Don’t Blame Joe Berardino For Arthur Andersen

Bela Barner

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Much has been written about the demise of Arthur Andersen LLP (Arthur Andersen). On the surface, its unraveling began when it blessed Enron Corporation financial statements that overstated the energy trader’s income and inflated its assets in the wake of some esoteric trading operations. Enron’s shocking announcement of a $600 million net loss and a $1.2 billion shareholder equity writedown for the third quarter of 2001 prompted an SEC investigation of the company’s accounting practices. Allegations of lax auditor oversight and document shredding emerged, followed by an indictment of the firm on charges of obstruction of justice. By the time Arthur Andersen was convicted in June 2002, a steady stream of client defections was well under way.

By September 2002, the denouement of this drama offered little suspense. After 89 years of attesting to the financial health of thousands of companies, Arthur Andersen would issue no more audit opinions. The firm had forfeited the most critical ingredient of any public accounting firm: the public trust. Without it, Arthur Andersen had no franchise.

How could a firm with such a sterling reputation fall so quickly? It is easy to point a finger at Joe Berardino, the former CEO of Arthur Andersen’s parent company, Andersen Worldwide. Berardino vowed to quickly rebuild the firm after its messy split with Andersen Consulting gutted its standing as the world’s largest professional services firm. As Business Week argued in a recent article, Berardino’s myopic emphasis on revenue growth and then his clumsy handling of the Enron debacle make him the poster child of failed corporate leadership.

Berardino as the poster child of a fallen icon? Certainly. The leader responsible for its implosion? Hardly.  In reality, Arthur Andersen’s decline cannot be traced to a single leader or a single event in the firm’s history. Its fall was a steady but accelerating erosion of its founding principles. Eventually, the firm’s underpinnings deteriorated to the point where the firm became highly unstable and unbalanced, its very size and ambition a threat to itself.

How does a firm that grew so rapidly to become the world’s largest professional services firm and an icon of professionalism be in decline at the same time? Except to a handful of Arthur Andersen audit practice veterans and perhaps some longtime attorneys at the SEC, Arthur Andersen’s decline was largely invisible. Despite the well-publicized struggles between audit partners and consulting partners in the 1990’s, the firm appeared to be thriving. In reality, it was deteriorating from its core.

What Ozymandias Did Not Know

In 1994, Stanford professors Jerry Porras and Jim Collins published Built to Last, which attempted to unveil the secrets of great, enduring companies. The principal findings from their research on hundreds of companies were that the world’s best-performing, long-lived companies lived by a set of rock solid principles collectively known as Vision. Vision, according to the book, is a set of company-specific beliefs that guide their holders through market evolution, economic cycles, technology change, leadership transition, and other forces of upheaval that often sink non-visionary firms.

One of the keys to living a Vision is having a clear understanding of what is vitally core to the organization while also mastering the mechanisms that stimulate continuous forward progress. Visionary companies do both. They preserve their core ideology by adhering to a handful of self-professed principles that require no external justification or even tangible evidence of their benefits. At the same time, they rely on embedded mechanisms to generate continual forward movement—mechanisms that enable experimentation, learning, and change.

Built To Last argues that these principles can steer companies through good times and bad. If a company is a sailing ship, its core ideology becomes its map and compass, assuring captain and crew that certain routes offer favorable winds, predictable currents, and safe seas, while others offer unknown perils that should never be tempted. For example, 3M has always adhered to its belief in innovation and solving problems, regardless of economic standing or business strategy. Its unwavering belief in these core values (along with several others), has given it a strong sense of stability even during turbulent times throughout its lengthy history. In short, in an ever-changing and sometimes turbulent world, a company’s core ideology endows it with a sense of proven and reliable beliefs that can guide it in the absence of clear direction.

For decades, Arthur Andersen lived by a powerful ideology centered around its core value of independence—a fundamental and unwavering belief in rendering opinions that upheld the standards of the profession irrespective of powerful forces that favored expediency for its clients. The firm’s allegiance to this principle enabled to it resist clients seeking lenient treatment of their accounting practices. It also compelled Arthur Andersen to become the industry’s leading critic of lax oversight, as well as its most dogmatic advocate of new standards designed to serve shareholders to the fullest. It was a powerful guiding principle that served the firm through generations of leaders, partners, technologies, competitors, and clients.

Yet somehow, Arthur Andersen strayed from and eventually abandoned this belief.