You can take the accountant out of Arthur Andersen. You can’t take the Arthur Andersen out of the accountant.
It almost wouldn’t be fair to say we should have known that Chicago-based Huron Consulting Group Inc. was destined to implode. It is tempting to say it, though.
Huron was founded by about two dozen Arthur Andersen Llp. partners in March 2002, the same month the now-defunct accounting firm was indicted as part of the US government’s investigation into the collapsed energy trader Enron Corp. For seven years, Huron has advised other companies on how to deal with complex accounting questions and investigations.
Today, Huron is better known as the forensic-accounting shop that couldn’t keep its own books straight, and blew up its business model in the process.
On 31 July, after the stock market closed and traders had begun heading home for the weekend, Huron disclosed it would restate its financial reports since 2006 to correct errors in how it accounted for employee-compensation expenses. The move will slash its net income for the period by $57 million, or almost half the $120 million that Huron had shown before.
The fallout was immediate. The company’s chairman and chief executive officer, former Andersen partner Gary Holdren, resigned without severance pay. Huron said its chief financial officer and chief accounting officer were leaving, also without severance. The US Securities and Exchange Commission is making inquiries.
Huron fell 69% when trading resumed 3 August, wiping $660 million (Rs3,141.6) off the company’s market value. The curse of Andersen, which failed to stop the frauds at Enron and long- distance telephone company Worldcom Group Inc., lives on.
There hasn’t been an accounting fiasco this rich with irony since the tax-return preparer H&R Block Inc. had to redo its financial reports in 2006 to correct errors in its accounting for corporate taxes.
For sheer brand destruction, Huron’s restatement promises to be much worse. Think what happened to the career of The Pee-wee Herman Show actor Paul Reubens after he was arrested for indecent exposure at an adult movie theatre in 1991, and that should give you an idea of how damaging Huron’s scandal may get.
Brand destruction: The building that houses Huron Consulting Group’s office in Chicago. Huron is now known as the forensic-accounting shop that couldn’t keep its own books straight and blew up its business model. Frank Polich / Reuters
Huron had built a reputation as a Mr Fix-It for companies embroiled in accounting messes. On its website, the company says its professionals have the skills and experience to help you resolve your accounting question, the ability to explain the literature in a clear and concise manner, and the ability to help you apply the literature in practice. Its clients over the years have included Fannie Mae, Nortel Networks Corp., and Tenet Healthcare Corp.
Huron’s misstatements centred on four companies it bought from 2005 to 2007. Huron said the companies’ former owners redistributed some of the sale proceeds they received in ways that weren’t consistent with their ownership percentages. In some instances, they used the proceeds to pay employees at the businesses they had sold, as a reward for continuing to work at Huron or for achieving personal performance measures.
Under the accounting rules, Huron was required to report the payments by the former owners as compensation expenses, because the actions of economic interest holders in a company may be imputed to the company itself, as Huron explained. Huron failed to do this. The company said the restatement would reduce its 2008 net income by 76% to $10 million.
Huron said it expects to identify one or more material weaknesses in its internal control over financial reporting, as a result of the findings. It said the US Securities and Exchange Commission is also looking into whether Huron’s revenue-recognition practices are appropriate. If you were a director on the board of a company looking for accounting or management advice, you would be hard-pressed to justify hiring Huron now.
The job of leading Huron now falls to two other Andersen veterans: George Massaro, its new chairman, and James Roth, a company founder who was named chief executive. Massaro had been the point man on the company’s 2006 investigative report for Fannie Mae, which concluded, among other things, that Fannie’s accounting systems were grossly inadequate.
A turnaround under these circumstances may be too much to hope for, especially at a company so leveraged. As of 31 March, Huron had $321.5 million of long-term bank borrowings, an amount almost as large as its $337.5 million of shareholder equity. While it takes just minutes to destroy a reputation, debt isn’t so easily discharged.
One thing Huron did get right years ago was a risk-factor disclosure it included in the October 2004 prospectus for its initial public offering.
Our ability to maintain and attract new business depends upon our reputation, the professional reputation of our consultants and the quality of our services, the prospectus said. Any factor that diminishes our reputation or that of our consultants or calls into question the quality of our services could make it substantially more difficult for us to attract new engagements and clients.
Just how much more difficult, Huron is about to find out.