END OF ANDERSEN

END OF ANDERSEN - Implicated in the Enron frauds by its destruction of evidence, the auditing firm lost all credibility and most of its blue-chip clients. Robert Lea recounts how a global reputation was shredded.

by ROBERT LEA
Last Updated: 31 Aug 2010

Implicated in the Enron frauds by its destruction of evidence, the auditing firm lost all credibility and most of its blue-chip clients. Robert Lea recounts how a global reputation was shredded.

At lunch on one of those bright but chill early February London days, a stone's throw from the smart HQ of Andersen on the Strand, a senior executive at one of Britain's rival Big Five accountantancy firms could talk of little else. 'What the hell were they doing?' he yelled. 'Yes, Andersen needed to front up. But going on Newsnight? Bloody hell. What control do you have over your message? You just don't do Newsnight.' He was talking of the excruciating 10 and a half minutes spent, a week earlier, by John Ormerod, managing partner of Andersen in the UK, getting kebabed by Jeremy Vine on BBC TV's nightly inquisition.

The greatest scandal ever in American corporate life - Enron - was engulfing its auditors, Andersen, and the firm had been accused of ducking the press. Yet according to his peers, the decision by Ormerod, at 53 a highly experienced and intelligent chartered accountant but something of a media novice in the Newsnight bear pit, was more foolhardy than brave.

Ormerod left the BBC studios that night savaged and having failed miserably to rescue his company's reputation. Within 10 weeks, he had given up making excuses and was instead signing away the independence of Andersen's UK arm to arch-rival Deloitte & Touche. By the end of this summer, the once-proud name of Andersen had been expunged from daily commercial life.

It was all over, almost in a trice. And this was not just any old firm of dusty bookkeepers going to the wall. Andersen may have been the smallest of the Big Five but it was also the proudest. In the late 90s Andersen worldwide was receiving a million job applications a year. By '97 it had become the biggest services provider in the world. A 2001 survey of British final-year students placed Andersen fifth among the most desirable employers, after the Foreign Office, BA, Accenture and the BBC. In the 21st century, when you fall from the heights you come down hard and fast.

When Ormerod sold the firm in April he had been in the managing partner's job only 13 months. An Oxford physics graduate from a Lancashire grammar school with 31 years at Andersen, he was the very embodiment of the technocratic and meritocratic elite that was the firm's partnership.

Andersen people always enjoyed referring to themselves as the professional services marine corps - the best of the best. The truth is that to have been an Andersen person was to have been a particular kind of accountant - someone, it was quipped, who was prepared to make the Faustian pact of working all hours in pursuit of the greater glory of the client.

Not without reason were Andersen staff known as the Androids, with a reputation for 'aggressive' accounting and unflagging toil. But the big crisp pay cheque, unmatched anywhere else in the British profession, was the flip side of the bargain.

The firm, however, was in a state of flux. The acrimonious worldwide split in 2000 of the Arthur Andersen accounting firm from the Andersen Consulting business - later rebranded as Accenture - at once refocused the accountancy practice and hobbled it.

Shorn of the glamour, clout and earning power of Andersen Consulting, the accountancy business was suddenly exposed as the weakest of the Big Five.

After eight months, Ormerod stamped his authority on the firm with a wholesale restructuring. Most shocking for Andersen staff on that first Friday in November last year was his decision to cut 5% of the 7,000 headcount.

'We are no more immune to the economic circumstances than anyone else is,' Ormerod told them. 'In common with all firms, we were starting to experience a slowdown in growth even before the 11 September atrocities.'

This was news. In the company that had led the way in flexible working and sabbaticals for surplus staff recruited in the boom of the late '90s, no high-flying graduate ever joined expecting to be shown the door. Now not only were there to be redundancies, but they were to be swift and compulsory.

As Andersen staff swallowed the pill, the first shadows were creeping across the Atlantic from a company called Enron. One former Android computer audit specialist recalls: 'Sure, I'd heard of Enron but I wasn't really aware of what they did or that they were a major client of ours.'

That would change rapidly. In the following weeks, Andersen staff read reports on Enron with increasing dismay and incredulity: the creation of the off-balance sheet financing vehicles and the collusion of colleagues in the cover-up of the true financial state of the global energy trader.

As Thanksgiving passed, Enron filed for bankruptcy and there was talk of record-breaking, billion-dollar legal actions against the auditor. Andersen's worldwide boss Joseph Berardino gave horrifyingly frank Congressional testimony: 'Andersen will have to change ... the accounting profession will have to reform itself. Our system of regulation and discipline will have to improve.'

