Reading the news this year about BP, Toyota, and Goldman Sachs, C.E. Andrews (ACCT ’74) couldn’t help but be reminded of his own experience managing a major corporate crisis nearly a decade ago.
In late 2001, the Enron debacle emerged. That event and others in its wake led to a scrutiny of the accounting and governance practices of U.S. public companies and legislation aimed at far-reaching reforms. It also resulted in the demise of accounting giant Arthur Andersen, where Andrews had worked for 29 years.
At the time, Andrews had just been appointed the global managing partner of Andersen’s assurance and business advisory practice. He had never worked on Enron matters when the Texas-based energy company was an Andersen client. However, after Andersen was indicted for obstruction of justice — for allegedly destroying documents related to its audit of Enron — Andrews was pulled to the front and center of his firm’s management of the crisis.
With the departures of Andersen’s CEO and general counsel, Andrews became the face of the firm before Congress and the press, a key executive in the winding down of the 89-year old firm after its 2002 conviction. He switched off the lights at Andersen’s Houston office and closed its doors. The conviction was unanimously reversed by the U.S. Supreme Court in 2005, but it was too late for the firm and its 85,000-plus employees around the world, including 28,000 in the United States.
Andrews is now president and chief operating officer of tax and consulting services firm RSM McGladrey, a subsidiary of H&R Block. In a recent campus lecture and interviews, he provided an insider’s view of that “painful and difficult” period of crisis management and discussed how the events have changed — and not changed — America’s business landscape. His key message: why ethics education matters today.
Constructive and significant changes
Enron’s failure and others in its wake led to the Sarbanes-Oxley Act, which broadly set new standards for transparency and accountability in financial reporting by public companies. Sarbanes-Oxley, Andrews says, is a “dense and complex” law with “challenging requirements, all aimed at making business more honest and more transparent.” Compliance has come at “an enormous cost and burden,” he says. “Frankly, the bulk of the benefits could have been achieved at much less cost. Perhaps more troubling is that the compliance efforts were not directed toward the areas of greatest risk.”
In any case, legislation can’t prevent fraud, Andrews notes. He cites Madoff’s multibillion-dollar Ponzi scheme, the “ninja” and “liar” loans of the mortgage crisis, and the improper backdating of stock options at many major companies as “clear evidence of the shortcomings of Sarbanes-Oxley and proof that you cannot legislate honesty.” In fact, he points out, “we have had some of our largest ethical lapses and frauds in the last few years.”
Still, a lot of good has come out of Sarbanes-Oxley, Andrews acknowledges. The law includes provisions related to auditing, auditor independence, and corporate governance, and it is in the latter realm, he feels, that the act has made a real difference.
“Corporate governance has improved a great deal, particularly the way boards of directors operate. Their role is now being fulfilled much better than it was pre-Enron, pre-Sarbanes-Oxley,” says Andrews, alluding to an era when boards tended to be less active bodies whose members lacked the know-how needed to understand the intricacies of the business and could not reliably offer effective oversight of management actions.
Moreover, in many public companies, management used to determine board membership. “Even though board members are supposed to be representatives of the shareholders and elected by the shareholders, board members were often largely handpicked by the CEO or management of the company. And boards operated in a role where they were equals or, sometimes even, subordinates to management.
“Post-Enron, that’s changed dramatically. The corporate governance model has gotten straightened out. The board is now in charge. Most companies have separated the CEO and chairman of the board roles and have put great effort into having the right kinds of people on the board.”
And, he added, board members are taking their responsibilities seriously. The board’s audit committee, in particular, has gained new authority and duties as well as safeguards against management control.
The beefed-up role and responsibilities of the board, Andrews says, is probably the most valuable result of Sarbanes-Oxley. “You’ve got to see a good corporate governance model to be able to trust what’s going on in a company.”
Another significant development has been the renewed emphasis on the duties and obligations of accounting and audit firms. “I believe it really did right the ship a bit on the importance of financial integrity, the responsibility that accounting and auditing firms and financial managers have.” These functions and obligations and their responsibilities to the investors “that are so important to public trust had gotten watered down over the years.” Now, he says, they have been re-elevated to the status where they belong.
Mistakes of a few
Discussing the challenges of crisis management at Andersen, Andrews says: “There was no way to fully comprehend, in the beginning, the magnitude of the situation. It’s only as things unfold and evolve that it grows into something much more complex — that was not obvious at the beginning of the process.”
