several top partners, including Mr. Samek, ran for the top job in a race that became a
referendum on the firm's direction. The winner was Joseph Berardino, an understated
accountant who had run the firm's U.S. auditing operation. Mr. Samek took a marketing
position in Chicago. Mr. Berardino resigned after Andersen was indicted, and both men,
like many senior partners at Andersen, are carrying out their first job searches since