From 17 Corporate Crime Reporter 13, March 31, 2003

INTERVIEW WITH BARBARA LEY TOFFLER, AUTHOR OF FINAL ACCOUNTING: AMBITION, GREED AND THE FALL OF ARTHUR ANDERSEN

For years, Arthur Andersen used to be a subscriber to Corporate Crime Reporter.

Then, in December 1999, we received a letter from an Arthur Andersen partner informing us that the firm would no longer be subscribing to this publication.

Why?

The interviews were too "anti-corporate" and "a bit wearing," he wrote.

In honor of that partner, we run today an interview with Barbara Ley Toffler, the former Andersen partner-in-charge of Andersen's Ethics & Responsible Business Practices consulting services.

Toffler is the author, with Jennifer Reingold, of the recently released Final Accounting: Ambition, Greed and the Fall of Arthur Andersen (Broadway Books, 2003).

Arthur Andersen's conviction on obstruction of justice charges related to the Enron debacle spelled the abrupt end of the 88-year-old accounting firm.

In her book, Toffler reveals that the symptoms of Andersen's fatal disease were evident long before Enron.

Toffler chronicles how a culture of arrogance and greed infected her company and led to enormous lapses in judgment among her peers.

Toffler details the slow deterioration of values that led not only to Enron but also to the earlier financial scandals of other Andersen clients, including Sunbeam and Waste Management, and illustrates the practices that paved the way for the accounting fiascos at WorldCom and other major companies.

We interviewed Toffler on March 24, 2003.

CCR: What is your current professional position?
TOFFLER: I am an adjunct professor at Columbia University Graduate School of Business. I teach a course that uses Shakespeare to teach about leadership.

CCR: Sketch for us your professional career.
TOFFLER: I received a Ph D from Yale University in administrative sciences. I taught for two years at Boston University's Graduate School of Management, and then was on the faculty at the Harvard Business School for eight years. I set up a consulting firm called Resources for Responsible Management. I then left to join Arthur Andersen as a partner in 1995 to set up a ethics and responsible business practices consulting group.

CCR: How long were you with Arthur Andersen?
TOFFLER: Four years.

CCR: Why did you join Andersen?
TOFFLER: My husband, Chuck Powers, had an interesting offer. Over the last 20 years, Chuck has established a series of relatively small non-profit organizations that bridge public and private sector entities and deal with environmental public policy concerns.. He was approached to set up a multi-university consortium, based out of the state university medical school in New Jersey, to do a risk evaluation with stakeholder participation of the nuclear waste sites in this country, including Hanford and Savannah River.

We were living in Boston.

Things were changing in my firm. As well, my clients had never been based in Boston, so I was doing a lot of traveling. I had been thinking that it might be the right time to move my firm down to the New York area. And quite by chance, I got a telephone call from a headhunter. He told me about this Arthur Andersen position, which sounded like an entrepreneurial opportunity within a resource rich organization. I was wrong on both counts, as it turns out.

CCR: Andersen historically has been known as a straight shooting firm.
TOFFLER: Yes, in fact, the man Arthur Andersen was a picture of rectitude. It is rather interesting to think that in the early years of his firm, in the 1920s, he risked losing his business because he walked away from his most lucrative client. That client was a railroad magnate who wanted Andersen to approve something similar to what WorldCom did -- to record operating expenditures as capital expenditures.

He wanted Arthur Andersen, the man, to sign off on a fraudulent financial statement. Andersen said to him, "there is not enough money in the city of Chicago to convince me to do that." Essentially he said, "You can take your business and walk." Which is what the client did. It was Andersen's most lucrative client at the time.

As a result, Andersen gained a reputation as someone with absolute integrity. He was then called in to clean up the financial mess in the Insull Companies, a group of electric utility companies remarkably like Enron.

After Insull, Andersen's name and career were made.

CCR: When you went to Andersen, did you have a sense of whether Andersen was still a straight shooting firm?
TOFFLER: I had thought that it was. Maybe I simply didn't do my due diligence as well as I should have.

I knew that in 1987 Andersen had put $5 million into developing an ethics training program. It was introduced to undergraduate business professors around the country. They were brought into the Andersen St. Charles facilities in Chicago and trained to use these excellent materials, at no cost to any of the colleges. I had seen some of those videos.

One amusing -- and prescient -- factor was the appearance on tape of Stew Leonard , CEO of Stew Leonard Stores.

In the video, he told the students "If you are not ethical, you'll end up in jail."

