Ruing Andersen's demise and the loss of audit competition.

A unanimous Supreme Court recently overturned the 2002 criminal conviction of Arthur Andersen for shredding documents related to its audit of Enron Corp. Andersen's conviction by a jury was reversed by the high court based on a finding that the trial judge's instructions to the jury were improper.

In writing the opinion, Chief Justice William Rehnquist stated that if the lower court's jury instruction is applied as a definition of law, then any company ever destroying any document might need to be concerned that the document would be relevant in future investigations or lawsuits.

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I was at a dinner recently sitting next to a very accomplished gentleman, who, when asked where he began his career, rather sheepishly whispered, "Arthur Andersen," as if it were a deeply held secret that he feared would get out. It reminds me of the famous quote from President Reagan's former Labor Secretary, Ray Donovan, who asked after his acquittal, "Which office do I go to, to get my reputation back?"

It is a shame that the actions of a few individuals at Andersen caused about 28,000 employees in the U.S. to lose their jobs. Putting the entire company out of business for the deeds of a couple of individuals was the real crime here. I believe that this reversal will help to remove the unjustified cloud over the extremely competent and high-integrity individuals who have been employed by this firm. While this reversal comes "too little, too late" for Andersen, it hopefully denotes a change in the prosecutorial environment.

Industry Is Less Competitive

While we still have to endure some state attorneys general who continue to "try" cases via the press, many of the current cases are indeed going after the individuals who perpetrated the alleged criminal acts rather than the companies themselves: Enron, Adelphia Communications Corp., Tyco International Ltd., HealthSouth Corp.

The only thing accomplished by putting Andersen out of business was depriving the market of another audit firm that might have been useful in this post-Sarbanes-Oxley world. The accounting industry has become less competitive.

We have seen the Big Eight dwindle down to the Big Five due to consolidations; with Andersen gone, we have been down to the Big Four. At the same time, companies have been faced with using a different audit firm for consulting, tax and internal audit work. This generally leaves little room for real choices should they require that the audit be done by a Big Four firm.

According to a 2003 survey by the Government Accountability Office (GAO), the Big Four perform audits on companies representing about 98 percent of all public company revenues. With Sarbanes-Oxley Section 404 work pushing these firms' audit resources to capacity, the need for more competition is even greater.

Limited Choices for Many

While many recognize that this is a problem, we are short on solutions. The issue is largely market-driven, and many companies have no choice due to their global reach, debt covenants, etc. but to choose a large firm.

The GAO report noted above did offer some recommendations, as follows:

"It is important that regulators and enforcement agencies continue to balance the firms' and the individuals' responsibilities when problems are uncovered and to target sanctions accordingly ... when appropriate, hold partners and employees rather than the entire firm accountable ... However, it is equally important that concerns about the firms' viability be balanced against the firms' believing they are 'too few to fail.'"

Several audit firms, among them Grant Thornton, have gained clients from the Big Four over the last several years. Hopefully, we will see more of these second- and third-tier firms emerge and grow to create more competition. As Ed Nusbaum, CEO of Grant Thornton's U.S. unit, said in the April issue of this magazine, "Times have changed. Auditors have changed. Companies' decisions have changed. It's time we embrace this reality and examine all of the possibilities."