WEBVTT 00:00:00.000 --> 00:00:03.399 Imagine a world where a specific brand name is 00:00:03.399 --> 00:00:07.259 the ultimate passport to respectability. And 00:00:07.259 --> 00:00:09.279 I'm not talking about a fashion brand like Gucci 00:00:09.279 --> 00:00:13.519 or a tech brand like Apple. No, no. I'm talking 00:00:13.519 --> 00:00:15.699 about something much drier, but in the corporate 00:00:15.699 --> 00:00:19.640 world, infinitely more powerful. I want you to 00:00:19.640 --> 00:00:22.769 imagine a company that was... The absolute gold 00:00:22.769 --> 00:00:25.370 standard of integrity. The kind of place where 00:00:25.370 --> 00:00:27.449 if you had their name on your resume, it was 00:00:27.449 --> 00:00:29.730 like having a seal of approval from, I don't 00:00:29.730 --> 00:00:31.989 know, the Pope of capitalism. Exactly. A firm 00:00:31.989 --> 00:00:34.270 where if they signed off on your financial statements, 00:00:34.450 --> 00:00:37.210 the markets didn't just believe you, they revered 00:00:37.210 --> 00:00:39.829 you. A company that employed 28 ,000 people. 00:00:40.130 --> 00:00:42.189 28 ,000. A company that was bringing in over 00:00:42.189 --> 00:00:46.469 $9 billion in revenue a year. A titan. And then 00:00:46.469 --> 00:00:50.009 imagine that this titan, this pillar of American 00:00:50.009 --> 00:00:54.310 commerce just... Poof. Gone. Into thin air. In 00:00:54.310 --> 00:00:56.490 a matter of months, it goes from being the backbone 00:00:56.490 --> 00:00:59.149 of corporate trust to being a punchline on late 00:00:59.149 --> 00:01:01.549 night TV. It becomes a cautionary tale taught 00:01:01.549 --> 00:01:03.950 in every business school ethics class from here 00:01:03.950 --> 00:01:06.689 to, well, Timbuktu. We are, of course, talking 00:01:06.689 --> 00:01:09.150 about the rise and fall of Arthur Anderson. The 00:01:09.150 --> 00:01:11.689 tragedy of Arthur Anderson. And I'm glad you 00:01:11.689 --> 00:01:14.189 used that word tragedy because that is really 00:01:14.189 --> 00:01:17.290 the only way to frame this. Usually when we do 00:01:17.290 --> 00:01:19.609 these deep dives into business failures, we're 00:01:19.609 --> 00:01:22.140 talking about bad strategy. We're talking about 00:01:22.140 --> 00:01:25.819 a CEO who bet on the wrong technology or a marketing 00:01:25.819 --> 00:01:28.500 campaign that flopped or just getting out -competed. 00:01:28.599 --> 00:01:30.959 It's usually a story about math. Yeah, business 00:01:30.959 --> 00:01:33.599 errors. Blockbuster didn't buy Netflix. Kodak 00:01:33.599 --> 00:01:36.159 ignored digital cameras. Exactly. Those are calculation 00:01:36.159 --> 00:01:39.260 errors. But the story of Arthur Anderson isn't 00:01:39.260 --> 00:01:42.579 about a miscalculation. It's a Shakespearean 00:01:42.579 --> 00:01:45.260 character arc. It's about a moral collapse. It 00:01:45.260 --> 00:01:47.980 is. It's about a firm that spent nearly a century 00:01:47.980 --> 00:01:51.689 building this fortress of honesty. only to blow 00:01:51.689 --> 00:01:53.469 it up from the inside because they, well, they 00:01:53.469 --> 00:01:55.609 forgot who they were. It really is wild. I mean, 00:01:55.629 --> 00:01:57.489 most people listening today, especially if they 00:01:57.489 --> 00:01:59.909 are younger or just not deep in the finance weeds, 00:02:00.049 --> 00:02:03.049 they know the big four accounting firms. Right. 00:02:03.209 --> 00:02:07.430 Deloitte. PWC, EY, KPMG. They're the giants. 00:02:07.769 --> 00:02:10.310 But for a very, very long time, it was the big 00:02:10.310 --> 00:02:12.590 five. And Arthur Anderson wasn't just one of 00:02:12.590 --> 00:02:15.069 the five. In many ways, it was the leader. It 00:02:15.069 --> 00:02:17.469 was the alpha. It was the firm that defined the 00:02:17.469 --> 00:02:19.810 profession. And that is what makes this deep 00:02:19.810 --> 00:02:23.189 dive so fascinating and, frankly, so unsettling. 00:02:23.469 --> 00:02:25.349 We aren't just going to look at the Enron shredding 00:02:25.349 --> 00:02:27.250 party, though. Believe me, we are going to get 00:02:27.250 --> 00:02:29.710 into the details. Oh, we have to. The shredding 00:02:29.710 --> 00:02:32.090 party is a must. But to understand why the shredding 00:02:32.090 --> 00:02:34.460 matters, we have to understand. the 89 years 00:02:34.460 --> 00:02:37.300 that came before it. We've got a massive stack 00:02:37.300 --> 00:02:39.740 of sources here. Biographies, legal breakdowns 00:02:39.740 --> 00:02:42.159 from the Supreme Court, internal memos, you name 00:02:42.159 --> 00:02:46.259 it. We're going to trace this arc from 1913 all 00:02:46.259 --> 00:02:50.580 the way to a ruling in 2005 that it changes everything 00:02:50.580 --> 00:02:52.469 you think you know about the ending. And the 00:02:52.469 --> 00:02:54.129 central tension we're going to be exploring today 00:02:54.129 --> 00:02:56.349 is really a battle for the soul of this institution. 00:02:56.610 --> 00:02:58.469 It's a battle between the founders' original 00:02:58.469 --> 00:03:01.409 motto, think straight, talk straight, and the 00:03:01.409 --> 00:03:03.870 later era's obsession with profit that led them 00:03:03.870 --> 00:03:06.590 straight into the abyss. Which, as we know, leads 00:03:06.590 --> 00:03:09.530 us inevitably to Enron. But we can't start with 00:03:09.530 --> 00:03:11.590 Enron. That's the third act. We have to start 00:03:11.590 --> 00:03:14.409 with the protagonist. So let's go back, way back. 00:03:14.530 --> 00:03:17.469 Let's set the scene. It's the early 1900s, and 00:03:17.469 --> 00:03:20.520 we need to talk about Arthur E. Anderson. Because 00:03:20.520 --> 00:03:23.080 his origin story is, honestly, reading through 00:03:23.080 --> 00:03:25.219 these notes, it felt like I was reading a Charles 00:03:25.219 --> 00:03:27.439 Dickens novel. It really is. It's the classic 00:03:27.439 --> 00:03:30.740 American struggle, but turned up to 11. Arthur 00:03:30.740 --> 00:03:33.379 Anderson was born in 1885 in Plano, Illinois. 00:03:33.900 --> 00:03:37.439 And his start in life was not easy. By the time 00:03:37.439 --> 00:03:40.710 he is 16 years old, tragedy strikes. His parents 00:03:40.710 --> 00:03:43.550 die. 16. I mean, that is a child. No parents, 00:03:43.669 --> 00:03:46.810 no safety net, no trust fund. None. He is completely 00:03:46.810 --> 00:03:49.509 orphaned. Now, in 1901, there is no social safety 00:03:49.509 --> 00:03:51.389 net to speak of. If you don't work, you don't 00:03:51.389 --> 00:03:53.750 eat. It's that simple. So he has to take a job 00:03:53.750 --> 00:03:55.729 as a mail boy during the day just to survive. 