And turns out he did. He was convicted of tax fraud. He is now out of jail. And the Stew Leonard stores still exist in Connecticut and are very successful.

But I knew that many people around the country were using these ethics materials. And that said something important to me about the Firm.

Also, in 1993, I had done a day-long session with Andersen Consulting's Strategy Group.

I was brought in to do a session with their young partners to talk about some of the pressures they were facing that created ethical dilemmas.

I was quite impressed that they actually were putting time, money and genuine work into dealing with these concerns.

So, I thought it made sense for me to consider joining Arthur Andersen.

CCR: If Arthur Andersen, the man, was still in charge of the company, he wouldn't have needed an ethics program, because he was the embodiment of the program. That would define the culture.
TOFFLER: That may be right.

But it took me a while to realize that the Arthur Andersen culture was always one in which any kind of individualism, or any kind of acting outside the accepted conforming behavior was not looked at positively.

But Arthur Andersen the man was so upright that the chances of something going wrong in an audit or a consulting project was much lower than it ultimate became. There was always the issue though that if something did go wrong, this was not a culture in which somebody would have been likely to say -- "Hey, we've got a problem here.

CCR: When Arthur Andersen died, did the culture of integrity die with him?
TOFFLER: No. Leonard Spacek took over and he was the most impressive of the leaders post-Andersen. He embodied the uprightness of Andersen, but he really thought about how you grow and develop the firm. He was a more creative manager and leader. He only died in the 2000. And it must have just killed him to see what the firm was going through.

CCR: You went to Andersen in October 1, 1995. When did you realize that things weren't as they seemed to be?
TOFFLER: I had a bad experience the first day I walked in the door. I had been brought in by a young, very dynamic partner, Dean Fischer.

Fischer reported to Gary Holdren, who started the Central Region Consulting Organization, under which several audit-related consulting services would be housed.

The money for my group had been put up by Dick Measelle, who was the managing partner of Arthur Andersen. This was the same time that George Shaheen was the managing partner of Andersen Consulting.

When I talked with Dean Fischer prior to my joining the firm, he told me that Andersen had a hard time bringing in "experienced hires". So I had agreed to spend six to twelve months in Chicago before moving to the New York office, so that I could absorb the culture of the firm. Dean had said, "I am going to stick to you like glue for the first two months you're here. That's the only way you'll succeed."

After lunch my first day, I had an appointment scheduled with Dean.

When I walked in, it was clear that something was radically wrong. He didn't greet me. He didn't do anything. He said "Sit down, we have to talk." He continued, "You are not reporting to me anymore. I've stepped out of this position."

He was clearly very upset. I asked what happened, and he said "I can't talk about it, but it had to do with an ethical issue with my boss, Gary Holdren."

He wished me well, gave me his executive assistant for one-third time, and said "I hope things work out for you."

It was bizarre. His office was two doors to the right of Gary Holdren's, my office was two doors to the left of Gary Holdren's.

In the eight months that I was there, Gary never spoke with me. I would set up appointments which would be canceled. Nor would he acknowledge me in the hallway. And he and Dean weren't speaking either.

CCR: Who were you reporting to?
TOFFLER: Initially, no one.

CCR: Did you ever find out what that was about?
TOFFLER: No, I never did. I have my suspicions, but I don't really know.

And I won't speculate.

CCR: Were you getting work done?
TOFFLER: Work? I didn't have a computer. Thank God for wonderful Paulette, the executive assistant, who helped me negotiate some of the basics of the system.

There was a new technology. I didn't have a boss. Nor did I know anybody there.This was an oddball group.There were several other newcomers.

I made appointments. Most people were perfectly willing to sit down for an hour, talk with me, go out to lunch with me. But I wasn't reporting to anybody.

Eventually, they assign a partner, Clem Eibl, to replace Dean, but he, poor guy, didn't know what any of us were doing.

There was me, there was a fellow heading Business Fraud Risk Services, that did forensic accounting.

And there were several other small consulting service lines.

My job was to sell and deliver services in ethics and responsible business practices. Dean and I hadn't come to a complete agreement on what my group's services would actually consist of. It turned out that Dean and I and others had different ideas about what those services should be.

The fact that we had never come to an agreement should have been a warning note for me that there might be trouble up ahead.

CCR: Did you sense that they were skittish about selling business ethics services when in fact they had no similar program for the firm itself?
TOFFLER: They weren't skittish about it. They were so arrogant, that it really didn't occur to them. And it drove me nuts, because as I started going out to sell services, people said to me, "Tell us what Andersen is doing in-house."

