The last time Paul Volcker made front-page news he and Ronald Reagan had teamed up with a program of sound money and tax cuts to restore U.S. economic vitality. Fifteen years later, the nation’s old inflation conqueror is back in the headlines, this time attempting to “save” Arthur Andersen.
But with arrogance still firmly in place at the embattled accounting firm, it’s gone even farther than that. It might be more accurate to say that Volcker is plotting a hostile takeover of Andersen, a move that would give birth to a new industry standard for an auditing company and completely change the corporate accounting system in the process.
The stakes for Andersen first heated up when the Justice Department took a breathtakingly aggressive action against the accounting firm in the dust cloud of the Enron collapse. Rather than indict the individuals within the firm who committed wrongful acts as document-shredding advisors to Enron, top Justice prosecutor Michael Chertoff decided to criminally indict Andersen as a corporation. This prevents it from completing any life-saving mergers with — or acquisitions by — other accounting firms. In effect, the decision puts Andersen out of business.
Eyebrows were raised across the financial and business worlds at the Justice Department’s overpowering action, but the DOJ was only acting as a corporate ethics regulator and law enforcer — well within its guidelines. The Andersen criminal indictment sent a message to all U.S. businesses that a corrupt corporate culture is just as bad as any individual criminal wrongdoing.
At 74 years old, and with nearly four decades at the U.S. Treasury and the Federal Reserve under his belt, Paul Volcker appreciates full well the importance of the regulatory fine print. He is aware that Andersen is responsible for a string of government scrapes that includes Lincoln Savings and Loan, Colonial Reality, Waste Management, Home State Savings Bank, and the Baptist Foundation of Arizona — with the document shredding at Enron topping the list.
Incredibly, not once did the accounting firm ever acknowledge wrongdoing, nor fire guilty executives, nor internally reform its operating practices following each of these cases. It was this inability to show any level of corporate contrition — in addition to the document shredding — that led the DOJ to take such highly punitive action.
But Volcker’s survival plan would change Andersen across the board, on the condition that the government drop its criminal case against the firm and instead reach a large financial settlement. Also, Andersen must finally acknowledge wrongdoing.
Volcker’s plan would overhaul Andersen’s internal procedures, including setting up an independent board to monitor the company’s own accounting. This would come in addition to a new seven-person board that would make major management changes. Volcker would take the helm of this board, which would include graybeards like John C. Bogle, the former Vanguard investment-management head; Roy Vagelos, the retired CEO of Merck and Co.; and retired Sen. John C. Danforth.
The survival plan would also end the type of conflict-of-interest problems that existed between Andersen and Enron by taking Andersen completely out of the consulting business and focusing it on auditing. While SEC chair Harvey Pitt recently opposed this vital reform, Volcker — who is now essentially doing Harvey Pitts’ job — remains in perfect pitch with investors who see conflict-of-interest problems as endemic to dishonest accounting.
Volcker, like Wall Street and many in the investor class, understands the high stakes of the Andersen situation, and his reforms are the right ones — not just for this company but for the industry. Yet the arrogance of the Andersen executive suite is even now so great that as the entire firm crumbles they haven’t had the common sense or grace to endorse the plan. But this isn’t deterring Volcker.
Rather than enlist overvalued equity or highly leveraged junk-bond financing to propel his takeover forward, the wily old central banker is using hard-headed logic as his currency. He believes that a successful reform of Andersen will serve as the industry standard — one that will end the fraudulent co-dependent enabling that marked the relationship between Enron and Andersen.
The Volcker plan hinges on a large settlement — perhaps $750 million — with the SEC and plaintiff attorneys representing Enron creditors and stock-owning employees. Such a settlement, however, could fund the effort by Labor Department secretary Elaine Chao to compensate Enron pensioners and 401(k) holders for their losses. Yet if Andersen evaporates, chances of retirement recovery for Enron employees is just about nill.
Most legal observers give Volcker virtually no chance of success. But then again, 20 years ago, no one believed he could end inflation either.