00:03:56.120 --> 00:03:58.060 And most people in that situation, you'd forgive 00:03:58.060 --> 00:04:00.139 them for just trying to get by, just trying to 00:04:00.139 --> 00:04:02.280 survive day to day. Right. But Arthur Anderson 00:04:02.280 --> 00:04:05.479 had this fire in him, this relentless drive. 00:04:05.759 --> 00:04:09.520 He works as a mailboy all day long. And then 00:04:09.520 --> 00:04:11.919 instead of collapsing, he goes to school at night. 00:04:12.580 --> 00:04:15.099 He's determined to educate himself out of poverty. 00:04:15.560 --> 00:04:18.079 That work all day, study all night mentality, 00:04:18.399 --> 00:04:20.939 that's deep programming. That forges a person 00:04:20.939 --> 00:04:23.819 in a very specific way. It absolutely does. He 00:04:23.819 --> 00:04:25.920 eventually gets a job as an assistant to a controller 00:04:25.920 --> 00:04:28.759 at a company, but he just keeps pushing. He keeps 00:04:28.759 --> 00:04:31.800 taking those night courses. And by 1908, at the 00:04:31.800 --> 00:04:34.300 age of 23, he achieves something incredible. 00:04:34.730 --> 00:04:37.029 What's that? He becomes the youngest certified 00:04:37.029 --> 00:04:40.509 public accountant, or CPA, in the entire state 00:04:40.509 --> 00:04:43.029 of Illinois. 23 years old. I don't think I knew 00:04:43.029 --> 00:04:45.110 what a balance sheet was at 23, let alone being 00:04:45.110 --> 00:04:47.569 the youngest CPA in the state. It just speaks 00:04:47.569 --> 00:04:49.509 to his intellect, but I think more importantly, 00:04:49.649 --> 00:04:52.209 to his discipline. And that discipline becomes 00:04:52.209 --> 00:04:56.529 the DNA of the CIRM he builds. So in 1913, he 00:04:56.529 --> 00:04:58.730 teams up with a guy named Clarence Delaney, and 00:04:58.730 --> 00:05:01.389 they found Anderson, Delaney & Co. And Delaney 00:05:01.389 --> 00:05:03.149 eventually leaves, right? That's why we don't 00:05:03.149 --> 00:05:05.930 know that name. He does. And in 1918, it becomes 00:05:05.930 --> 00:05:09.370 Arthur Anderson & Co. But that year, 1913, is 00:05:09.370 --> 00:05:12.230 the birth. And I love looking at the very beginning 00:05:12.230 --> 00:05:14.689 of these massive corporations. Do we know who 00:05:14.689 --> 00:05:17.069 their first client was? I do. And I love this 00:05:17.069 --> 00:05:19.910 detail because it's so grounded. Their first 00:05:19.910 --> 00:05:22.449 client was the Joseph Schlitz Brewing Company. 00:05:22.629 --> 00:05:25.509 The beer guys. The beer guys in Milwaukee. And 00:05:25.509 --> 00:05:27.990 this wasn't just a cold call or anything. Anderson 00:05:27.990 --> 00:05:30.410 had actually worked there as a controller previously. 00:05:30.790 --> 00:05:33.310 Ah, so he was using his network. Exactly. It 00:05:33.310 --> 00:05:35.589 shows you that even at 28, he understood the 00:05:35.589 --> 00:05:37.829 value of his network. Because of that relationship, 00:05:38.129 --> 00:05:40.050 they opened their second office in Milwaukee 00:05:40.050 --> 00:05:42.689 in 1915. So he's young, he's hungry, he's got 00:05:42.689 --> 00:05:44.970 a beer client. But here's the thing that really 00:05:44.970 --> 00:05:47.689 struck me in the research. Usually when a young 00:05:47.689 --> 00:05:50.550 guy starts a firm in the roaring teens or 20s, 00:05:50.569 --> 00:05:53.170 the goal is make money, get rich, build an empire. 00:05:53.529 --> 00:05:55.589 But Arthur Anderson seemed to have a completely 00:05:55.589 --> 00:05:58.089 different philosophical approach to what an accountant 00:05:58.089 --> 00:06:01.170 is supposed to be. This is the crucial nugget. 00:06:01.170 --> 00:06:03.790 This is the seed of everything. If you miss this, 00:06:03.949 --> 00:06:07.439 you miss the tragedy. Arthur Anderson believed 00:06:07.439 --> 00:06:09.839 that accounting wasn't just about crunching numbers 00:06:09.839 --> 00:06:12.220 for the boss. Right. He didn't think he worked 00:06:12.220 --> 00:06:14.879 for the CEO of the company he was auditing. He 00:06:14.879 --> 00:06:16.939 believed that an accountant's primary responsibility 00:06:16.939 --> 00:06:19.920 was to the investors. That is a radical distinction. 00:06:20.139 --> 00:06:22.339 I'm paid by the client, but I work for the public. 00:06:22.459 --> 00:06:25.259 Exactly. He viewed the accountant as a public 00:06:25.259 --> 00:06:28.560 watchdog, a gatekeeper. If the management was 00:06:28.560 --> 00:06:31.079 lying or inflating numbers or hiding losses, 00:06:31.420 --> 00:06:34.160 it was his job to expose it, not help them hide 00:06:34.160 --> 00:06:36.079 it. And this is where that famous motto comes 00:06:36.079 --> 00:06:37.980 in. Think straight, talk straight. Think straight, 00:06:38.079 --> 00:06:40.399 talk straight. And let's be clear, this wasn't 00:06:40.399 --> 00:06:42.639 some corporate synergy buzzword cooked up by 00:06:42.639 --> 00:06:45.759 a marketing team at a glass office. This was 00:06:45.759 --> 00:06:48.139 an axiom his mother had passed down to him before 00:06:48.139 --> 00:06:51.019 she died. It was core to his identity as a human 00:06:51.019 --> 00:06:53.709 being. There is a famous story from the early 00:06:53.709 --> 00:06:56.610 years, the railway anecdote, that really illustrates 00:06:56.610 --> 00:06:58.970 this. I feel like this is the moment that cemented 00:06:58.970 --> 00:07:01.810 the legend. It's like the George Washington cherry 00:07:01.810 --> 00:07:04.750 tree story, but for accountants. It is the defining 00:07:04.750 --> 00:07:08.389 mythos of the firm. So set the scene. It's the 00:07:08.389 --> 00:07:11.290 early years. The firm is growing, but it's still 00:07:11.290 --> 00:07:14.829 vulnerable. A frantic executive from a local 00:07:14.829 --> 00:07:18.589 rail utility comes to Arthur Anderson. This executive 00:07:18.589 --> 00:07:21.480 is in real trouble. The company's accounts are 00:07:21.480 --> 00:07:25.620 flawed. Flawed how? Like bad math or? Basically, 00:07:25.620 --> 00:07:27.959 the books are cooked or at least very messy and 00:07:27.959 --> 00:07:30.100 misleading. They don't reflect the reality of 00:07:30.100 --> 00:07:32.480 the business. But the executive needs Anderson 00:07:32.480 --> 00:07:34.720 to sign off on them anyway. He says if Anderson 00:07:34.720 --> 00:07:37.019 doesn't certify the books, the utility is going 00:07:37.019 --> 00:07:39.000 to lose a major contract. So it's a do or die 00:07:39.000 --> 00:07:41.040 moment for this client. The executive is putting 00:07:41.040 --> 00:07:43.480 the screws to him. Huge pressure. He's essentially 00:07:43.480 --> 00:07:46.980 saying, sign this paper. Save my company or we 00:07:46.980 --> 00:07:49.160 take our business elsewhere and I ruin your little 00:07:49.160 --> 00:07:51.480 startup firm. It's the ultimate test of that 00:07:51.480 --> 00:07:53.639 motto. Right. And Arthur Anderson looks him in 00:07:53.639 --> 00:07:56.759 the eye, this powerful railroad executive, and 00:07:56.759 --> 00:07:58.779 says there is not enough money in the city of 00:07:58.779 --> 00:08:01.300 Chicago to make him do it. Not enough money in 00:08:01.300 --> 00:08:03.220 the city of Chicago. I mean, I got chills reading 00:08:03.220 --> 00:08:05.939 that. That is a power move. It is. And the railroad 00:08:05.939 --> 00:08:09.180 executive, furious, fires him on the spot. Anderson 00:08:09.180 --> 00:08:12.480 loses the client. Financially, it was a hit. 00:08:13.060 --> 00:08:16.959 But. A few months later, that railroad went bankrupt. 