And all I could do was go back to that 1987 program. But this was 1995.

And the next question usually was, "What have you done since then?" It was always a problem.

Also, Andersen was a partnership. And they did not see themselves as subject to the Federal Sentencing Guidelines for Organizations. It is so ironic that Andersen is the only company that has ever suffered the ultimate consequence that the guidelines do promise -- which is the dissolution of the company.

CCR: Although, they were effectively dead before the sentence.
TOFFLER: Yes, once there was even the potential for indictment, very few public companies wanted them auditing their books. As soon as that happened the big clients left in droves.

The firm's partners were very arrogant. I actually thought the title of the book should have been Arrogance, Greed and the Fall of Arthur Andersen. They believed nothing could touch them.

CCR: There was arrogance, but what you've described so far is disorganization.
TOFFLER: There was tremendous disorganization when I was there. The defining issue was the Arthur Andersen/Andersen Consulting split in 1989.

AA was the audit company. AC was the technology consulting company. They were both under Andersen Worldwide based in Geneva Switzerland.

Ultimately the final split was like an ugly divorce. When they first split, AC needed the name and the financial resources. And at that time, the AA side was still making more money. In the beginning, there were transfer payments going from AA to AC. Very rapidly, AC began to grow exponentially.

By the agreement drafted in 1989, whichever side was bringing in more dollars had to balance the income through transfer payments. With its rapid growth, AC was soon making the payments back to AA.

The more AC grew, and the less AA grew, the more AC had to turn over to their sister firm.

Ultimately, that led AC and George Shaheen to say, "What are we doing?" And that question laid the groundwork for the dispute to go to arbitration. It was a brutal and hostile arbitration.

And that was the firm that I came into.

CCR: You did financially well at Andersen, right?
TOFFLER: When I was to New York, I was reporting to a wonderful guy, John Kelly, and we were successful, we met our targets.

When Joe Berardino took over, he increased my target by 80% immediately, and there was no way my group could meet it It was an impossible task, which was part of the strategy to weed out any service line that was not grossing extremely high revenue. And we were not alone.

CCR: You portray ethics programs as fig leafs.
TOFFLER: Most of the programs generated by the Federal Sentencing Guidelines are, essentially, fig leafs.

CCR: Were you selling fig leafs?
TOFFLER: I got to the point where I would have sold anything. Anything anyone would take, I would have sold. That was the culture. I had been very successful in my own firm providing organizational and behavioral services geared to deal with real vulnerabilities a client was experiencing. But at Andersen, I felt pretty miserable most of the time.

I had always been proud of the work I did. I wasn't making the kind of money partners were making at Andersen. But I was doing very, very nicely. And I absolutely believed in what I was doing. As I said, the services my own small firm provided were detailed diagnoses and assessments of where the ethical vulnerabilities were inside a corporation. That involved individual and group interviews and meetings with senior management.

It is almost impossible to do those kinds of assessments now, because what were formerly confidential sessions, can no longer be guaranteed to be such.

In fact, since Stender v. Lucky Stores in 1992, the law allows anything said in a confidential meeting within an organization is to be considered discoverable. There is no privilege. It doesn't matter if the general counsel does the interviewing, information shared in such a meeting can be subpoenaed.

Therefore, a company has got to be crazy to have the kind of discussions and the generation of information that my firm used to do all the time with our clients.

We could make a difference, because we were able to talk to people about their jobs, their perceptions of the company's culture, and the ways they experienced pressures to perform less than ethical activities.

I conducted management sessions where middle managers would confront high-level executives with the truth about their organizations, about the disasters they foresaw. And I had good competitors that were doing the same thing. We were making a difference. We were preventing problems. We were helping senior management understand their organizations.

CCR: You tried to do this internally at Andersen, too, right?
TOFFLER: Right near the end of my time there.

It was becoming clear to me and my group that unethical things were going on within Andersen.

Senior people knew what was happening, but they needed to take their heads out of the sand and confront the risks the firm was facing.

They were charging exorbitant fees, they were often selling services unneeded services.

In many cases unqualified people were performing the work. And frequently, they did not use the expertise they did have.

And, possibly most importantly, their clear awareness on the part of members of the Risk Management Executive Committee that the firm was engaging in "aggressive accounting" that might come back to bite them when the "economy tanks."

But nothing was done to address these practices and problems.

