Acton Commentary

The Accountability of Arthur Andersen - The Market Reacts


Many observers will be watching the court system closely to ascertain the final judgement on the actions of accounting giant Arthur Andersen. In America, the courts are usually viewed as the place where individual and corporate activities are scrutinized, but the reaction of market forces will be the real judge of Andersen's continued survival. While select Andersen executives and employees may face legal trouble in the courts, the accountability and ultimate fate of the entire organization rests in the hands of its owners.

Based on the preliminary investigations and evidence, indictments have been issued, and several partners and staff members will face prosecution for criminal acts. In an effort to restore credible leadership to the company, Arthur Andersen's CEO Joseph Bernardino resigned on March 26, 2002. Some observers offer that his resignation could pave the way for the Department of Justice to strike an agreement to drop all criminal charges against the firm and its employees. This agreement, proposed by former Federal Reserve Chairman Paul Volcker, would install an independent board to oversee the ailing Andersen, in exchange for dropping all of the federal indictments. Although the move would personally benefit a few who face indictments, this company's trouble is far from over.

In a free market economic system where corporate accountability and transparency are essential for the proper functioning of the market, Andersen faces its greatest foe not in the courts, but in market forces themselves. In fact, the "judge" of market forces has already imposed some stiff penalties, even while the evidence for legal proceedings is still being gathered. Among the evidence currently surfacing, in addition to its questionable dealings in the Enron fiasco, are new discoveries of Andersen's involvement in other schemes. Just last week, the Securities and Exchange Commission made public that Andersen paid a $7 million claim to settle a case in which they were accused of issuing false and misleading audit reports, misstating the earnings for Waste Management from 1993 to 1996. These misleading reports allowed Waste Management to inflate its earnings by more than $1.7 billion for the years of 1993–1996. Additionally, Arthur Andersen has come under further scrutiny for its role in the recently collapsed Global Crossings Ltd.

Federal Reserve Chairman Alan Greenspan stated in a recent Wall Street Journal article that the market would be the best regulator. Greenspan's caution was directed at lawmakers who tend to regulate by creating new restrictions through laws. Moral lapses and unethical decision making cannot be regulated, even with the most stringent regulatory regime in place. Market forces have responded and rendered judgment on Andersen's actions in a far more efficient fashion than any regulatory scheme might. More than 80 clients have terminated their business with Andersen and others are leaving daily. Among those who have left are some of Andersen's most loyal customers, some who have used Andersen's services for nearly thirty years or more. Hundreds of companies are calculating the collateral damage that their operations could incur should they continue to employ the services of Arthur Andersen.

One of the strongest market reactions to Andersen's questionable dealings included the sudden termination of merger talks between Andersen and another major accounting firm. The negative market reaction forced potential merger partners to walk away or risk guilt by association. Additionally, many Andersen employees have decided it is time to move on to other employment, doubting the viability of Andersen's continued survival. With more than 85,000 employees, including more than 28,000 in the United States alone, employees have experienced the market reaction and have decided that it may be in their best interest to move to another firm before Andersen collapses.

In order to survive the judgment of market forces, it is essential that organizations have serious accountability measures within their governing structures. Andersen seems to have fallen short of this mark. Moral accountability is the result of many forces at work within an organization, not just written policies. The most essential component of an organization's governing structure is the moral framework that executives, managers, and employees use to make the ethical decisions effecting an organization's business practices. Additionally, the board of directors must fulfill its required role, which is to foster accountability to shareholders, employees, and consumers. In order to assume this role, the board must be knowledgeable about the organization's operations and without conflicts of interest. The key to organizational accountability is for the board and the CEO to operate in unison, looking out for the interests of the owners of the organization.

According to many industry experts, it seems doubtful that any plan can prevent the total collapse of Arthur Andersen. Shareholders, clients, and other industry leaders have simply lost all confidence in the firm. While it is true that the courts will be deciding Andersen's liability and scrutinizing its actions, the lack of confidence that its questionable business practices have engendered in shareholders, clients, and industry leaders has rendered the harshest judgement of all.