00:08:17.180 --> 00:08:20.920 Wow. It collapsed. And that bankruptcy validated 00:08:20.920 --> 00:08:24.160 everything Anderson stood for. It proved that 00:08:24.160 --> 00:08:26.420 his integrity wasn't just a high moral stance. 00:08:26.779 --> 00:08:29.259 It was actually good business foresight. Because 00:08:29.259 --> 00:08:31.399 if he had signed those papers, his reputation 00:08:31.399 --> 00:08:32.919 would have been destroyed. He would have been 00:08:32.919 --> 00:08:35.259 dragged down with the ship. Exactly. Instead, 00:08:35.399 --> 00:08:37.559 he built a reputation as the guy who couldn't 00:08:37.559 --> 00:08:40.179 be bought. He became the guy who saved you from 00:08:40.179 --> 00:08:42.879 yourself, basically. Banks started saying, we 00:08:42.879 --> 00:08:45.019 will lend to you, but only if Arthur Anderson 00:08:45.019 --> 00:08:48.059 audits your books. The signature became the asset. 00:08:48.320 --> 00:08:50.799 And that reputation created a very specific culture 00:08:50.799 --> 00:08:53.559 within the firm. As it grew, the employees developed 00:08:53.559 --> 00:08:55.379 a nickname for themselves. They did. They called 00:08:55.379 --> 00:08:57.500 themselves Arthur Androids. Arthur Androids. 00:08:57.639 --> 00:09:00.759 Now, to me, sitting here in the 2020s, that sounds 00:09:00.759 --> 00:09:04.159 terrible. It sounds like mindless robots. It 00:09:04.159 --> 00:09:06.059 does to modern ears, but you have to understand 00:09:06.059 --> 00:09:08.419 the intent at the time. It wasn't about being 00:09:08.419 --> 00:09:10.940 mindless. It was about consistency. It was about 00:09:10.940 --> 00:09:14.039 reliability. Okay. The idea was that whether 00:09:14.039 --> 00:09:16.240 a client walked into an Arthur Anderson office 00:09:16.240 --> 00:09:20.059 in Chicago or New York or eventually London or 00:09:20.059 --> 00:09:24.100 Tokyo, they would get the exact same high standard 00:09:24.100 --> 00:09:26.159 of service. Like the McDonald's of high finance, 00:09:26.419 --> 00:09:30.679 but classy. In a way, yes. Yeah. Standardization. 00:09:31.440 --> 00:09:34.200 Anderson was actually a pioneer in training. 00:09:34.679 --> 00:09:37.100 He created the profession's first centralized 00:09:37.100 --> 00:09:40.159 training program. They had this massive facility 00:09:40.159 --> 00:09:42.419 in St. Charles, Illinois. The Q Center. The Q 00:09:42.419 --> 00:09:45.320 Center. And get this. Arthur Anderson, remembering 00:09:45.320 --> 00:09:48.039 his own exhaustion from night school, believed 00:09:48.039 --> 00:09:50.389 that training should happen. during working hours. 00:09:50.529 --> 00:09:52.509 Oh, that's interesting. He didn't want his people 00:09:52.509 --> 00:09:54.509 burning out studying at night like he had to. 00:09:54.570 --> 00:09:57.169 He wanted them sharp. He wanted them fresh. He 00:09:57.169 --> 00:09:58.870 was actually incredibly progressive for the time. 00:09:58.929 --> 00:10:00.710 It really was. And it must have built a loyalty 00:10:00.710 --> 00:10:03.490 that was unmatched. Absolutely. If you were an 00:10:03.490 --> 00:10:06.090 Arthur Android, you were the elite. You were 00:10:06.090 --> 00:10:07.850 the Marine Corps of accounting. You walked a 00:10:07.850 --> 00:10:09.850 certain way. You talked a certain way. And you 00:10:09.850 --> 00:10:12.370 had that think straight, talk straight ethos 00:10:12.370 --> 00:10:15.450 tattooed on your brain. So for decades, this 00:10:15.450 --> 00:10:18.379 is the vibe. High standards, deep integrity, 00:10:18.600 --> 00:10:22.299 uniform excellence. Arthur Anderson himself runs 00:10:22.299 --> 00:10:26.039 the firm until his death in 1947. But obviously, 00:10:26.200 --> 00:10:29.080 the company outlives him. It thrives. It expands 00:10:29.080 --> 00:10:31.340 globally. It becomes a juggernaut. But as we 00:10:31.340 --> 00:10:34.720 move into the 1970s and 80s, the DNA of the firm 00:10:34.720 --> 00:10:36.899 starts to mutate. And this is where we enter 00:10:36.899 --> 00:10:39.320 the second act of our tragedy. We move from the 00:10:39.320 --> 00:10:41.980 founder to the split personality. This is where 00:10:41.980 --> 00:10:43.980 the consultants come in, right? This is the crack 00:10:43.980 --> 00:10:46.120 in the foundation. Exactly. You have to understand 00:10:46.120 --> 00:10:48.799 the structure. You have the audit side, the traditional 00:10:48.799 --> 00:10:51.279 CPAs checking the books, the think straight, 00:10:51.419 --> 00:10:53.919 talk straight folks. But then, starting in the 00:10:53.919 --> 00:10:55.919 70s, you have the consulting wing. And why did 00:10:55.919 --> 00:10:58.299 consulting get so big? What changed? Technology. 00:10:59.240 --> 00:11:01.960 Computers. Systems integration. Companies didn't 00:11:01.960 --> 00:11:03.500 just need someone to count their money anymore. 00:11:03.700 --> 00:11:05.799 They needed someone to help them install the 00:11:05.799 --> 00:11:08.100 computer systems to track the money. They needed 00:11:08.100 --> 00:11:10.899 strategy. And Anderson was really, really good 00:11:10.899 --> 00:11:12.919 at this. So the consulting wing just took off. 00:11:13.120 --> 00:11:16.220 It started growing much, much faster than the 00:11:16.220 --> 00:11:19.440 auditing and tax side. And this is where the 00:11:19.440 --> 00:11:22.200 tension starts. I mean, real tension. I can just 00:11:22.200 --> 00:11:24.740 picture it. The cool, fast -growing consulting 00:11:24.740 --> 00:11:28.860 kids with the slick suits versus the stodgy rule 00:11:28.860 --> 00:11:31.139 -following audit parents. It was worse than just 00:11:31.139 --> 00:11:33.740 a culture clash. It was about money. The way 00:11:33.740 --> 00:11:35.919 the firm was structured, the profits were pooled. 