A Culture Turned Against Itself at Andersen

Arthur Andersen, the former accounting powerhouse that collapsed last year because of the Enron scandal, always tried hard to create a strong internal corporate culture. Carefully selected young recruits would attend the firm's boot camp in St. Charles, Ill. In a process that had overtones of Marine Corps training, they would be molded into Arthur Andersen people.

At the office during their first days at work, they were told to follow very specific routines, even where to hang their hats. In the early 1950's, a partner named Eugene Delves gave new employees $5 each to buy specific kinds of hats. He instructed the newbies to wear the hats from Labor Day to Memorial Day, part of a strict dress code to reinforce their common Andersen identity.

That is the kind of detail offered by Barbara Ley Toffler, a former ethics consultant at Andersen, and her co-author, Jennifer Reingold, the senior features editor at Worth magazine, in “Final Accounting: Ambition, Greed and the Fall of Arthur Andersen”. Ms. Toffler spent four years at Andersen. She didn't have a huge impact either on clients or the firm, but her description of the Andersen culture provides insight into what went wrong. “It was a culture in which everyone followed the rules and the leader,” she writes. “When the rules and leaders stood for decency and integrity, the lock-step culture was the key to competence and respectability. But when the game and the leaders changed direction, the culture of conformity led to disaster.”

Ms. Toffler, 61, now an adjunct professor of management at Columbia's graduate business school, joined Andersen in October 1995 in Chicago, the company's hometown. She was the partner in charge of Andersen's ethics consulting group, and her primary task was to sell as many services as possible to clients. But she also found herself clashing with Andersen's internal practices and culture. She has no “smoking gun” secrets about misdeeds at Andersen and acknowledges that for a while, at least, she was seduced by the money — she was making more than she had ever made before.

So Ms. Toffler isn't some sort of Joan of Arc heroine who slew dragons. But her book is useful because it explores how a company's culture, governance system and compensation system may create patterns of behavior that ultimately come back to haunt. “I basically went along with the culture,” Ms. Toffler says — a considerable acknowledgment from someone who had taught corporate ethics at Harvard and had been an ethics consultant for years. “If I got caught up in much of the culture, what can we expect from young people entering an organization with no idea whether what is happening is normal or not?”

She refers to Andersen employees as “Androids” who were part of a hierarchical culture in which there was “no deviation from the norm, however silly the norm may be.” Shortly after she arrived, she began to conclude that “a mighty culture was disintegrating into a soulless cult behind those doors, and I stumbled right into the middle of it.”

One sign that Andersen was headed for trouble, she writes, was the rise of the consultants (who later split off from Arthur Andersen to form Accenture). “If a consulting project had to end, then the point was to find another reason to stay once you where there, morphing from the discretionary to the necessary,” Ms. Toffler writes. “Like the famous Roach Motel, consultants were taught to check in, but never check out.” She recalls that partners intentionally overcharged clients. When the firm ordered her to bill at a rate of $500 an hour, she writes, she thought it excessive. But pressure was intense, she writes, to “bill our brains out.”

The author was no admirer of Joseph F. Berardino, the former chief executive. In November 1997 while he was head of the firm's audit practice in New York, Ms. Toffler writes, he met with her to review the budgetary target she had established. When she told him how much she had been expecting to make, she writes, he cut her off immediately and said he was changing the target. “He didn't want to see our projections or our targeted clients or anything,” she writes. “He just pulled a number out of the air and announced, `Your target will be $2.8 million.' “

When Ms. Toffler told him it couldn't be done, she writes, he stared at her. “No one has ever said that to me before,” she quotes him as saying.

As time passed, there was a sense among some of Andersen's 85,000 employees that things were spinning out of control, she writes, yet “the leadership that existed was distracted and angry, providing neither strategy, direction, nor cohesion.”

By 1998, Ms. Toffler says, she was among those at Andersen who understood that the firm ran a high risk of conducting flawed audits that could hurt Andersen's reputation. (The firm did suffer major damage from the disclosure of questionable audits of Waste Management and Sunbeam, which led to Securities and Exchange Commission enforcement actions in 2001.) Ms. Toffler and senior partners at Andersen formed a risk-management executive committee that put together a memorandum warning all employees that they must conduct tougher audits. This became known at Andersen as the cooking-the-books memo.

“Looking back, I think this was a critical juncture for the firm, a point at which great leadership could truly have made a difference,” she writes. Yet taking the steps necessary to clean up Andersen's auditing process might have cost the firm clients. “So the leaders did what, unfortunately, many leaders do when times are tough: They punted the ball,” she writes — meaning they did nothing.

Ms. Toffler resigned in late 1999, two years before the Enron meltdown and the disclosures of document shredding at Andersen, Enron's auditor, that led the Justice Department to successfully prosecute Andersen on a charge of obstruction of justice last June. The firm is now a shell of its former self.

“FINAL ACCOUNTING” has the slight whiff of sour grapes. But Ms. Toffler's acknowledging that she was seduced and went along with the game saves the book from being a shrill I-told-you-so. She also has interesting things to say about what should come next. She argues, for example, that the surviving Big Four auditing and accounting firms must eliminate their consulting activities if they are to establish a consistent practice of rigorous and fair audits. She further contends that the big accounting firms should refrain from the game of political contributions and the influence business in Washington, which she considers a root cause of the accounting abuse at Andersen.

If Ms. Toffler is right, a lot more work must be done before the accounting and auditing profession regains credibility.

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