Last week, the news of a major Hewlett-Packard write-down of $8.8 billion due to problems with its acquisition of Autonomy, is of course, nothing new. According to the Wall Street Journal, H-P’s problems are cited as follows, “that Autonomy made “outright misrepresentations” to inflate its financial results…U.S. authorities are trying to establish whether much of the company’s business may also have been a facade.” While the size of this scandal gives pause, anyone who has ever been involved in financial reporting and controls should not even be asking how such a thing could possibly happen, but how to safeguard against such fraud.
I once worked for a company that, prior to Enron’s demise, was one of Arthur Andersen’s largest clients, and one out of the handful of Andersen’s blatant accounting scandals. Here is a minor first hand account, and it illustrates how well known the scandals were among the rank and file. I was part of a financial staff and our business unit was being audited, so I was working with the auditors directly. Over lunch one day, one of the auditors asks, “did you hear about Enron?” With no emotion at all the other says, “yeah, it will probably bring the firm down.” Now this was at least six months before anyone had ever heard of a company called Enron, unless you were a high flying investor, interested in energy trading, etc. They continued eating like nothing revelatory had been said as I stared in amazement. Then they both ask me, “do you know about all this?” They proceeded to fill me in and it wasn’t long after that before the shredding started back at the home office. Everything proceeded just as they said.
The point of my story is that mid level staff auditors of no particular importance knew exactly what was happening at “the firm,” as they called it, from the CEO to the mailroom. And I never forgot it. That was the extent to which the knowledge of what Andersen was doing seemingly permeated all ranks, unless these two were unusually informed.
The accounting scandal that involved our company was being dealt with shortly after I came on board, with continual “top side” entries correcting balance sheet items that were simply out of compliance. The cumulative result of some of the corrections was a “$3.5 billion charge (against earnings) for the company…while Andersen agreed to pay $220 million to settle shareholder litigation” (Schroeder, 2000) [this was over a decade ago]. Why such dereliction? Follow the money. “At the same Arthur Andersen was conducting audits that failed to halt the questionable accounting, the firm was pocketing big fees for consulting services it provided [the same company]” (Schroeder, 2000). This of course was the kind of ethically breached, at minimum, and even criminal behavior that eventually led to Sarbanes-Oxley.
As all this relates personally, I only knew about most of these things because I regularly read the Wall Street Journal at the time (not nearly as common as today), and eventually put two and two together with various little things I saw at the company. As most of us will not run or even be a part of a company or organization this size, so I suppose there are unique characteristics. But the general principles are the same. I think the influence can come when a person says no the first time a financial or accounting matter does not pass the “smell test.” But in the case of Andersen, so many people ignored the problems until you had a complete mess from top to bottom instead of a respectable company. The rest is history. The other organization on the other hand, cleaned up their act and went on to maintain terrific standards.
References:
Scheck, J., Sonne, P. & Worthen, B. (2012). Long Before H-P Deal, Autonomy’s Red Flags. The Wall Street Journal. http://online.wsj.com/article/SB10001424127887324784404578141462744040072.html
Schroeder, M. (2000). SEC Probes Andersen for Conflict of Interest. The Wall Street Journal. http://online.wsj.com/article/SB967149253225994918.html
Stewart, J. (2012). From H.P., a Blunder That Seems to Beat All. The New York Times. http://www.nytimes.com/2012/12/01/business/hps-autonomy-blunder-might-be-one-for-the-record-books.html?pagewanted=all&_r=0