00:11:35.940 --> 00:11:38.240 So as the consultants started making money hand 00:11:38.240 --> 00:11:41.519 over fist, they resented the fact that they had 00:11:41.519 --> 00:11:43.879 to make what were called transfer payments. to 00:11:43.879 --> 00:11:45.860 the auditing partners. So if I'm a consultant, 00:11:46.000 --> 00:11:47.860 I'm bringing in all this new business, all this 00:11:47.860 --> 00:11:50.100 high margin revenue, but I have to give a chunk 00:11:50.100 --> 00:11:52.580 of it to the auditors who were just growing at 00:11:52.580 --> 00:11:55.299 a snail's pace. Precisely. They felt like they 00:11:55.299 --> 00:11:57.259 were subsidizing the slower growth part of the 00:11:57.259 --> 00:11:59.860 business. The feeling was, we're doing the heavy 00:11:59.860 --> 00:12:01.820 lifting and you guys are taking our lunch money. 00:12:02.019 --> 00:12:04.740 It created this deep bitterness. So did the firm 00:12:04.740 --> 00:12:07.220 try to fix this? Did they see this civil war 00:12:07.220 --> 00:12:10.240 brewing? They tried. In 1989, there was actually 00:12:10.240 --> 00:12:12.980 an attempt to merge with Price Waterhouse. The 00:12:12.980 --> 00:12:15.320 idea was to create a massive counterbalance to 00:12:15.320 --> 00:12:18.000 get bigger on the audit side, but it failed. 00:12:18.100 --> 00:12:20.659 Why did it fail? A couple of reasons. One was 00:12:20.659 --> 00:12:23.320 just radically different cultures. Price Waterhouse 00:12:23.320 --> 00:12:25.399 was seen as more white shoe, more, you know, 00:12:25.399 --> 00:12:28.659 country club. Anderson was this scrappy, aggressive 00:12:28.659 --> 00:12:32.129 meritocracy. Okay. But also... Huge conflicts 00:12:32.129 --> 00:12:34.350 of interest. For example, Anderson had strong 00:12:34.350 --> 00:12:36.570 commercial links with IBM. They were selling 00:12:36.570 --> 00:12:39.029 them consulting services, while Pricewaterhouse 00:12:39.029 --> 00:12:42.129 was IBM's auditor. You can't be both a business 00:12:42.129 --> 00:12:44.330 partner and an independent auditor for the same 00:12:44.330 --> 00:12:46.850 company. That's a huge conflict. Well, you shouldn't 00:12:46.850 --> 00:12:49.389 be. And that conflict is some serious foreshadowing 00:12:49.389 --> 00:12:52.789 for what happens later. So the merger collapsed, 00:12:53.049 --> 00:12:56.269 and the firm was stuck in this internal civil 00:12:56.269 --> 00:12:59.789 war. So what did they do? In 1989, they formally 00:12:59.789 --> 00:13:01.889 split the firm into two business units under 00:13:01.889 --> 00:13:04.509 one umbrella. Arthur Anderson, which was the 00:13:04.509 --> 00:13:06.909 auditors, and Anderson Consulting. And they spent 00:13:06.909 --> 00:13:09.850 the entire 1990s fighting. A whole decade of 00:13:09.850 --> 00:13:12.389 infighting. That sounds toxic. It was. A bitter 00:13:12.389 --> 00:13:14.750 dispute over money, over independence, and over 00:13:14.750 --> 00:13:16.950 the brand name. Finally, it goes to arbitration. 00:13:17.090 --> 00:13:19.649 And in August 2000, the arbitrator drops a bomb. 00:13:19.809 --> 00:13:22.230 Okay, what was the ruling? Anderson Consulting 00:13:22.230 --> 00:13:25.029 was granted total independence. They were free. 00:13:25.409 --> 00:13:28.460 But there was a catch. Two catches, actually. 00:13:28.559 --> 00:13:30.919 Go on. First, the consultants had to pay Arthur 00:13:30.919 --> 00:13:34.220 Anderson, the audit side, $1 .2 billion that 00:13:34.220 --> 00:13:37.000 had been held in escrow. $1 .2 billion. That's 00:13:37.000 --> 00:13:39.460 a nice parting gift. It sounds like a lot. But 00:13:39.460 --> 00:13:42.259 the second catch was that Anderson Consulting 00:13:42.259 --> 00:13:44.759 had to surrender the Anderson name. They couldn't 00:13:44.759 --> 00:13:46.799 use it anymore. So they lose the name. What do 00:13:46.799 --> 00:13:49.419 they become? They rebranded as Accenture. Oh, 00:13:49.440 --> 00:13:52.279 wow. Accenture is huge today. I had no idea they 00:13:52.279 --> 00:13:54.179 were born out of this divorce. Massive success 00:13:54.179 --> 00:13:57.169 story. And they arguably got the better end of 00:13:57.169 --> 00:13:59.169 the deal, because for the Arthur Anderson side, 00:13:59.330 --> 00:14:02.080 the auditors, This ruling was actually a complete 00:14:02.080 --> 00:14:05.759 disaster. Yet how is getting $1 .2 billion a 00:14:05.759 --> 00:14:08.019 disaster? I'm not following. Because of expectations. 00:14:08.539 --> 00:14:11.080 The board of Arthur Anderson had set a much higher 00:14:11.080 --> 00:14:13.240 bar. They were convinced they were owed much 00:14:13.240 --> 00:14:16.120 more for, you know, raising the consulting arm 00:14:16.120 --> 00:14:18.940 from infancy. The CEO of Arthur Anderson at the 00:14:18.940 --> 00:14:22.019 time, a guy named Jim Wadia, resigned just four 00:14:22.019 --> 00:14:24.100 hours after the ruling came out. Four hours? 00:14:24.159 --> 00:14:27.179 Why so fast? Because the board had passed resolutions 00:14:27.179 --> 00:14:30.480 saying Wadia had to resign if he didn't secure 00:14:30.480 --> 00:14:33.700 at least an incremental $4 billion from the split. 00:14:33.919 --> 00:14:37.220 $4 billion? He only got $1 .2. The audit partners 00:14:37.220 --> 00:14:40.419 were expecting this massive payout to compensate 00:14:40.419 --> 00:14:43.100 for losing the consulting cash cow, and they 00:14:43.100 --> 00:14:45.259 just didn't get it. So let's unpack the psychology 00:14:45.259 --> 00:14:48.320 here. It's the year 2000. Arthur Anderson, the 00:14:48.320 --> 00:14:50.600 audit firm, has just lost its fastest -growing 00:14:50.600 --> 00:14:53.200 sibling. They've lost that guaranteed revenue 00:14:53.200 --> 00:14:55.690 stream from the consultants. They are, frankly, 00:14:55.850 --> 00:14:58.289 humiliated. And they are desperate. This is the 00:14:58.289 --> 00:15:00.929 pivot point. They need to prove that they can 00:15:00.929 --> 00:15:03.590 grow just as fast as the consultants did. They 00:15:03.590 --> 00:15:05.710 need to replace that revenue. And this is where 00:15:05.710 --> 00:15:07.929 the erosion of standards kicks into high gear. 00:15:08.070 --> 00:15:10.090 The pressure must have been immense. It was. 00:15:10.210 --> 00:15:12.289 They were struggling to balance that historical 00:15:12.289 --> 00:15:14.490 faithfulness to think straight, talk straight, 00:15:14.610 --> 00:15:17.210 with a new desperate need to maximize profits 00:15:17.210 --> 00:15:20.559 in the quarterly earnings era. The culture shifted 00:15:20.559 --> 00:15:24.080 from we answer to the investors to we must keep 00:15:24.080 --> 00:15:27.220 the client happy at all costs. Because if you 00:15:27.220 --> 00:15:29.519 lose a client, you lose revenue and you're already 00:15:29.519 --> 00:15:32.200 behind the eight ball. It's a classic trap. Exactly. 