His further admission that accounting decisions had 'turned out wrong' was a statement that no accountant had ever made, inside or outside a law court.

Yet regular Andersen staffers over Christmas and the New Year had still to clock the full implications. The 'oh shit, this is serious' moment - in the words of a senior insider - did not come till January 10, with the first tangible evidence of the extent of the cover-up: Andersen staff had shredded Enron documentation.

From then on, says the insider, there were tears in the corridors, tantrums in offices and an air of collective paranoia as it became increasingly obvious to staff that the firm they had joined had changed forever.

Clients wanted explanations. Andersen offices around the world - the firm was made up of different national partnerships - went into huddles.

Should they merge with another Big Five player to save themselves from financial disaster? Should they split off audit and non-audit functions?

More worryingly, some of Andersen's top clients refused to back them publicly. One, London-listed fund management group Amvescap, said it was conducting 'due diligence' on its auditor.

Ormerod fought back. Towards the end of January he sent out audit engagement partners to schmooze clients, each carrying a two-page missive pleading with chairmen and finance directors to hold their nerve. Andersen UK should not be singled out for blame over Enron, wrote Ormerod, adding: 'Our current practices and policies are robust and should not cause you or your shareholders any concern.'

While the American press was busy writing off Andersen, the great British press harangued it for its closeness to Tony Blair and for cosying up to New Labour - a crime to some in Fleet Street far worse than any illegal financial engineering across the water.

Blacklisted from Government work for 15 years following the DeLorean scandal, Andersen was put back on the roster when New Labour swept to power. Indeed, Andersen people worked closely with Gordon Brown's Shadow Treasury team on New Labour's economic agenda. It quickly won official contracts, including the audit of the Millennium Dome and work on the planned sell-offs of the NATS air traffic control business, the London Underground and British Nuclear Fuels.

And investigators' files were open on Andersen's role at two major audit clients, Wickes and SSL, both hit by fraud accusations. Another client, Allied Carpets, had been clattered by a five-year accounting scam.

It was against this background that Ormerod's public relations advisers decided to right perceived media wrongs with his ill-fated appearance on Newsnight. As Vine jibed, chided, and smirked, repeatedly asking Ormerod why he did not know what had gone on, Ormerod reverted to pedantry, protesting that Andersen were not Enron's accountants but its auditors. The firm didn't do 'consultancy work', he said, it did 'non-audit work'.

When Ormerod finally admitted he could not speak for the actions of his partners in the US, Vine triumphantly quoted back the firm's brochure: 'One team, one voice, one global operation.'

The ex-Andersen computer auditor recalls his decision to see a headhunter at this time. 'They told me they had seen a fair few Andersen people.

They did not doubt the high calibre of the people they were seeing, but were saying clients were raising concerns about whether they would really want someone from Andersen joining their internal audit department. It was apparent that some organisations were reticent about looking at Andersen people.'

Higher-ranking employees were already deciding to quit. John Watt, head of project finance at Andersen in Scotland, took his six-man team to Grant Thornton. 'We had got to the stage where it had become pretty obvious that, in the arena of bidding for public-sector work, using the Andersen name was not going to work in our favour,' he says.

'It had become obvious by mid-February that it was time to look around. Until then, I still believed, misguidedly, that Andersen was going to come through it. We looked around and decided Grant Thornton was a better option.'

Unlike many of his colleagues in the audit and tax departments who were helplessly watching work go out of the door, Watt had not been a career Andersen man. 'There were some pretty long faces in the firm as work began to tail off. I had come in from the outside five years previously, so when it was apparent that it was time to move on, we moved on. Those who had been at Andersen all their careers looked at it differently.

'But the firm could never survive what happened in the US,' he adds. 'It was a global brand and it was the international capability that defined the firm.'

By the end of February, John Connolly, UK chief executive of Deloitte & Touche and a burly bruiser of an accountant, began the first of a series of transatlantic shuttles aimed at securing for his firm a rescue merger with Andersen. He believed Berardino would do a deal with him, but by early March the merger talks were gatecrashed by Ernst & Young and KPMG.

It became apparent that a global deal with Andersen could not happen.

In the second week of March, a New York meeting of senior Andersen partners from around the world broke up with speculation that different partnerships would go their own way. KPMG was already lapping up the European firm with its well-organised and well-managed practices in Spain, Italy and France as well as in the UK, which accounted for 30% of Andersen's global revenues of dollars 9.3 billion.

