In Defense of Arthur Andersen
Hell hath no fury like an accountant scorned.
At least I think that is how the saying goes. It is one that came to mind recently as I was reading about the amusing spectacle of an estimated 1,000 beleaguered Arthur Andersen employees storming the U.S. Capitol’s West Front Terrace to protest their firm’s federal indictment by the Justice Department for Enron-related activities. They also wished to send a message to the DOJ’s legal bureaucrats that the Andersen Baby (its rank and file employees) is quite different from the Andersen Bathwater (its employees assigned to Enron), and that care should be taken not to throw them both out together.
Hey, accountants are people, too, and they're not very happy ones these days. Andersen’s accountants, not unjustifiably, think that they are unfairly being made the scapegoat for much of Enron’s unreported sins, and the consequences could be devastating for the accounting concern’s survival. It is not a pleasant thought for the individuals and families whose livelihood is maintained by working for the firm. You might picket the DOJ as well if it focused its sights on your firm in a similar manner.
The DOJ, however, isn’t acting in good faith. An obvious contributor to the Enron saga has been the political class itself, which opened its collective wallets to Enron contributions and then gave the firm special benefits denied to Enron's competitors. These included the tweaking of laws (exempting it from important sections of the Investment Company Act, thus providing the legal basis for its notorious off-balance budgeting practices), approving taxpayer-subsidized loans ($1 billion in 1996), and strong-arming foreign governments to accept contracts with the firm (such as India’s agreement to build the Dabhol Power project). See the table below for a chronology of some of the wealth transfers made by Enron to the political class over its history.
It doesn’t take a lot of investigative savvy to uncover the state’s role in Enron’s unsustainable rise and inevitable fall. Penalizing Andersen and trumpeting its sins loudly through the state’s PR machine is a way for the state to draw attention away from its own complicity. After all, isn’t that what DOJ bureaucrats are paid to do?
This is not to argue that Andersen is lily-white in its dealings with Enron. But the accounting concern has paid a swift, market-driven price for its actions already, in the form of the loss of at least 26 major accounts and a justifiably tarnished reputation. Just as the Securities and Exchange Commission lagged behind the market in blaming Enron--it didn’t start investigating the firm until October 2001, well after the firm’s stock price began its final slide--so has the DOJ lagged behind the market in penalizing Andersen.
The problem is that Andersen is more of a symptom than a cause in the Enron saga. Its current trashing by the media and political figures is reminiscent of the attacks on the banking industry that occurred in the 1930s. This too was a time in which the political class attacked an industry to draw attention away from its own complicity in slowing the economic recovery. By institutionalizing policies that tried to stop the fall of wages and prices, the state institutionalized a situation in which the nation’s labor and goods markets could never clear.
Bankers were made to blame for the Great Depression, primarily to draw attention away from the disastrous effects of both Hoover’s "enlightened wage policies" and FDR’s New Deal. In a sense, the same strategy is being used against the accounting industry today, and for the same reasons.
Not that we should cry anything but crocodile tears for the bankers of this era. They had already ceded much control of their industry to federal control 20 years earlier with the passage of the Federal Reserve Act of 1913 (which, ironically, is the same year that Arthur Andersen was founded). Banks transferred their assets to the government, which assumed the role of issuing currency for all Federal Reserve member banks. Existing bankers benefited greatly from the resulting stability and decreased competition within their industry. But in the process, they also became easier for the federal government to control, which would prove beneficial to it in later years.
The same trend has been occurring in accounting as well. The federal audit requirements caused that industry to grow much bigger than would have been required by a free market. The result has been a much closer relationship between the accounting industry as a whole and the federal government. And now, albeit on a smaller scale than during the depression, the political class is pushing the accountants to take much of the blame for its egregious policies, much like it made bankers take the blame for disastrous economic policies in the 1930s. Meanwhile, the scandal is serving to justify the passage of the accounting industry’s version of Glass-Steagall before the November elections.
The true blame for scandals such as this is not hard to find because it usually can be traced to the same source: a selfish and insecure federal government that uses and discards interest groups at will to protect its own place in society. The scorned accountants of today could prefigure scorned doctors, teachers, and skilled laborers tomorrow, and for the same reason.
Christopher Westley is an assistant professor of economics at Jacksonville State University and co-author of "Enron: A Study of Excess and Intrigue" in Journal of Financial Decisions (forthcoming). See his Mises.org Articles Archive and send him MAIL.