00:15:32.320 --> 00:15:34.759 And the warning signs were flashing red long 00:15:34.759 --> 00:15:37.700 before Enron. We tend to think of Enron as this 00:15:37.700 --> 00:15:41.240 singular event. But the truth is. Arthur Anderson 00:15:41.240 --> 00:15:43.899 was embroiled in multiple accounting frauds in 00:15:43.899 --> 00:15:46.679 the 90s and early 2000s. So this wasn't an isolated 00:15:46.679 --> 00:15:49.679 incident. It was a pattern. A pattern. A rogues 00:15:49.679 --> 00:15:51.879 gallery of corporate scandals. You had Sunbeam 00:15:51.879 --> 00:15:54.620 products. Chainsaw Al Dunlap. That whole fiasco. 00:15:54.740 --> 00:15:56.659 Right. Sunbeam was cooking the books to show 00:15:56.659 --> 00:15:59.399 massive growth, and Anderson signed off on it. 00:15:59.500 --> 00:16:02.620 You had waste management, a massive fraud involving 00:16:02.620 --> 00:16:05.059 depreciation schedules. You had Asia Pulp and 00:16:05.059 --> 00:16:07.940 Paper, the Baptist Foundation of Arizona, and 00:16:07.940 --> 00:16:10.690 importantly, WorldCom. They had WorldCom, too. 00:16:10.850 --> 00:16:12.549 Yes. We'll get to WorldCom. But the point is, 00:16:12.649 --> 00:16:14.909 in the 1990s, Anderson wasn't spotting these 00:16:14.909 --> 00:16:17.009 frauds. They were allegedly facilitating them, 00:16:17.049 --> 00:16:18.730 or at the very least looking the other way. Which 00:16:18.730 --> 00:16:22.029 is such a crazy contrast to the 1970s. I read 00:16:22.029 --> 00:16:23.990 that in the 70s, Anderson was actually the first 00:16:23.990 --> 00:16:26.730 to identify risks in the subprime market, and 00:16:26.730 --> 00:16:28.350 they voluntarily dropped clients that looked 00:16:28.350 --> 00:16:30.809 shady. That's the tragedy right there in a nutshell. 00:16:31.329 --> 00:16:34.750 In the 70s, they fired clients who were risky 00:16:34.750 --> 00:16:37.690 because they valued their reputation more than 00:16:37.690 --> 00:16:41.309 the fees. In the 90s, they clung to them because 00:16:41.309 --> 00:16:43.490 they valued the fees more than the reputation. 00:16:43.830 --> 00:16:46.090 They went from not enough money in Chicago to 00:16:46.090 --> 00:16:48.490 make me lie to how can we help you structure 00:16:48.490 --> 00:16:51.129 this so it looks okay? That's it. And that brings 00:16:51.129 --> 00:16:53.850 us to the client that would end it all. Enron. 00:16:54.009 --> 00:16:57.330 Enron. The energy giant. The smartest guys in 00:16:57.330 --> 00:16:59.830 the room. And for Arthur Anderson, their most 00:16:59.830 --> 00:17:02.389 lucrative client, they were charging Enron something 00:17:02.389 --> 00:17:05.069 like a million dollars a week in fees. A million 00:17:05.069 --> 00:17:07.369 a week. Between audit fees and consulting fees, 00:17:07.529 --> 00:17:09.269 yes. And that's the other thing. After the split, 00:17:09.430 --> 00:17:11.589 Anderson had started to rebuild a consulting 00:17:11.589 --> 00:17:14.230 practice inside the audit firm. So they were 00:17:14.230 --> 00:17:15.970 back to doing exactly what they weren't supposed 00:17:15.970 --> 00:17:18.029 to do, auditing the same people they were consulting 00:17:18.029 --> 00:17:21.150 for. The conflict was back. So just to give us 00:17:21.150 --> 00:17:23.809 some scale here, how bad was the Enron fraud? 00:17:24.200 --> 00:17:26.420 It was catastrophic. At the time, it was the 00:17:26.420 --> 00:17:29.779 biggest in history. Enron had fraudulently reported 00:17:29.779 --> 00:17:33.099 about $100 billion in revenue. It was systemic 00:17:33.099 --> 00:17:36.099 accounting fraud designed to hide massive debts 00:17:36.099 --> 00:17:38.500 and inflate earnings to make the stock price 00:17:38.500 --> 00:17:40.759 soar. And when it finally unraveled, it was the 00:17:40.759 --> 00:17:43.019 largest corporate bankruptcy in American history 00:17:43.019 --> 00:17:46.079 at that point. It was. And Anderson was the auditor. 00:17:46.359 --> 00:17:48.400 They were the ones supposed to be checking the 00:17:48.400 --> 00:17:50.839 math. But they weren't just checking the math. 00:17:51.079 --> 00:17:53.740 They were deeply embedded. What does that mean? 00:17:53.920 --> 00:17:55.900 Well, the Powers Committee, which was appointed 00:17:55.900 --> 00:17:58.599 by Enron's own board to investigate, found that 00:17:58.599 --> 00:18:01.019 Anderson simply did not fulfill its professional 00:18:01.019 --> 00:18:04.180 responsibilities. They failed to alert the Enron 00:18:04.180 --> 00:18:07.019 board about major concerns regarding related 00:18:07.019 --> 00:18:09.779 party transactions. OK, related party transactions. 00:18:09.880 --> 00:18:11.700 Let's break that down for the listener. This 00:18:11.700 --> 00:18:14.740 is the call of the Enron scam. Right. So Enron 00:18:14.740 --> 00:18:17.680 executives, specifically the CFO, Andrew Fastow, 00:18:17.819 --> 00:18:20.299 were setting up these side companies. The technical 00:18:20.299 --> 00:18:23.539 term is special purpose entities or. So shell 00:18:23.539 --> 00:18:26.519 companies. Essentially, yes, shell companies. 00:18:26.980 --> 00:18:29.559 Enron would then take a bunch of bad debt or 00:18:29.559 --> 00:18:32.259 losing assets and sell them to the shell company. 00:18:32.900 --> 00:18:35.000 So it looks like the bad stuff is off Enron's 00:18:35.000 --> 00:18:37.420 books. So if I have a car that doesn't run and 00:18:37.420 --> 00:18:39.900 I owe money on it, I sell it to my cousin's company 00:18:39.900 --> 00:18:42.579 and now it's off my driveway and off my personal 00:18:42.579 --> 00:18:45.220 balance sheet. Exactly. But here is the catch. 00:18:45.759 --> 00:18:48.440 Enron was often secretly guaranteeing the loans 00:18:48.440 --> 00:18:51.359 for the shell company. So the risk was still 00:18:51.359 --> 00:18:53.829 with Enron. But the paperwork made it look like 00:18:53.829 --> 00:18:56.549 it was gone. It was a shell game. And Anderson 00:18:56.549 --> 00:18:59.269 knew about it. They knew. They had to know. They 00:18:59.269 --> 00:19:01.190 were auditing the transactions. In fact, some 00:19:01.190 --> 00:19:03.369 evidence suggests they were charging fees to 00:19:03.369 --> 00:19:05.309 advise on how to set these things up. That is 00:19:05.309 --> 00:19:07.450 a conflict of interest in a nutshell. Auditing 00:19:07.450 --> 00:19:10.450 your own advice. It gets worse. The actual whistleblower 00:19:10.450 --> 00:19:13.170 who brought this all down was a woman named Sharon 00:19:13.170 --> 00:19:17.130 Watkins, an Enron VP. And here's the kicker. 00:19:17.490 --> 00:19:20.289 She was a former Arthur Anderson auditor. No 00:19:20.289 --> 00:19:22.430 way. The call is coming from inside the house? 00:19:22.730 --> 00:19:25.069 In a way, yeah. She had the Arthur Android training 00:19:25.069 --> 00:19:26.750 to spot it. She looked at the books and said, 00:19:26.829 --> 00:19:29.150 this math doesn't work. This is a house of cards. 