Volcker's Plan May Reopen DOJ-Andersen Talks
Paul A. Volcker, former chairman of the Federal Reserve Board and head of Andersen's oversight board, issued a statement on March 22, 2002, outlining a plan for a "new Andersen." Many are hoping this plan will reopen the talks between the firm and the Department of Justice (DOJ). The talks broke off after Andersen refused to plead guilty to charges of obstructing justice.
Mr. Volcker's plan
Under the terms of the plan, which Mr. Volcker described to Andersen only an hour or so before releasing the statement at a hastily arranged press conference, a seven-member board led by Mr. Volcker will take over the firm in exchange for a series of agreements.
DOJ must agree to drop or postpone the criminal charges, the Securities and Exchange Commission must agree to settle the class action lawsuits for a fine that Andersen can afford to pay, and a critical majority of the firm's partners must agree to stay and participate in the rebuilding of the firm. Mediation on civil suits could begin as early as March 25, 2002. Mr. Volcker explained the charges can be dropped "without prejudice," meaning the charges can be restated at a later time, if DOJ is not satisfied with the firm's conduct under the new board.
The seven-member board is composed of John C. Bogle, the retired chairman of the Vanguard Group; Charles A. Bowsher, departing chairman of the Public Oversight Board that oversaw the accounting profession; C. Michael Cook, former chairman and chief executive of Deloitte & Touche, John C. Danforth, former United States senator; Russell E. Palmer, former dean of the Wharton School at the University of Pennsylvania; and Dr. P. Roy Vagelos, retired chairman and chief executive of Merck & Company.
DOJ's response
The Justice Department responded with a statement that emphasized the need for "cooperation and acceptance of responsibility." Prosecutors take this to mean the DOJ has not ruled out the possibility. But they are skeptical the DOJ will back off its position in response to a proposal from an outside party.
Others have likened Mr. Volcker's plan to a successful rescue effort by Warren Buffett at Salomon Brothers in 1991. Unlike Andersen, Salomon was a publicly-traded company and was never indicted, so this would be a first in some respects. It will also be a first if Andersen survives. As Business Week points out, no major professional services firm has ever survived criminal indictment ("The Heavy Hand of Justice," April 1, 2002).
An exercise in prosecutorial machismo
There have been many firsts and unusual approaches in a case that Business Week calls an "exercise in prosecutorial machismo." This is the first-ever prosecution of a major accounting firm that chose to go to trial rather than settling. The DOJ took an unusual approach in indicting the entire firm, instead of individuals, and this approach was even more unusual because DOJ took action without allowing Andersen to present its case before the Houston grand jury that handed up the indictment. Indeed, says Business Week, the prosecutors seemed to have wanted to nail Andersen at all costs.
In the rush to judgment and in its prosecutorial zeal, DOJ may well have made mistakes. These mistakes will be compounded by an unusually short time to prepare for the trial and growing pressures from Congress over the loss of jobs at Andersen. It is far from clear that DOJ will win, and if Andersen is exonerated, it will come at the cost of lost jobs, lost financial resources for victims, and a squandered opportunity for real reforms.
The risks and the size of the price tag may be enough to get DOJ back to the bargaining table. Andersen is hoping this will be the case. The firm issued a statement supporting Mr. Volcker's plan.
-Rosemary Schlank
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Let the "Exercise in Machismo" play
The rhetoric flowing from each side of the Enron / Andersen / Federal Government debate is extreme to state it mildly. But, in the usually sedate accounting and auditing world these are extreme times. As a truly objective, “auditor at heart” I admit that DOJ’s zealous pursuit of justice seems a bit too intense for the charges, however we, the CPA’s of the country, must not rally in blind support for Andersen and their employees. We must remember that the venerable Andersen, once the “pillar of the accounting and auditing profession” has been playing fast and loose with GAAP and GAAS for more than a decade. Just look at the litany of shoddy audits that Andersen has performed: Lincoln Savings & Loan, Baptist Foundation of Arizona, Enron, Waste Management, Global Crossing, Sunbeam, Colonial Realty, Home State Savings Bank……. I fully understand the concept of “suing the last person standing”, which often leads to inappropriately blaming auditors for management’s mistakes. However, the public news of Andersen clients’ disclosure problems speaks volumes. On a personal note, I have seen the supposedly “innocent” Andersen employees accept any piece of garbage written on paper as evidence. I’ve also seen them accept an entire population of charges as materially correct after performing what can only generously be called a cursory examination of a sample of five transactions (from a population of over 100,000 nearly uniform transactions). Sorry, but in my little conservative world, even with good results on tests of controls, that dog won’t hunt. So don’t pound the drum too loudly in support of Andersen, let the judicial process play out, then go from there.