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Independent Accounting Firms

New Page -- 9 September 2003

Arthur Andersen has the distinction of all the big name Independent Accounting Firms of having led the way in terms of sheer audacity when it comes to corrupt practices.  Even in 1999, when another of the big accounting firms, Ernst & Young, was paying out $335 million to settle allegations that its audit of one company failed to reveal $500 million in inflated earnings [Oops!], Arthur Andersen was rubber stamping Sunbeam’s CEO Al Dunlap’s lame-brained scheme which led this company into bankruptcy, and thereafter causing Arthur Andersen to pay $110 million to Sunbeam shareholders. [1]

According to Arianna Huffington [1], “Later that same year Arthur Andersen, long considered the dullest firm in a hyper-square profession, again had flown its freak flag high and wide at the huge garbage disposal conglomerate Waste Management.  Over several years it had overstated pretax profits by $1.4 billion.  Andersen was accused by the SEC of fraud for okaying false financial statements for four years beginning in 1992, and eventually agreed to pay part of a $220 million Waste Management settlement.

“But it was allowed to set a dangerous precedent: paying a fine with no admission of wrongdoing.  No Andersen executives even lost their jobs and, in fact, several of the very same executives were involved in the Enron fraud just three years later.  One of them, Richard, Kutsenda, putting his Waste Management experience to good use, was actually given the task of determining what the shredding policy should be for sensitive documents.  That policy would, of course, come in awfully handy when Enron hit the headlines.”  [emphasis added]

[Ever wonder why anyone would pay a fine of several hundred million dollars, if there was not some pretty good evidence to suggest that they were in fact, quite guilty?  On the other hand, by handing over the assets of shareholders is infinitely preferable to taking the chance that some executive might do a little jail time.  It's all in one's point of view -- be it from the executive suite or the ground floor of the local prison.]

The allegedly good news is that Arthur Andersen, after paying out settlements – in some cases more than once – settlements which involved seven different corporations from 1982 to 2001 and totaling some $470 million, officially closed its doors on August 31, 2002.  Accordingly, workers and shareholders got stuck, but the high level execs didn't do any jail time.  There's always that silver -- make that gold -- lining!

The bleak news is that Arthur Andersen is simply the tip of an iceberg of potentially frozen asset reallocations.  The term “restatement of earnings” – which has become a classic euphemism – is essentially asking for a do-over on the playground.  It sounds like a typo, when in reality it’s inevitably a downward revision of a company’s earnings “claimed in the supposedly meticulous annual reports prepared by the company’s auditors.  In the out-of-control world of corporate America, however, they’ve become one of the methods of choice for perpetrating out-and-out fraud.” [1]  For the most part, it’s an acknowledgement on the part of the companies and their auditors that they were indeed caught with their hands in the cookie jar, and now want to erase the embarrassment and pretend it never really happened.

What is absolutely phenomenal is that it works -- or at least allowed by the feds!

A relevant fact is that even if a so-called Independent Accounting Firms actually did an honest, no conflict-of-interest, legitimate audit, the chances of such an audit accurately indicating a company’s financial position is remote at best.  In what is referred to as “Generally Accepted Accounting Principles”, all manner of strange beasts arise. 

Assets, for example, are valued based on their purchase price, and not their actual value.  Assets have in fact been known to appreciate enormously – particularly real estate which has been held for thirty or forty years.  Consequently, if a “corporate raider” discovers such a gold mine, then by buying a company based upon its stock price -- which is in turn based upon the company’s value using original cost instead of actual current value -- the raider can afford to pay a premium for controlling stock (often 130 to 140% of the stock price prior to the takeover bid), and thereafter sell off the appreciated assets and obtain a return of three or four times their initial outlay.  This often results in hundreds of millions of dollars to the raider.

The difficulty lies in the fact Generally Accepted Accounting Principles are designed to determine a company’s tax liability and not its value to shareholders.  So when Disney had a wealth of assets in the film vault (Sleeping Beauty and the like), but which assets were valued by the accountants at cost, Disney incoming CEO Michael Eisner was able to resurrect the films, take advantage of decades of  inflation, and thereby reap millions in personal bonuses for making Disney appear enormously more profitable in the short term than it was in reality.  Another way of looking at it is to note that if someone sold their Disney stock prior to Eisner’s work, they would have sold their stock at a pittance of its actual value.  At the same time, the difference in company value is due entirely to the inability of the accountants to determine the actual value of a company.

Speaking of fantasies, Arianna Huffington puts it most succinctly by noting:  “In a classic Monty Python sketch, Michael Palin plays an accountant who visits a career counselor, played by John Cleese.  Palin tells Cleese that he’s sick of accounting and what he really wants to be is a lion tamer.  Cleese, however, talks him out of any career change by explaining that, according to his tests, Palin is ideally suited to accounting because he is ‘an appallingly dull fellow, unimaginative, timid, lacking in initiative, spineless, easily dominated, no sense of humor, and irrepressibly drab and awful.’  ‘In most professions,’ Cleese continues, ‘these would be considered drawbacks.  In accountancy, they are a positive boon.’

“During the 1990s, accountants from the Big Five [now Four <g>] accounting firms began to get in touch with their long-repressed lion-tamer side.  No longer content to just be the bag men, they became the enablers in the rape and pillage of America’s 401(k) plans and stock portfolios.  Along the way, the accountants squandered their reputation for incorruptible probity that had long been the bedrock of the capital markets.” [1]

Meanwhile, CEOs hoping to continue to pillage their companies have been switching accounting firms among the remaining Big Four.  These four include: KPMG (now under investigation for accounting irregularities at Xerox), Deloitte & Touche (fired by Adelphia Communications in June 2002), PricewaterhouseCoopers (paid $55 million to settle a class action lawsuit over its bookkeeping and book-cooking for MicroStrategy, whose shareholders lost $11 billion), and Ernst & Young (currently being investigated by the SEC for apparent accounting “irregularities” at Computer Associates).  ‘There’s no one left untainted among the Big Four.”

In effect, the Big Five went from “bag men” to entrepreneurs to co-conspirators to scapegoats for the dishonest CEOs and boards of directors of the corporations.

A significant portion of the problem stems from a 1987 change in policy by the Federal Trade Commission – i.e., Corporate Politics [during Ronald Reagan’s open-season-on-shareholders-and-taxpayers tenure].  This change allowed accounting firms to start selling “creative accounting” techniques and consulting services.  “Congress also did its part to undermine the profession’s ethics by passing laws limiting the firms’ liability if caught in fraud.”  “The notion that the job of auditors was actually to serve investors had become an anachronistic as the notion that stock analysts were objective.  The client was the company that paid the bills, and accountants competed just the way everyone else does in a market: they offered a more attractive service than their competitors.” [1]

In essence, Corporate America has deemed that all’s fair in pillaging the shareholder’s assets, and Independent Accounting Firms are merely one more tool with which to make a pretense at honesty while committing every imaginable form of dishonesty, fraud and misrepresentation. 

For corporate shareholders the name of the game is to sell, never buy and cease altogether to support the wholly dishonest stock market and the companies which currently plague our lives.



[1] Arianna Huffington, Pigs at the Trough, Crown Publishers, New York, 2003.

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