CCR: Are all of these ethics programs that have been spawned by the Federal Sentencing Guidelines for Organizations a waste of money?
TOFFLER: They are not a waste of money. If your company is found guilty of violating a federal law, but the courts can ascertain that you have the required "mitigating factors" in place, your will not be sentenced as harshly as it would were those elements not there.

So, the investment does serve to protect the company. But it doesn't affect behavior.

CCR: But are they making the company more ethical?
TOFFLER: Most of them do not.The programs that do make a difference are those where the company has a very fine ethics officer who has a direct line to the CEO of the company., and serves as internal expert.

In many companies, the ethics officers come out of the legal or audit divisions, and are more focused on meeting the checklist requirements of the federal guidelines. I do know that some ethics officers have raised the question of self-examination privilege with the Sentencing Commission, in an effort to enable companies to do a better job of preventing wrongdoing.

CCR: The Ethics Officers Association holds meetings every year. You used to go and meet with your fellow ethics officers.
TOFFLER: I'm not and have never been an ethics officer and wasn't at Andersen.

CCR: Andersen didn't have an ethics officer?
TOFFLER: It didn't feel it needed one. An ethics officer is usually a lawyer or auditor working within the organization. I never was an ethics officer. I am a social scientist who was hired to sell consulting services, not to do anything internally.

CCR: The ethics officers would be your clients?
TOFFLER: Yes.

CCR: Are ethics officers pulling their hair out saying -- I'd like to do the right thing, but can't?
TOFFLER: There are some ethics officers who know their companies inside and out. They are not pulling their hair out because they have internal CEOs who do listen to them. Not that they get everything done that they want to get done, by a long shot. Privately, they are pulling their hair out all of time. But they are highly respected and are seen as members of the executive team. And they really do have some say about what is going on.

But they are not representative of the vast number of ethics officers, many of whom have left their positions because they feel they are having little impact on the organization. All they are doing is administering this checklist program

CCR: You write disparagingly about the Defense Industry Initiative, which was the model for the Sentencing Guidelines. Ethics is now a huge industry, and you seem to be down on it?
TOFFLER: The way "ethics" is being done, it doesn't change behavior and it doesn't help a company understand where the vulnerabilities are.

CCR: You report that you went and visited a smaller defense contractor, and the workers had signs all around that read: "Be ethical, get screwed." When they actually tried to fix a problem, they were slapped down.
TOFFLER: When I had my own business, I dealt with a plant that had nuclear facilities. We used short cases in a program we put together. In one case, a quality assurance manager is told by two senior managers not to report that some people had not gone through a hand and foot scan.

This same fellow also got a lot of pressure from his boss not to make trouble.

The lawyers looked at this case and said: "This is a no-brainer -- of course, he has to report it."

And then you put the lawyers in a room with a couple of "real" people, who say, "Of course he knows that he supposed to report it -- that is not what this case is about. The case is about the quality assurance manager getting pressure from two people, senior to him, who can affect his job or career, to not comply with the regulation to report the incident -- and who is getting no back up support from his boss."

CCR: So it's more a question of culture change. From your experience, what would have saved Andersen?
TOFFLER: They knew what was going on. They knew t their risks. And they simply did nothing about it. You have to get your head out of the sand.

Trouble is not going to go away if you ignore it.

If they got their head out of the sand, they could have fixed much of what was wrong. It would have cost them some consulting work, in fact, it would have probably cost them a lot of work -- Enron, WorldCom and others. They would have to rethink how they should deal with all their clients that were making a lot of money by acquiring debt and hiding it.

But they knew, and they did not do anything. In most companies, the things that can bring you down are not surprises.

CCR: Sarbanes Oxley, the new head of the SEC -- are these things going to make a difference?
TOFFLER: None of us know yet. There is a lot of talk. We are waiting to see how Bill Donaldson, the new chair of the SEC, is going to do.

You know, the Arthur Andersen story might have had a different ending if, when Enron exploded, CEO Joe Bernardino had not taken such an arrogant stand in the Wall Street Journal op-ed piece he wrote in December 2001.

If, in fact, he'd stood up and said, "We have always been a an institution of integrity, we have gotten caught up in things that many of our brethren also have been involved in. But we have always been a leader and we are going to lead the industry out of this." Then they might have had a chance.

[Contact: Barbara Ley Toffler, 200 Winston Drive, Suite 1209, Cliffside Park, New Jersey 07010. Telephone: (201) 224-9445. E-mail: [email protected]]