Andersen's Temple of Doom

 “We just received a message from Saddam Hussein. The good news is that he’s willing to have his nuclear, biological and chemical weapons counted. The bad news is he wants Arthur Andersen to do it.”                                 

  -George W. Bush, 2002

Salient points that emerge from the case study are:

1.        Policies.       Andersen tried to present a defense that destruction of documents was in accordance with its “Document retention policy”. However, the courts were not impressed because while policies are common in business and it is not illegal for a manager to instruct his employees to comply with a valid document retention policy under ordinary circumstances, policies must be reasonable and evenly applied. In this case, it was seen that the policy was selectively applied only to Enron documents!

2.       Role of Supervision.         The decision to destroy documents started with Temple, but its implementation was company-wide. No one questioned, much less opposed, Temple’s instructions. Over a dozen of Andersen’s most senior global managers were party to discussions in which pursuit of the mostly ignored document policy was urged, and dozens more of the firm’s lower level employees carried out the work of purging the record, without objection. The document destruction was not limited to Andersen’s Houston office; Enron records were also destroyed in Chicago, Portland, and London.

3.       Corporate Culture.           Andersen’s in-house lawyers were expected to “rubber-stamp” all transactions, regardless of ethical or legal propriety. Andersen seemingly expected its employees, including in-house counsel, to protect the “firm” and its clients at all costs, legal or otherwise. Andersen had an “up or out” environment, in which employees either moved up the ranks or were moved out of the firm. By the late 1990s, the sure and possibly only way for Andersen employees to move up the ranks was “to keep both their bosses and the people at Enron happy” and the sure way was to approve every transaction. By contrast, the sure way for Andersen employees to move out of the firm was to dissent to an Enron transaction.

The experience of Andersen partner Carl Bass exemplifies the “yes-man” culture at Andersen. Bass was a senior partner in Andersen’s Houston office. He served on the prestigious “Professional Standards Group (PSG)”, an internal team of accounting experts that reviewed and approved troublesome “accounting issues” confronting local offices. For decades, the PSG’s word was accepted as law at Andersen.

Enron was considered one of Andersen’s highest-risk clients. In February 2001, Bass, who had been assigned “to monitor . . . high-risk audit[s], strongly objected to Enron’s accounting.”  Bass’s objection was overruled by local partners in the Houston office; Andersen was the only Big Five accounting firm that allowed local partners to overrule the PSG. Thereafter, Bass continued to object to Enron’s accounting and, not surprisingly, tensions grew between Bass and Enron. Enron “considered him a roadblock to their rapid fire deal-making.” Rather than stand up for Bass – a member of the PSG – Andersen, in an unprecedented move that was protested by most of the members of the PSG, demoted Bass by removing him from all oversight of the Enron account. Bass was demoted for being too rules-oriented. The demotion was no small matter, as it was approved by Andersen’s CEO Joe Berardino.

Bass paid the price for saying “no” to a rogue client. At least two other Andersen accountants – Jennifer Stevenson and Pattie Grutzmacher – were also removed from the Enron engagement for challenging Enron’s use of SPEs.  Undoubtedly, these demotions sent a clear message to all Andersen employees, including Temple.

In this environment, how could one expect Nancy Temple, a relatively junior in-house lawyer who had recently been assigned to the Enron account, to say “no” to Enron or senior Andersen partners when she had recently witnessed the demotion of a senior partner for the very same act? Thus, Andersen’s culture presented Temple with an excruciating dilemma: protect Andersen by instructing its employees to destroy Enron’s documents or destroy her career. Unfortunately, she chose the former and, ironically, destroyed Andersen.

4.       The Temple of Doom.      In conclusion, Andersen’s “Temple of Doom” was its corporate culture, a cult-like culture in which employees were not free to think or act independently. It was this culture – and not greedy partners or unethical lawyers – that doomed Andersen to a needless death.

So, what do we learn from this case study?

This case study is a reaffirmation of the earlier statement that Organizations create a climate in which humans work and take decisions. The climate, or culture, created by an organization has a direct bearing on the type of decisions its employees take, and hence the number of errors they make!

The role of supervision is also clearly brought out here. Any degree of supervision over Temple could have prevented this disaster. However, those responsible for supervising Temple went along with her…but we will talk more about this when we discuss the role of supervision in detail.

So, next week we will move on to the higher elements in the error causation food chain.

Until next week,

The Erring Human.