First of four parts This series was reported by Delroy Alexander, Greg Burns, Robert Manor, Flynn McRoberts and E.A. Torriero. It was written by McRoberts.
Trading his customary dark suit for a pair of jeans, Mike Gagel trudged over pallet after pallet of multicolored bricks in the central Ohio storage yard. The summer heat was stifling as he counted once, then twice. Something was wrong.
Arthur Andersen, the prestigious Chicago accounting firm, had sent the eager young auditor for a routine task: to certify the inventory of a million bricks baking in the sun near Marion. But each time Gagel counted the pallets, he came up 100,000 bricks short.
At first, the factory owner reacted angrily when Gagel confronted him with his findings. He grabbed the phone and asked Gagel's boss why he had sent such a rookie.
The boss told Gagel to count the bricks again. On his third pass, Gagel once again counted 900,000 bricks; only this time, the owner checked into the discrepancy. He discovered that a plant manager had been ripping him off, secretly selling truckloads of bricks out of the back gate at night.
Gagel's brickyard math is a classic example of the vigilance that made the name Arthur Andersen the gold standard of the accounting profession for decades. But the incident occurred in 1969, and it, like Andersen's reputation, is history.
On Saturday, a firm that once stood for trust and accountability ended 90 years as an auditor of publicly traded companies under a cloud of scandal and shame. Its felony conviction for obstructing a federal investigation into Enron Corp., its now-notorious client, cost Andersen the heart of its practice. It will continue with a tiny fraction of the 85,000 employees it spread across the globe just months ago.
Andersen's leaders have portrayed the firm as the innocent victim of overzealous prosecutors and a dishonest client. But a close examination of Andersen's collapse reveals a very different story.
In the 1990s, the firm embarked on a path that valued hefty fees ahead of bluntly honest bookkeeping, eroding Andersen's good name.
Andersen shunted aside accountants who failed to adapt to the firm's new direction. In their place, Andersen promoted a slicker breed who could turn modestly profitable auditing assignments into consulting gold mines.
Repeatedly, Andersen rewarded those involved with the firm's most troubled clients, while guardians of the company's legacy, like Gagel, were shown the door.
In an early-90s purge, the new leaders forced out roughly one of every 10 auditing partners and neutered Andersen's elite corps of in-house ethics watchdogs, who for decades had been the firm's final word on accounting matters large and small. These moves drew scant public attention, but the implications reached far beyond Andersen's headquarters at 33 W. Monroe St.
The quiet dilution of standards and the rise of auditor-salesmen at Andersen are central to the scandals that have cost investors billions of dollars, eliminated thousands of jobs and threatened the retirement security of millions of citizens. Most of all, they have cast suspicion over the financial reports that Americans rely on to judge the health of companies where they work and invest.
As the firm spiraled down during the past year, its leaders contended that conflicts between its auditing and consulting missions had no impact on the quality of its work. And they said Enron should be viewed as an aberration, not part of a disturbing pattern.
To determine how the firm fell so far, so fast, the Tribune reviewed volumes of Andersen internal documents, sworn testimony and congressional hearings. Tribune reporters also interviewed scores of Andersen employees--from senior partners to secretaries--as well as federal investigators and industry insiders across a dozen states.
Contrary to Andersen's assertions, what emerges is a cautionary tale, the story of a firm that tried to mix the public interest of an auditing mission with a mercenary consulting culture and botched the job. Even as many of its partners and staff continued to uphold a high standard, others compromised in the interest of generating fees.
"It came down to doing the job as quickly as possible and making the most money. They pushed the edge of the envelope--pushed it too far," said Dean Christensen, who ran Andersen's Columbus, Ohio, office for more than 15 years. "I just think it got out of control. What it ended up being is greed. Total greed."
Andersen's remaining leadership disputed that the firm emphasized the selling of services over audit quality, replacing partners who were strong auditors but didn't generate enough revenue.
"Not true," said Andersen spokesman Patrick Dorton, in a written response. "Work performance and commitment to quality have always been an essential part of our evaluation. No one has ever been dismissed because of their commitment to quality, but personnel have been dismissed for an inadequate commitment to quality."
A FINAL ACCOUNTING
The fall of Andersen
In its drive to boost profits, the Chicago auditing legend diluted its lofty standards, rewarding partners who generated hefty consulting fees and forcing out its blunt bookkeepers.
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