Author(s): Robert Mednick Special to The Chicago Sun-Times   
Date: December 9, 2005
Page: 59 Section: Editorials

With the recent announcement that the Justice Department has moved to dismiss its 2002 criminal indictment of Arthur Andersen on one count of obstruction of justice, now is an appropriate time to take stock of the lasting impact of one of the most controversial cases ever brought by the U.S. government against a major business or professional services firm. The 2002 indictment could be described as nothing short of a politically motivated rush to judgment in the wake of the dramatic failure of a politically well-connected Enron Corporation. In and of itself, it marked the death knell of the nearly 100-year-old Chicago based accounting firm, effectively branding its more than 25,000 U.S. partners and employees — suddenly faced with the loss of jobs, health insurance and, for retired partners, retirement benefits — as criminals. Ironically, the same Department of Justice had concluded, only five or six years earlier, that permitting the then-Big Six accounting firms to consolidate to four firms would have been anti-competitive and contrary to the public interest.

In this respect, it is now widely accepted that the Department’s earlier concern has since become an unfortunate reality. Numerous commentators, both within and outside the United States, have bemoaned the lack of a sufficient number of firms capable of auditing the largest global enterprises. Moreover, the problem has been exacerbated by the Securities and Exchange Commission independence rules which often cause one or even two of the alternative firms to be ineligible to serve as a company’s auditors if and when a company wants or has to change its auditing firm.

Some have even talked of contingency plans to deal with the major catastrophe which would occur if another of the now-Big Four were to fail or discontinue auditing public companies for any reason. In fact, the Justice Department itself recently went out of its way to avoid indicting KPMG — choosing instead to indict only the responsible individuals, the same course of action recommended by many on Andersen’s case — in connection with its sale of allegedly fraudulent tax shelters costing the government more than $1 billion in tax revenues.

As a result, not only did tens of thousands of upstanding former partner and professional and clerical employees of Andersen suffer enormous and irreparable harm, but the business community and capital markets unnecessarily suffered and continue to suffer as well at the hands of, what a former SEC chairman described at the time as, a “terribly stupid or venal” government agency.

This raises the natural question of whether there were any winners coming out of this irrevocable tragedy. While some would say the lesson taught by the indictment has improved the quality of auditing, recently released results of quality reviews done by the new Public Company Accounting Oversight Board don’t seem to bear this out. Moreover, one must remember that it was Andersen which had been rated by U.S. accounting professors as No. 1 among the largest firms in service to clients, technical reputation, staff training and career opportunities for 16 consecutive years until the time of my retirement in 1998. In addition, the firm was responsible for a disproportionately small percentage of the close to 1,000 alleged audit failures reported to the SEC Practice Section during the 1980s and 1990s.

The assistant attorney general, Michael Chertoff, who made the decision in 2002 to criminally indict the firm did, admittedly, fare better. In 2003, he was appointed by President Bush to the prestigious 3rd Circuit Court of Appeals in Washington, D.C. Moreover, earlier this year, he was appointed to the president’s Cabinet as the secretary of the Department of Homeland Security, though his star was tarnished during the recent Hurricane Katrina debacle.

Unfortunately for Andersen and its former people, I am told the U.S. government is protected against civil litigation for erroneous prosecution, even when it seems to have admitted the error of its ways. That doesn’t mean, however, that the Justice Department and those responsible should be immune from public scrutiny and criticism when a horribly bad decision has caused so much harm to so many people without any measurable public good. The tens of thousands of Andersen alumni and their families, which contributed so much to the Chicago community for so many decades, deserve at least this much.

Robert Mednick is a retired managing partner of Andersen Worldwide and former chairman of the American Institute of Certified Public Accountants.