In London, the bombs were falling. Mayflower, a manufacturer whose audit committee was chaired by former prime minister John Major, became the first UK-listed company to sack Andersen. Within a day, it was reported that the trail of shredded Enron-related documents stretched to the firm's London head office.

And then came what many now regard as the death knell, not only for Andersen in the US but for the brand worldwide. The US federal government brought charges of obstruction of justice against it. The indictment read: 'Andersen through its partners and others did intentionally and corruptly persuade Andersen employees to withhold records, documents and other objects from regulatory and criminal proceedings and investigations.'

A senior Andersen partner later confided: 'That was the minute we knew the game was up.'

Within hours, KPMG's senior partner Mike Rake got a call from Alberto Terol, Andersen managing partner for western Europe: 'The game's over. We want to talk.' Rake had already clocked up frequent flier points on Concorde seeking a deal, and on Saturday, 16 March he and his senior team spent all day thrashing out an agreement with Andersen's European leadership at Heathrow.

Meetings with KPMG continued in Frankfurt on the Sunday but D&T's Connolly had already launched his own secret negotiations. Yet on the Tuesday, he watched as Ormerod joined Rake to announce Andersen UK's merger with KPMG. 'Today is an important moment for Andersen,' declared Ormerod. 'Today we start putting the past behind us.'

A tired-looking Rake was more circumspect, saying he hoped the deal was do-able.

Rake's own partners were soon briefing against what seemed to be a premature announcement. They put the chances of a successful merger at no better than 50:50 and warned that the KPMG partnership was not being properly insulated against potential Andersen liabilities.

Connolly began to drive in the wedge. 'We had approached the UK firm about having talks in the UK and elsewhere,' he later explained. 'Then KPMG announced they had done a global deal. There were photo calls and a press conference. But the deal was not finalised and it soon became apparent that other parts of Andersen - Spain and Italy especially - didn't want to do a deal with KPMG.

'We aggressively sought to recruit Andersen people and we are certain many would have joined us even if their firm had done a deal with KPMG. That became known and it was obvious to Andersen partners in the UK that it was better to do a deal with us.'

As those partners fretted over their future, both Rake and Connolly knew they had to act quickly, as multi-million pound clients were beginning to jump. When Amvescap carried out its threat and became the first FTSE-100 company to axe Andersen as auditors, it suddenly seemed possible that pounds 50 million worth of business might be up for grabs: prime blue-chip Andersen-audited firms like WPP, Cadbury Schweppes, BSkyB, Canary Wharf, British Land, Shire Pharmaceuticals, Balfour Beatty and Stagecoach.

By the earlier-than-usual Easter weekend, Berardino had quit as worldwide chief and Andersen partnerships around the globe were splitting off and jumping into bed with different firms.

On 2 April, KPMG's plan to take as much of non-US Andersen as possible fell apart as Spain, the jewel in Andersen's European crown and the springboard to Latin America, defected to D&T.

A humbled Rake gave up the ghost: 'Clearly we are not going to achieve a wide-ranging combination.'

By the end of that week, Connolly had secured from Ormerod agreement to fix meetings for the following Tuesday, 9 April. After a weekend of detailed preparation and marathon sessions with the lawyers, the day was planned with military precision.

At 7.30am, Connolly and Ormerod signed heads of agreement. Ormerod then motored to the Radisson Hotel at Heathrow to present the deal to his 400 or so partners, who had convened for a 10am meeting.

Connolly spent the day fine-tuning what would prove to be the performance of his career - selling a deal with Andersen to 360 D&T partners, many of them sceptical. He had booked the Park Lane Hilton for the meeting, scheduled for 4pm. Scouring the morning and evening papers beforehand, he found to his satisfaction that no-one had caught wind of the day's proceedings.

His partners were convening in the Hilton's ballroom when Connolly took a call at 3.55pm. It was Ormerod. His partners had backed the deal unanimously.

Connolly then opened his three-hour presentation, a step-by-step guide to how Andersen's people would be incorporated into D&T.

It would be a transaction, not a merger, Connolly said. It would effectively be a mass hiring, with D&T taking on Andersen partners and staff. D&T would purchase the assets of the firm, the office fit-outs and the computers at a cost of up to pounds 80 million, but not buy the goodwill or the receivables or take on the firm's liabilities or commitment to creditors. The cash would go to the extant Andersen partnership and be distributed among its partners after the settlement of creditors and commitments.