He and his team first had to determine the facts — were the allegations accurate? “Our conclusions were that they were not accurate, and there was never any intent or action to impede the government’s investigation. Therefore, we concluded that, while this was a very significant matter, a system of fairness would make it a manageable and containable problem. It was clear that we had to function on multiple fronts — deal aggressively with the regulatory and legal matters, maintain our relationships with our people and clients (and calm their fears), and fight a massive battle on the image and public relations front, where we were constantly being attacked and put on the defensive.”
Enron and its executives and board, Andrews says, had successfully distanced or insulated themselves temporarily from the debacle. “They very quickly started hiding behind legal barriers,” making Andersen the easy and only target. “Enron’s senior management had committed massive fraud, which it successfully hid from its board and us, the auditors. Further, no one has ever determined that the accounting or financial disclosures were wrong. Yet, we were the ones aggressively attacked at the beginning — not those that committed the crime.”
This was ironic, he notes. “Consider what Andersen was as a business. We think of ourselves as being about trust and integrity, doing the right thing, not running from dealing with issues. We truly didn’t believe we had done anything wrong of any substance, so we were willing to participate in the initial phase of the investigations. We did not run, and we did not hide. Sadly, we were severely punished for being open and transparent.”
In one appearance on Capitol Hill, Andrews stressed that Andersen had voluntarily and promptly come forward to disclose the destruction of documents by its employees, although it was “well aware of the potentially devastating impact” of the disclosure on its reputation and that the documents destroyed were unrelated to the government investigation. The firm, he told members of Congress, was certainly not proud of the document destruction — “but we are proud of our decision to step forward and accept responsibility.” This approach, he notes, reflected Andersen’s “think straight, talk straight” culture of the last 90 years.
A gross injustice
The crisis management experience shook his faith in the “fairness of the system,” he says, and made him question the motives and methods of some government officials. Lawmakers, rule makers, and rule enforcers sometimes operate in a “ready, fire, aim” fashion, he says, reaching a conclusion and implementing an action before gathering supporting evidence.
“Power, whether in business or in government, used to excess and used in the wrong way, can be very damaging.” What happened to Andersen in the Enron situation, he says, was a misuse of power and “overreaction to the mistakes of a few” that ended up unnecessarily punishing the innocent majority.
During the unfolding events, Andersen’s clients had generally remained with the firm, Andrews says, “respecting our firm, our people, and our services and believing, as most people would, that the entire enterprise should not be condemned over the actions of a few.” The federal indictment changed everything. It made it impossible for public companies to continue to do business with Andersen.
“If you are an auditing firm, a federal indictment for obstruction of justice is a death sentence. The prosecutors knew this … they understood the stakes of filing their indictment. They went ahead anyway — an action that I believe was reckless, unwarranted, and unnecessary. So the firm shut down — thousands lost their jobs and financial assets. And in my view, that was a gross injustice. The eventual reversal of the indictment, while emotionally gratifying, did nothing for the many whose lives were permanently changed. You can’t put the toothpaste back in the tube.”
He was fortunate, Andrews says, in being able to immediately join a new employer — Sallie Mae, where he worked for five years, part of that time as president. Most Andersen employees and partners were very quickly placed with other firms, he says, with many gaining leadership positions.
There were indeed numerous senior executives whose reputations and careers were unfairly tainted by Enron — those who had not worked closely with Enron when it was a client. It was a somber reminder, he says, that “it takes a lifetime to build a good reputation and only an instant to destroy it.”
Powerful emblems of a unique culture
On a bittersweet note, the breakup of Andersen has spawned an extensive alumni network of former Andersen employees who organize annual reunions in various cities across the country and keep in touch on social networking sites. Andrews says he always makes it to the D.C.-area gatherings if he is in town.
The reunions are “powerful” emblems of Andersen’s unique culture, and the mood “almost entirely upbeat,” he says. “Virtually all who attend have great pride in Arthur Andersen, and the memory sharing is generally very positive and enjoyable. Plus, the majority are in successful situations, and that creates good conversation.” A common theme among the alumni, he points out, is how “their subsequent work experiences have truly reinforced how great a firm Andersen was.”
It’s a view that Andrews himself embraces. “I’ve been on the inside of companies all my life. As an auditor, you’re in companies all the time and around other accounting firms. The culture of Arthur Andersen — the depth, substance, and essence — is probably stronger than any company of any type I’ve ever seen.” The entity is no longer there, he says, but the bonds of its former employees remain very much in place.