Lyceum – Larry Katzen, Earthlink, Arthur Anderson (retired)

By Tom Hanlon

Lessons Learned from 35 Years at Arthur Andersen

Early on in his talk at a recent accounting lyceum, Larry Katzen asked the students their general impressions of former Big Five accounting firm Arthur Andersen – the firm that audited Enron and declared bankruptcy in 2001 after it was embroiled in a scandal involving accounting fraud. Arthur Andersen was Enron’s auditor in 2001. The image the students had of Arthur Andersen was predictably negative. But Katzen, who spent 25 of his 35 years at Andersen as a partner, said, “Despite the fact that millions of documents were subpoenaed by the federal government, not one piece of evidence showed that Arthur Andersen did anything wrong in the Enron audit. The only thing they were indicted on was obstruction of documents. “Each accounting firm has a similar policy – they only want you to retain the files that support their audit opinion. Anything that does not pertain to the audit opinion gets discarded. So it’s perfectly legal to destroy documents, as long as it is done before you receive any subpoena.” Andersen Cleared – But the Damage Had Been Done Indeed, while Andersen voluntarily surrendered its licenses to practice as CPAs, the Supreme Court, by a 9-0 decision, later overturned Andersen’s guilty verdict. But the damage had been done, and within 90 days of the Enron scandal being made public, 85,000 Andersen professionals were out of work. The primary blame for Andersen’s downfall, Katzen said, lies with former Enron CFO Andy Fastow, who was indicted on 78 counts, including fraud, money laundering, and conspiracy. Fastow was later imprisoned for his misdeeds. The problem – hidden by Fastow and Enron from Andersen – lay in Enron’s use of special purpose entities (SPEs), formed to perform a specific transaction, such as the purchase and related financing of an oil tanker, which enabled them to treat the SPE as a non-consolidated entity. By doing so, Enron did not reflect the purchase and related debt from the SPE in its consolidated financial statements. The SPEs were audited not by Andersen, but by a different firm. “The banks were in cahoots with Enron,” Katzen said, “and they had to pay hundreds of millions of dollars in fines, but no one at the banks served any prison time. The auditors who audited those SPEs never got any penalty.” It was Arthur Andersen, a proud giant in the industry, who took the fall, though as mentioned, they were later cleared of any wrongdoing. The Consequences of the Enron Scandal “Of the Eight five thousand people at Arthur Andersen who lost their jobs and careers, two thousand were partners ” Katzen said. “Those partners lost their capital as well. And their retirement plans and other fringe benefits, such as their health insurance. It was all gone, and everyone had to find another career.” Who benefited from Andersen’s downfall? Its competitors. The Big Five became the Big Four, and many Andersen partners found leadership positions among the other top accounting firms. “There’s a phrase,” Katzen said, “that cream rises to the top. That’s what happened with Arthur Andersen people.” He added that many of Andersen’s employees were also hired by the Public Company Accounting Oversight Board, which oversees the accounting profession. Since Andersen’s demise—it still nominally exists, limited only to operating its training facility in St. Charles, Illinois for the benefit of other companies—Katzen has served on the board for three public companies and three private companies. He is currently an audit committee member for the Annenberg Foundation in Rancho Mirage, California, which has hosted most of our former presidents since Dwight D. Eisenhower.  It recently hosted President Obama’s visit with the prime minister of China. Lessons Learned Fittingly, Katzen wrote a book entitled And You Thought Accountants Were Boring, detailing his career at Arthur Andersen and 15 lessons he learned along the way. He shared a few of those lessons with the students. “The first lesson is do the right thing,” he said. He noted that doing the right thing as a senior at Drake University landed him his job at Andersen. He had already undergone interviews with seven of the then Big Eight accounting firms, and he planned to ditch his last interview, with Andersen. But an accounting professor told him that he signed up for the interview – now do the right thing and go through with it. Andersen offered him less money than the other firms, but he was drawn in by their corporate culture, by their principles, chief among them being “do the right thing.” A second lesson he shared was “with increase in responsibility comes personal sacrifice.” Katzen said hard work is a given wherever you go, and that students will have to learn to balance their personal life with their professional life. “But you’ll have to remember that since you are in a personal service business, you invariably will have to make personal sacrifices for the benefit of your clients. That doesn’t mean you have to agree with everything the client wants you to do. But you must treat the client with respect and dignity. In most cases they want you to tell them if you disagree with them and why.” A third lesson is that “learning never ends.” In fact, he said, “if you stop learning, you fall behind and your career is dead. You always try to expand your horizons. Learning is so important.” A fourth lesson is about the common culture that holds a company together. Katzen noted that even as Enron was going down and the dark rumors about Andersen’s imminent demise grew daily, Andersen’s clients were served as usual – no slowdowns, no drop in quality. “We were trained that the clients come first,” he explained. “I told our people to continue to do the good work you’ve always done. Focus on what you can control and ignore what you can’t control. If you continue to do quality work, good things will happen.” Andersen finished all their audits in a quality fashion even as the Enron scandal swirled around them. “Culture is really important,” he said. “Each firm has a strong culture, and it’s there for a reason.”