Don’t Blame Joe Berardino For Arthur Andersen

Bela Barner

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A Signpost on the Road Behind

Clearly, Arthur Andersen’s implosion is much more than a tale of a firm paying a heavy price for dereliction of duty. Could anything have been done to prevent its implosion? Perhaps. There was 1979 and the caustic reaction among the partners to the notion of spinning off the consulting business. This question could have been an opportunity for the firm to re-examine its ideological roots and perhaps recognize the strain that it was under. It might have found a solution to maintain its core beliefs while serving clients in new and responsible ways.

It could have walked away from Enron and other high-risk clients. The firm had actually done this in the 1980’s after some painful outcomes from shareholder lawsuits over audits of failed clients. Arthur Andersen introduced a process to rank clients according to their risk of bankruptcy, and began severing ties with clients likely to fail. Among these were Lincoln Savings & Loan, which at the time was a substantial source of revenue for its Phoenix office. The high profile thrift collapsed three years later.

Ironically, the Phoenix audit practice was cited sixteen years later in the collapse of another organization that became entangled in speculative real estate investments: the Baptist Foundation of Arizona. This instance suggests that by the late 1990’s, it was too late for Arthur Andersen to rediscover the internal fortitude to shed risky clients. Much of the discretionary power over client relationships that had once been at the structural and intellectual center of the firm had been devolved to partners in local offices. The rainmakers now made policy. The firm’s center had been lost.

Another potential opportunity passed in 2000. An arbitrator finally ruled that Andersen Consulting could buy its way out of the partnership for $1 billion and its agreement to leave the Andersen name behind. The separation ruling gave Arthur Andersen a ready-made excuse for reinventing itself. Its reputation, though sullied somewhat by high-profile audit problems with Waste Management and Sunbeam, was intact, and the ten-year long distraction of the separation battle was nearing an end. However, with the firm’s breakup looming in the mid-1990’s, the audit partners had already committed the firm to resuming its pursuit of fast-growing non-audit business once the divorce was finalized. Arthur Andersen’s leaders gave little thought to the possible alternatives in creating the “new” Arthur Andersen.

There were likely many instances over the past twenty years where Arthur Andersen could have viewed itself as standing at a crossroads. Had the firm paused from its dealings with an industry and an organization culture that was undergoing wrenching change, it might have noticed its gradual but inexorable drift away from its center. It might have seen a signpost: one arrow pointing back to its roots as a defender of the public trust, the other toward an unknown future. In reality, the firm breezed through the intersection with hardly a glance out the window.

The author thanks Richard Wardell for his contributions to this article.

Sources:

• Jerry Porras and James Collins. Built to Last. New York: Harper Collins. 1994.

• McRoberts, Flynn. “The Fall of Andersen.” Chicago Tribune, 1 September 2002, sec 1, pp. 1, 16.

• Bryne, John. “Fall From Grace.” BusinessWeek, 12 August 2002, pp. 50-56.

• Strahler, Steven. “An Icon Crumbles.”; “Green Beans and Blues”; “Rise of Consultants”; “Auditing as an Afterthought”. Chicagobusiness.com web site  (www.chicagobusiness.com) Accessed 7 October 2002.