00:19:29.589 --> 00:19:32.049 She testified to Congress and implicated her 00:19:32.049 --> 00:19:35.210 former firm. Wow. But the real smoking gun wasn't 00:19:35.210 --> 00:19:37.650 just the bad auditing. Bad auditing gets you 00:19:37.650 --> 00:19:40.130 sued. You pay a massive fine, you settle. What 00:19:40.130 --> 00:19:42.589 destroyed them was the cover -up. The shredding 00:19:42.589 --> 00:19:44.670 party. The shredding party. This is where we 00:19:44.670 --> 00:19:48.509 move from professional negligence to... outright 00:19:48.509 --> 00:19:52.009 crime. So paint the scene for us. It's late 2001. 00:19:52.349 --> 00:19:55.549 The stock is cratering. The SEC is sniffing around. 00:19:55.930 --> 00:19:58.289 What happens at the Anderson offices in Houston? 00:19:58.490 --> 00:20:00.609 Well, you have David Duncan, who's the lead partner 00:20:00.609 --> 00:20:03.210 for the Enron account. And you have Nancy Temple, 00:20:03.349 --> 00:20:05.230 an attorney from the legal department in Chicago. 00:20:05.869 --> 00:20:07.910 As the investigation is heating up on October 00:20:07.910 --> 00:20:11.779 23rd, David Duncan calls an urgent meeting. And 00:20:11.779 --> 00:20:14.220 shortly after that meeting, a massive effort 00:20:14.220 --> 00:20:16.920 begins to destroy documents. Like physical paper 00:20:16.920 --> 00:20:20.779 shredding in 2001. Oh, yeah. Physical shredding 00:20:20.779 --> 00:20:23.500 of tons of documents. They brought in extra shredder 00:20:23.500 --> 00:20:25.599 trucks. They were shredding so much paper they 00:20:25.599 --> 00:20:28.099 literally couldn't keep up. And at the same time, 00:20:28.140 --> 00:20:30.440 they were deleting thousands upon thousands of 00:20:30.440 --> 00:20:32.240 emails. They were trying to wipe the trail clean 00:20:32.240 --> 00:20:34.700 before the investigators could seize the files. 00:20:34.900 --> 00:20:39.579 That feels so panicked. It's not the calculated 00:20:39.579 --> 00:20:41.700 move of a mastermind. It's the move of someone 00:20:41.700 --> 00:20:44.660 who is terrified and cornered. It was obstruction 00:20:44.660 --> 00:20:47.920 of justice, plain and simple. You cannot destroy 00:20:47.920 --> 00:20:49.819 evidence when you know a federal investigation 00:20:49.819 --> 00:20:52.240 is looming. It's one of the cardinal sins. And 00:20:52.240 --> 00:20:53.839 the government finds out. Of course they find 00:20:53.839 --> 00:20:55.200 out. You can't shred that much paper without 00:20:55.200 --> 00:20:57.259 someone noticing. And the Department of Justice 00:20:57.259 --> 00:20:59.960 decides to make an example of them. They don't 00:20:59.960 --> 00:21:02.559 just indict David Duncan or Nancy Temple. They 00:21:02.559 --> 00:21:04.660 indict the entire firm. The whole company. The 00:21:04.660 --> 00:21:08.079 firm. Arthur Anderson, LLP. And the trial happens. 00:21:08.220 --> 00:21:12.079 On June 15, 2002, the verdict comes down. Arthur 00:21:12.079 --> 00:21:14.140 Anderson was convicted of obstruction of justice. 00:21:14.359 --> 00:21:16.839 A felony conviction. A felony. And for an accounting 00:21:16.839 --> 00:21:19.119 firm, that is a death sentence. Okay, explain 00:21:19.119 --> 00:21:21.140 that to me. Why is it a death sentence? I mean, 00:21:21.160 --> 00:21:23.339 why couldn't they just pay a massive fine, fire 00:21:23.339 --> 00:21:25.900 the bad apples, and move on? Other big companies, 00:21:26.000 --> 00:21:28.660 banks, they get fined all the time and survive. 00:21:29.079 --> 00:21:32.009 Because accounting is different. The SEC, the 00:21:32.009 --> 00:21:34.250 Securities and Exchange Commission, has a very 00:21:34.250 --> 00:21:37.730 clear rule. They do not accept audits from convicted 00:21:37.730 --> 00:21:40.509 felons. If you are a public company in America, 00:21:40.730 --> 00:21:43.730 you must be audited by an SEC -approved firm. 00:21:44.210 --> 00:21:47.250 It's the law. The moment Anderson was convicted, 00:21:47.329 --> 00:21:49.190 they lost their license to practice before the 00:21:49.190 --> 00:21:51.789 SEC. They literally could not do their job anymore. 00:21:51.950 --> 00:21:54.529 So every single public client they had had to 00:21:54.529 --> 00:21:57.230 fire them. Immediately. They had no choice. If 00:21:57.230 --> 00:21:59.970 you were Coca -Cola or Delta Airlines or any 00:21:59.970 --> 00:22:01.869 of their thousands of clients, you had to fire 00:22:01.869 --> 00:22:04.009 Anderson that day or you would be delisted from 00:22:04.009 --> 00:22:06.190 the stock exchange. Wow. So the revenue goes 00:22:06.190 --> 00:22:09.309 to zero overnight. Essentially, yes. On August 00:22:09.309 --> 00:22:12.549 31st, 2002, Anderson formally agreed to surrender 00:22:12.549 --> 00:22:15.809 its CPA licenses. The firm, for all intents and 00:22:15.809 --> 00:22:17.769 purposes, went out of business. This is the part 00:22:17.769 --> 00:22:19.250 that I find really heartbreaking. We're talking 00:22:19.250 --> 00:22:23.569 about 28 ,000 employees. Yes. And the vast, vast 00:22:23.569 --> 00:22:25.490 majority of them had nothing to do with Enron. 00:22:25.829 --> 00:22:28.329 They were the Arthur Androids in offices in Kansas 00:22:28.329 --> 00:22:30.849 City or Frankfurt or Milwaukee, just doing their 00:22:30.849 --> 00:22:32.869 jobs, checking inventories, following the rules. 00:22:33.069 --> 00:22:35.210 It's the ultimate tragedy of the commons. A handful 00:22:35.210 --> 00:22:37.130 of people in the Houston office and the legal 00:22:37.130 --> 00:22:39.309 department in Chicago made these decisions, and 00:22:39.309 --> 00:22:43.049 28 ,000 people lost their livelihoods. It was 00:22:43.049 --> 00:22:45.519 an exodus. The firm just wound down its American 00:22:45.519 --> 00:22:48.359 operations. Partners and entire offices scrambled 00:22:48.359 --> 00:22:50.819 to find lifeboats. They migrated to competitors, 00:22:51.079 --> 00:22:53.920 KPMG, Ernst & Young, Deloitte, Grant Thornton. 00:22:54.019 --> 00:22:56.319 They swooped in and bought up local Anderson 00:22:56.319 --> 00:22:58.720 offices for pennies on the dollar. The carcass 00:22:58.720 --> 00:23:01.920 was picked clean. Completely. By 2005, a firm 00:23:01.920 --> 00:23:04.319 of 20 ,000 was reduced to a skeleton crew of 00:23:04.319 --> 00:23:07.039 about 200 people, mostly just lawyers and administrators 00:23:07.039 --> 00:23:09.920 handling the endless lawsuits. So the giant is 00:23:09.920 --> 00:23:12.019 dead. The corpse has been picked to clean my 00:23:12.019 --> 00:23:14.839 competitors. The name Arthur Anderson is synonymous 00:23:14.839 --> 00:23:18.079 with fraud. End of story. But then there is a 00:23:18.079 --> 00:23:20.460 plot twist, a twist so wild I had to read it 00:23:20.460 --> 00:23:23.740 twice. The Supreme Court ruling of 2005, Arthur 00:23:23.740 --> 00:23:27.359 Anderson, LLP v. United States. Three years after 00:23:27.359 --> 00:23:29.940 the firm is basically destroyed, the case goes 00:23:29.940 --> 00:23:32.740 to the highest court in the land. And what do 00:23:32.740 --> 00:23:35.319 they decide? They unanimously reverse the conviction. 