The deal would not include any property leaseholds, but D&T would retain several floors at the flagship Andersen headquarters not far from D&T's own base near Ludgate Circus. 'Their liabilities do not become ours and our liabilities do not become theirs,' said Connolly as he unveiled plans for ringfencing his partners, the key issue for the pockets of all present.

Similarly, Andersen staff would continue with their existing pension scheme arrangements.

Connolly talked of his plans for ensuring that Andersen people would fit in at Deloittes, to avoid the dogfighting that bedevilled the newly merged Price Waterhouse and Coopers & Lybrand four years earlier. He talked also of the benefits of the influx of new talent.

At 9pm the transaction went to the vote. The show of hands was thought to be unanimous, although partners now admit that a few of their number kept their hands down. When it came to signing the transaction document, however, every last D&T partner was a signatory. The champagne flowed.

'We prepared very well for the presentation,' Connolly recalls. 'We were very open and dealt with the risks, the challenges, the concerns. That gave everybody confidence.'

Within 24 hours, Connolly was made uncomfortably aware of the major challenges ahead. Twenty-year Andersen client Stagecoach, a company so close to its auditors that five directors, including founder Brian Souter, had worked for the firm, delivered a kick in the teeth. PricewaterhouseCoopers was being brought in, as Stagecoach no longer believed Andersen was up to the job.

A week later Ormerod delivered his part of the Connolly bargain - the unceremonious sacking of 1,500 partners and staff. Thus it was a much reduced UK Andersen, 227 partners and 3,500 staff - about half the number that had been in the firm six months previously - that joined D&T. Five of Andersen's six top executives were given senior jobs at D&T, Ormerod landing a senior partner's role in the London practice.

Clearance from the European authorities came in July. The formal transaction took place in August and one of the biggest names in accountancy began to slip beneath the waves.

Can the Andersen people survive the inevitable clash of cultures with D&T? One senior partner explained the differences: 'Andersen was a high-confidence organisation, there was style and energy and a highly motivated staff - fantastic people from a fantastic university recruitment policy. Andersen people were made to believe they were very bright and that they were very special.'

Working conditions were also quite different. D&T staff corralled into meet-and-greet sessions with their new colleagues at 180 The Strand were immediately impressed by the quality of both offices and refreshments.

At a later session filled with younger employees, the differences were so marked that identity badges were not required. The expensively dressed-down Andersen people pulled off the Manhattan preppy look effortlessly.

By contrast, relaxation for the suited-and-booted D&T contingent stretched only as far as removing their ties for the evening.

At the root of this divide was Andersen's extensive and deep-seated bonus culture, beginning with the high earnings (cpounds 25,000 a year) of its graduate intake. Grafting the expectations of Andersen people onto D&T's unashamedly bonus-free structure is, say insiders, the most critical issue in melding the two operations.

It's not just money, though. 'There's no doubt their culture is very different from the way ours was,' says one ex-Andersen tax person with 12 years under her belt. 'They have a pretty bad them-and-us attitude towards their support staff. They're like Andersen in the '80s. Connolly really is Mr Top Dog in a way that wouldn't have fitted at Andersen at all. But it's early days and it's not too bad. We could have wound up with Ernst & Young, who are a lot more ruthless. We can still hardly believe it went down so quickly.'

The ship has sunk for good but the ripples continue to spread. For a generation or more to come, the name Andersen will be synonymous with collusion, complicity and fraud. That is grossly unfair on the thousands of talented, honest and hardworking people who worked for the firm. But it is even worse for tens of thousands more chartered accountants in the wider profession.

< RISE AND FALL OF ARTHUR ANDERSEN - 1913 Arthur Andersen and Clarence DeLany form Andersen, DeLany & Co - 1918 DeLany leaves. Company changes name to Arthur Andersen - 1924 Launches 'one-firm' philosophy (focused on building a solid corporate culture among all Andersen employees) - 1940 Launches centralised training programme - 1947 Arthur Andersen dies. Leonard Spacek takes over the running of the firm - 1954 Launches first IT practice - 1955 Opens first office outside the US, in Mexico - 1959 Admits first overseas partners - 1979 Surpasses 1,000 partners; becomes world's biggest business services firm - 1989 Forms separate consulting practice. Andersen Worldwide is the umbrella company for both firms - 1997 Andersen Consulting bids for independence - 2000 Split between Arthur Andersen and Andersen Consulting agreed - 2002 KPMG merger fails; hit by civil and criminal lawsuits. Found guilty of obstructing justice

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