In 1963, a history of Arthur Andersen and Co., The First Fifty Years, was written to commemorate the fiftieth anniversary of the founding of the firm. It was revised and updated in 1973 and republished as The First Sixty Years (Library of Congress card number 74-84156). It was a collaborative effort by various members of the firm and is the only generally available account of its history.
The most striking fact to emerge from Andersen’s history is that they have always been on the cutting edge of their profession, often in co-operation with various federal agencies and authorities. WW2 formed a watershed in the firm’s development. Pre-war, their activities were almost wholly confined to the United States itself, although they had representatives in London handling both European and South American interests. In the post-war period, they began to expand internationally, following the global expansion of US capital. Indeed, they were often instrumental in that expansion. This was not simply a matter of geographical extension. They were key innovators in both management and administrative methods.
The firm was founded in Chicago in 1913 under the title of Andersen, Delaney & Co. It was a two-partner enterprise with an initial capitalisation of $4,000. They quickly gained a local reputation for both efficiency and integrity. Arthur Andersen refused to sign-off the audit of a local shipping company – losing a valuable contract, in the process – because he was dissatisfied with their accounting methods. His estimation was proved correct when the firm involved became bankrupt the following year.
The firm’s first federal involvement followed on their founding. The first Federal income tax, as we know it today, became effective on March 1, 1913. The tax rate was so low as to have little effect on either individuals or firms. However, when the US entered WW1 federal tax rates increased sharply. Andersen were the first firm to realise the importance of this, initiating a series of seminars on taxation at Northwestern University. These were attended by both federal and private interests – judges, lawyers, bankers and businessmen. Andersen set up an office in Washington so they could liaise more effectively with the Internal Revenue Service.
By 1930, Andersen’s total fee-income was some $2,000,000 compared with $322,000 in 1920. They had expanded on the back of the US post-war boom, initiating in the process a new degree of involvement in a firm’s total business practice as opposed to just finance and accounting. This involved the collection and classification of both general and detailed intelligence on many hitherto peripheral matters. These included labour relations, availability of raw materials, plants, products, markets and the effectiveness of the organisation and its future prospects. They had also begun to work closely with the investment banks.
After the Wall Street Crash of 1929, the firm helped to clean up the US financial markets, working with the newly established Securities Exchange Commission. They supported the new standards in accountancy whereby an accountancy firm was held responsible for the ‘fairness’ in the way a company’s books had been presented. Up till that time it was the firm which was held responsible for its own honesty. It is worth noting that after the Enron debacle Andersen tried to reverse this. They pleaded that the audit was only an ‘opinion’ and that the company itself was ethically and legally responsible for the figures, not the auditors. By then, most of the old regulatory rules introduced in the thirties had been scrapped.
WW2 was probably the largest logistical exercise ever carried out. In common with professions, the US military tried to utilise the civilian skills of accountants it recruited into the armed forces during this period. This had a profound effect on the way those personnel regarded their respective professions in the post-war period. A total political and economic engagement had been the norm for five years. Even those personnel who had remained part of the civilian war effort had become used to working closely with government at every level. Andersen quickly realised that WW2 had brought into effect completely new methods of organisation. The most important of these were the necessity of working at an international level, working both in foreign economic and legal environments and working with an awareness of non-US governments.
Post-war expansion
Andersen quickly expanded internationally. They were the first American accountants to do so, establishing offices in London and Paris immediately after the war and in economic conditions where there was little or no prospect of any immediate commercial profit for them. Partners and managers were transferred to Europe as early as December, 1945. From the beginnings of this expansion, they concentrated on establishing uniform and universal business practices. These practices were those which had evolved in the US both before and during the war. In short, Andersen were exporting US business practices to the rest of the world, starting in post-war Europe. There is little evidence of direct US government involvement in this. There was, however, a similarity in thought with the emerging State Department policy of the time. In a report back to the home office, Mark Littler, established in London but with overall responsibility for French operations as well, wrote:
‘…..we cannot hope for a peaceful and prosperous world unless we have a peaceful and prosperous Europe…..let us hope that some day it can be said…..we, as a firm, played our part in helping a better Europe to arise…’.
This startling anticipation of the Marshall Plan and the whole European reconstruction programme was made in 1946 by a Midwestern accountant.
Of equal interest was Andersen’s early involvement in computing. They were the first company to envisage the possibility of business computers as early as the late forties. Computers at this stage were still matters of national security and much of the early research work was done by the Rand Corporation, the world’s first think tank, and originally a Cold-War front for USAF intelligence. Initially, they were used in code-breaking. We learned only recently that US intelligence services had broken part of the Soviet codes as early as 1948, thus learning some of the reality of Soviet espionage penetration in the pre-war US. Andersen’s official history states that the initial idea for business computing came from one of their employees, Joseph Glickauf – and that he developed the idea and an initial working model himself. Apart from the inherent improbability of a US accounting firm producing a computer genius around the same time another of their staff managed to anticipate post-war US foreign policy, the expense alone is enough to throw some doubt on this. A business computer without a memory is useless. Memory alone cost $1 million per K in the early years of computer development.
Andersen had two central processors, one in their Chicago head office which handled all their US business and another which handled the rest of their world-wide business. This was based not in London or Paris, world financial-centres, but in Milan. Indeed, it was in Milan that they centred their non-US operations. Politically unstable and financially corrupt, Italy was a peculiar choice. It was, however, central to CIA operations in Europe. London was still a rival financial centre and Paris only a part-time ally of the US after DeGaulle.
The later history of Andersen is outside the scope of the book but it is worth noting that they opened a Moscow office as early as 1974 at the start of the period of Detente. They were the first Western company to sign a Protocol with the USSR Council of Ministers for Science and Technology. The agreement was for the exchange of technological knowledge in various areas.
After the collapse of the USSR, Andersen was the first Western firm to be involved in the post-Soviet privatisation programme. Among other things, they were closely involved with the privatisation of Russian energy resources. A Russian-born vice-president of Gazprom was until recently a senior partner at Andersen. He lives in the US. Andersen were recently involved in a Russian financial scandal. They had acted as advisors on an oil-transportation scheme, recommending that the cheapest method was by sea not by pipeline. Independent advice discovered the their recommendation would have resulted in costs ten percent more expensive. Andersen had failed to mention that they owned the company which was the main bidder for the method they had recommended.
The above circumstantial evidence suggests that Andersen had a close but so far unacknowledged relationship with the various federal and intelligence agencies in the US throughout a large part of the twentieth century. This would seem to be confirmed by the fact that Andersen has handled the business management of the FBI’s computer system for many years. This gave them access to content as well as to the ‘mechanics’ of the system. As Accenture, now the management consultancy side of the original firm, they have the contract to re-jig the Federal computer systems for the new Home Security system so that the FBI, CIA and State Department can have access to each others data bases. This is in spite of the fact that the auditing side of the firm was charged with, and found guilty of, a Federal offence in it’s dealings with Enron.