00:23:36.259 --> 00:23:38.200 Unanimously. You mean nine, nine, seven. Every 00:23:38.200 --> 00:23:41.660 single justice agreed. So wait a minute. Does 00:23:41.660 --> 00:23:44.319 that mean Anderson was innocent? Did they get 00:23:44.319 --> 00:23:47.140 a raw deal? It's complicated. This is where we 00:23:47.140 --> 00:23:48.700 have to be very careful with our legal terms. 00:23:48.839 --> 00:23:52.339 The Supreme Court didn't say Anderson did nothing 00:23:52.339 --> 00:23:55.400 wrong. They didn't say no documents were shredded. 00:23:55.619 --> 00:23:58.019 They certainly didn't say Enron wasn't a fraud. 00:23:58.319 --> 00:24:00.359 So what did they say? They said the trial was 00:24:00.359 --> 00:24:03.759 flawed, specifically the jury instructions. The 00:24:03.759 --> 00:24:06.359 instructions given to the jury by the judge at 00:24:06.359 --> 00:24:08.359 the end of the trial. Right. In a criminal trial, 00:24:08.619 --> 00:24:10.740 the judge gives the jury a set of instructions 00:24:10.740 --> 00:24:13.680 on how to apply the law to the facts. The Supreme 00:24:13.680 --> 00:24:15.559 Court ruled that the instructions in this case 00:24:15.559 --> 00:24:18.119 were way too vague. They allowed the jury to 00:24:18.119 --> 00:24:20.640 convict Anderson of obstruction of justice without 00:24:20.640 --> 00:24:22.400 proving that the firm knew it was breaking the 00:24:22.400 --> 00:24:24.900 law. This is that concept of corrupt persuasion, 00:24:24.900 --> 00:24:27.460 right? Yes. That's the legal term at the heart 00:24:27.460 --> 00:24:31.759 of it. The statute used the term corruptly persuades. 00:24:32.240 --> 00:24:34.640 The Supreme Court said that to be corrupt, you 00:24:34.640 --> 00:24:37.579 have to have a consciousness of wrongdoing. You 00:24:37.579 --> 00:24:39.279 have to know that what you are doing is illegal 00:24:39.279 --> 00:24:42.119 and you're trying to impede a specific official 00:24:42.119 --> 00:24:44.960 proceeding. OK. The jury instructions were so 00:24:44.960 --> 00:24:47.359 broad that they could have convicted Anderson 00:24:47.359 --> 00:24:49.940 just for following their standard document retention 00:24:49.940 --> 00:24:52.240 policy, even if they didn't have the specific 00:24:52.240 --> 00:24:55.240 intent to obstruct the SEC investigation. So 00:24:55.240 --> 00:24:58.519 because of a technicality in how the judge talked 00:24:58.519 --> 00:25:01.119 to the jury. Because the bar for conviction was 00:25:01.119 --> 00:25:03.819 set too low, the whole thing is thrown out. Correct. 00:25:03.920 --> 00:25:06.380 The chief justice at the time, Rehnquist, wrote 00:25:06.380 --> 00:25:08.279 that the instructions diluted the meaning of 00:25:08.279 --> 00:25:10.839 corruptly. But it's 2005. The firm is already 00:25:10.839 --> 00:25:13.400 dead. Exactly. It was a moral victory, perhaps, 00:25:13.640 --> 00:25:16.519 but a pyrrhic one, a completely hollow victory. 00:25:16.900 --> 00:25:19.579 The U .S. Chamber of Commerce released a statement 00:25:19.579 --> 00:25:21.859 saying there is no putting the company back together. 00:25:22.680 --> 00:25:25.420 Anderson was, by that point, a zombie firm. Did 00:25:25.420 --> 00:25:27.339 the government ever try to retry them on the 00:25:27.339 --> 00:25:30.609 case? No. Former U .S. attorneys and the government 00:25:30.609 --> 00:25:33.950 decided it would defy common sense. Why spend 00:25:33.950 --> 00:25:36.829 millions of taxpayer dollars prosecuting a corpse? 00:25:37.150 --> 00:25:40.109 The firm had no assets, no employees, no clients. 00:25:40.289 --> 00:25:43.289 It was over. But there is a huge what if here, 00:25:43.390 --> 00:25:45.509 isn't there? I mean, if the trial hadn't happened 00:25:45.509 --> 00:25:47.569 or if the instructions had been correct and they 00:25:47.569 --> 00:25:50.930 were acquitted back in 2002, could Arthur Anderson 00:25:50.930 --> 00:25:54.519 have survived Enron? Kurt Eichenwald, who wrote 00:25:54.519 --> 00:25:56.440 the book Conspiracy of Fools, which is really 00:25:56.440 --> 00:25:59.380 the definitive book on the Enron scandal, argues, 00:25:59.619 --> 00:26:03.039 no, not a chance. But why not? Because the world's 00:26:03.039 --> 00:26:05.599 come. Ah, right. The other massive fraud that 00:26:05.599 --> 00:26:07.299 was happening at the same time. The WorldCom 00:26:07.299 --> 00:26:09.839 fraud was revealed just days after the Enron 00:26:09.839 --> 00:26:12.880 conviction in June 2002. It was another massive 00:26:12.880 --> 00:26:15.319 accounting scandal involving billions of dollars, 00:26:15.420 --> 00:26:17.880 actually bigger than Enron in terms of the assets 00:26:17.880 --> 00:26:20.240 involved. And guess who their auditor was? Arthur 00:26:20.240 --> 00:26:22.700 Anderson. Arthur Anderson. So they strike out 00:26:22.700 --> 00:26:25.039 twice in a row on the biggest corporate frauds 00:26:25.039 --> 00:26:27.059 in American history. So Eichenwald's argument 00:26:27.059 --> 00:26:28.799 is that even if they had somehow limped away 00:26:28.799 --> 00:26:31.200 from Enron, the one -two punch of WorldCom would 00:26:31.200 --> 00:26:33.720 have killed them anyway. It would have. The reputation 00:26:33.720 --> 00:26:36.259 was simply too toxic. Trust is the only product 00:26:36.259 --> 00:26:38.579 an auditor really has. If nobody trusts your 00:26:38.579 --> 00:26:41.000 signature, you don't have a business. The market 00:26:41.000 --> 00:26:42.339 would have killed them even if the government 00:26:42.339 --> 00:26:45.160 didn't. So let's talk about the aftermath. The 00:26:45.160 --> 00:26:47.700 crater left by this explosion. It didn't just 00:26:47.700 --> 00:26:50.220 end a company. It changed the laws, didn't it? 00:26:50.279 --> 00:26:53.519 Oh, a huge regulatory impact. The scandals of 00:26:53.519 --> 00:26:56.059 Enron and WorldCom and Anderson's role in them 00:26:56.059 --> 00:26:58.880 were the primary drivers for the Sarbanes -Oxley 00:26:58.880 --> 00:27:02.720 Act of 2002. S .O .X. Every corporate accountant's 00:27:02.720 --> 00:27:05.460 favorite acronym. It drastically increased oversight. 00:27:05.759 --> 00:27:07.839 It established the Public Company Accounting 00:27:07.839 --> 00:27:10.500 Oversight Board, the PCAOB, to watch the watchers. 