After almost 10 years, accountants are finally getting a sequel to their favorite movie.
The Accountant 2 — with returning star Ben Affleck — just hit theaters. If you haven’t seen the first one, it’s pretty good. It follows Affleck’s Christian Wolff, an autistic math savant who leads a double life as a forensic accountant for criminal organizations. Buzz is the second one’s even better. That’s all I’ll say!
Here at Subscribed Weekly, we’ve been recognizing the important role that accountants play as we’ve seen the Subscription Economy officially enter the “Age of Monetization.” To celebrate accountants worldwide, including the bad-ass one in this movie, we thought we’d share a story of our own on one of the biggest moments in the accounting profession, if not the business world. Like The Accountant, it’s a story filled with intrigue and drama (but no assassins). We call it: The Story of SOX.
Enjoy.
The Story of SOX, Part 1: “Who’s Watching the Watchmen?”
In June 2001, a unique shareholder event took place at a luxury resort in Sardinia. The theme was ancient Rome. Jimmy Buffett played. There were exotic animals and toga-clad gladiators, as well as an anatomically correct ice sculpture in the shape of Michelangelo’s David that dispensed vodka.
The company holding the event was Tyco International, a $40 billion public company, and yes, around half of the 75 attendees were actual Tyco shareholders. But the event was also a 40th birthday party for Karen Mayo, the wife of Tyco CEO Dennis Kozlowski. She got carried into the festivities on a throne.
The pair are no longer married – Mayo filed for divorce after Kozlowski’s conviction and imprisonment for grand larceny and enterprise corruption. Did Kozlowski and his CFO go to jail for charging half the cost of the party to the corporate expense account? Not exactly. The cost of the $2 million dollar party was a drop in the bucket compared to the $600 million that they eventually embezzled.
This was not a unique story. In the early 2000s, corporate criminality was all the rage.
Adelphia CEO John Rigas stole over $2 billion by creating fraudulent loans and concealing them from the company’s balance sheet. WorldCom CEO Bernard Ebbers directed his finance team to overstate assets by $11 billion by improperly capitalizing expenses instead of reporting them as costs. Enron CEO Kenneth Lay engaged in massive accounting fraud by hiding debt and inflating profits through complex off-balance-sheet entities.
These were public companies. Their public financial statements were supposed to be thoroughly audited. And they were.
Following the stock market crash of 1929, the Securities Act of 1934 required all public companies to have their financial statements audited by independent certified public accountants (CPAs). People had lost trust in the system. The only way to restore confidence in the markets was to ensure mainstream investors that someone was minding the store.
Which made the Enron collapse so astonishing. The biggest example of corporate fraud was audited by one of the most storied accounting firms in the country, Arthur Andersen. Andersen was founded in 1913 by a 28-year-old professor at Northwestern whose motto was “Think straight, talk straight.” It quickly grew a reputation for rigorous auditing standards and independence, and was even known to turn down shady clients.
But a lot had changed since the Great Depression. In the 1970s, many accounting firms entered the management consulting business, which soon began generating more revenue than their auditing divisions. So suddenly they weren’t just checking the books for their clients, they were partnering with them, and charging hefty fees in the process. There was a lot of financial pressure to make sure their clients stayed happy.
Then came the client from hell, Enron. At the time of Enron’s collapse, Arthur Andersen’s Houston office was billing the company $1 million per week for auditing and consulting services, and their lead auditor had an annual performance goal of 20% increase in sales. What’s more, Enron’s chief accounting officer was a former colleague at Andersen. When Enron went down, Arthur Andersen went with them.
On June 15, 2002, Andersen was convicted of obstruction of justice for shredding documents during the Enron investigation, and promptly lost its license to engage in public accounting. Eighty-five thousand people lost their jobs overnight. Just like that, the “Big Five” public accounting firms became “The Big Four.”
Why was the collapse of Arthur Andersen such a big deal? Because they were supposed to be the good guys. They were the watchmen!
But instead of acting as an independent auditor, Andersen helped Enron hide its fraudulent activities by approving shady accounting practices, off-the-books partnerships, and looking the other way.
This wasn’t just a one-off, Madoff-style ponzi scheme. Andersen represented the entire financial establishment. Andersen was the system. If Andersen was crooked, what did that say about everything else? What happened when the auditors couldn’t audit?
Once again, the full faith and credit of the American financial system was cast into serious doubt. As Ohio Representative Michael G. Oxley later noted, “It was a severe shock to our system, to the core of the capital system that depends on honesty and integrity, and on having investors believe in the companies they invest in.”
So who was watching the watchmen?
Next week: “The Story of SOX, Part 2: Enter the Ex-FBI Agent.”