00:27:10.599 --> 00:27:12.640 It put strict rules on auditor independence, 00:27:13.059 --> 00:27:15.079 basically trying to prevent exactly what happened 00:27:15.079 --> 00:27:17.119 with Anderson, where the consulting and auditing 00:27:17.119 --> 00:27:20.119 lines got completely blurred. So now you can't 00:27:20.119 --> 00:27:22.400 be the auditor and the big money consultant for 00:27:22.400 --> 00:27:24.960 the same client. Generally, no. There are very 00:27:24.960 --> 00:27:27.180 strict limits. It also made executives personally 00:27:27.180 --> 00:27:29.539 liable for the accuracy of their financial statements. 00:27:29.720 --> 00:27:32.339 If the numbers are fake, The CEO can go to jail. 00:27:32.480 --> 00:27:35.519 So in a way, Arthur Anderson's death made the 00:27:35.519 --> 00:27:38.160 whole system stronger, or at least it tried to. 00:27:38.400 --> 00:27:40.619 That's the hope. And what about the pieces of 00:27:40.619 --> 00:27:42.400 the firm? We mentioned Accenture. They're the 00:27:42.400 --> 00:27:45.259 big winner here. Accenture is the thriving survivor. 00:27:45.940 --> 00:27:49.799 They are a global giant in consulting and professional 00:27:49.799 --> 00:27:52.920 services today. They really, really dodged a 00:27:52.920 --> 00:27:55.220 bullet by splitting off when they did. And getting 00:27:55.220 --> 00:27:57.160 forced to change their name turned out to be 00:27:57.160 --> 00:28:00.079 the luckiest break in corporate history. Absolute 00:28:00.079 --> 00:28:02.630 luck. If they had kept the Anderson name, they 00:28:02.630 --> 00:28:04.650 might have been dragged down, too, just by association. 00:28:05.029 --> 00:28:07.069 What about the other parts? Where did those 28 00:28:07.069 --> 00:28:09.670 ,000 people go? Well, a lot of them landed at 00:28:09.670 --> 00:28:12.710 the other big firms. But some interesting offshoots 00:28:12.710 --> 00:28:15.250 happen. There's a company called Portivity that 00:28:15.250 --> 00:28:18.569 was formed by about 700 former Anderson professionals 00:28:18.569 --> 00:28:21.849 who specialized in internal audit and risk consulting. 00:28:22.369 --> 00:28:24.250 They were hired by Robert Half International 00:28:24.250 --> 00:28:27.589 and essentially reconstituted as a new firm. 00:28:27.809 --> 00:28:29.289 And I've heard the name Anderson is actually 00:28:29.289 --> 00:28:32.130 back in some form. It is, which is fascinating. 00:28:32.289 --> 00:28:35.930 In 2014, a group of former partners who had started 00:28:35.930 --> 00:28:39.589 a tax firm called WTAS bought the rights to the 00:28:39.589 --> 00:28:42.549 Anderson name. They rebranded as Anderson Tax 00:28:42.549 --> 00:28:45.869 and later Anderson Global. So name lives on, 00:28:45.970 --> 00:28:48.470 but it's a tax firm now, not an audit firm. Right. 00:28:48.609 --> 00:28:51.509 It's a different entity, legally speaking, but 00:28:51.509 --> 00:28:53.910 it's trying to reclaim the lineage, the original 00:28:53.910 --> 00:28:56.869 think straight, talk straight ethos. And what 00:28:56.869 --> 00:28:59.029 about the Q Center? That big training facility. 00:28:59.410 --> 00:29:02.349 The Q Center in St. Charles, Illinois. The place 00:29:02.349 --> 00:29:04.009 where the androids were made. It's still there. 00:29:04.089 --> 00:29:05.930 It's a huge conference center. It's still used 00:29:05.930 --> 00:29:08.029 for training, offered by Accenture and other 00:29:08.029 --> 00:29:10.390 big companies. It stands as a physical monument 00:29:10.390 --> 00:29:12.289 to the sheer scale of what Anderson used to be. 00:29:12.390 --> 00:29:15.220 And the original legal entity. Arthur Anderson 00:29:15.220 --> 00:29:18.359 LLP. Is it just gone? It still technically exists, 00:29:18.619 --> 00:29:21.140 but it's owned by these limited liability companies 00:29:21.140 --> 00:29:23.720 called Omega Management. It doesn't do business. 00:29:23.740 --> 00:29:25.920 It just exists to handle any lingering legal 00:29:25.920 --> 00:29:29.339 cleanup. It's a ghost, a shell. So we've gone 00:29:29.339 --> 00:29:32.740 from the orphan boy in 1913, studying by candlelight, 00:29:32.819 --> 00:29:34.779 to the global empire, to the shredding room, 00:29:34.900 --> 00:29:37.660 to the Supreme Court, and finally to a ghost 00:29:37.660 --> 00:29:40.759 ship. It's quite a journey. When you look at 00:29:40.759 --> 00:29:42.819 this whole story, what is the big takeaway for 00:29:42.819 --> 00:29:45.079 you? What's the lesson? For me, it's about the 00:29:45.079 --> 00:29:48.049 fragility of culture. Arthur Anderson spent nearly 00:29:48.049 --> 00:29:50.470 a century building a culture of integrity. Think 00:29:50.470 --> 00:29:53.769 straight. Talk straight. It took decades to build 00:29:53.769 --> 00:29:56.289 that reputation into an ironclad asset. Right. 00:29:56.490 --> 00:29:59.130 But it only took a few years of chasing short 00:29:59.130 --> 00:30:02.470 -term profits, of prioritizing client fees over 00:30:02.470 --> 00:30:05.130 public duty, to burn it all to the ground. It's 00:30:05.130 --> 00:30:07.529 that famous idea, it takes a lifetime to build 00:30:07.529 --> 00:30:10.329 a reputation and five minutes to ruin it. Exactly. 00:30:10.589 --> 00:30:14.680 And the irony is just... It's so painful. The 00:30:14.680 --> 00:30:17.319 firm that was founded on the idea that you answer 00:30:17.319 --> 00:30:20.279 to the investors, not the client, died because 00:30:20.279 --> 00:30:22.380 it helped a client lie to investors. And the 00:30:22.380 --> 00:30:24.079 firm with the motto, think straight, talk straight, 00:30:24.259 --> 00:30:26.519 ended its life arguing in the Supreme Court about 00:30:26.519 --> 00:30:29.059 the precise definition of corrupt persuasion. 00:30:29.240 --> 00:30:31.819 You couldn't write a more poetic or tragic ending. 00:30:32.240 --> 00:30:34.380 So here is a question for you. Listen to this 00:30:34.380 --> 00:30:36.960 right now. We live in a world that is even more 00:30:36.960 --> 00:30:39.779 high pressure than the 1990s. The quarterly earnings 00:30:39.779 --> 00:30:42.279 pressure hasn't gone away. If anything, it's 00:30:42.279 --> 00:30:44.779 gotten worse. The speed of information, the speed 00:30:44.779 --> 00:30:47.920 of markets, it's all accelerated. Right. So is 00:30:47.920 --> 00:30:51.299 it actually possible for a firm to grow as large 00:30:51.299 --> 00:30:54.519 as Arthur Anderson did to become a global behemoth 00:30:54.519 --> 00:30:57.920 without eventually compromising the very standards 00:30:57.920 --> 00:31:00.839 that built it? When the choice is between responsibility 00:31:00.839 --> 00:31:04.019 to the public and keeping a hundred million dollar 00:31:04.019 --> 00:31:06.559 client happy, which one actually wins today? 00:31:06.740 --> 00:31:08.859 That is the billion dollar question, isn't it? 00:31:08.900 --> 00:31:10.539 Something to think about the next time you see 00:31:10.539 --> 00:31:12.220 a corporate earnings report. Thanks for diving 00:31:12.220 --> 00:31:13.160 in with us. See you next time.