Andersen: Three Strikes — and You’re Out?

Baseball’s logic is simple. A hitter gets three strikes (that is, missed hits) to get on base. If not, they are “retired.” Modelled on that all-American rule, the sentencing proposals urged that criminals — once they were convicted of three serious crimes — be “retired” from society.

This goal would be accomplished through a rather draconian mandatory life sentence for the third crime — with no possibility of parole.

Many have argued that “Three Strikes” is too mechanistic an approach to criminal justice. But if such a rule were applied to the accounting profession, some of the financial scandals now garnering headlines might have been avoided.

Do you know Joseph F. Bernadino? Well, he was named as CEO of Arthur Andersen — the world’s fifth largest accounting firm — in January 2001. His appointment was prompted in part by two previous scandals involving Andersen in the late 1990s.

One involved a large earnings restatement by Waste Management — then “the premier waste services provider in North America.” The other concerned misleading financial information in 1997 and 1998 about Sunbeam that lead to the home appliance company’s bankruptcy. In both scandals, Andersen auditors allowed corporate management to overstate revenues — and hence to mislead investors.

In May 2001, Mr. Bernadino approved a $110 million settlement with Sunbeam shareholders. The very next month, Andersen paid a $7 million SEC fine for the firm’s role in the Waste Management debacle.

In the latter case, Andersen got off with little more than a rap on the knuckles. The SEC even allowed the company to pay its fine with no admission of wrongdoing. In retrospect, the Commission should have been a little less lenient.

But it wasn’t. And Enron turned out to be the third major offense for the hapless Andersen. In the world of petty criminals, not the lofty heights of the accounting industry, that violation would have constituted the proverbial third strike.

But as aggressive as Andersen has been known for years to be in its accounting practices, why stop at number three?

Thus, Andersen’s Enron debacle was quickly followed by a strike four — a scandal involving the bankrupt telecom provider, Global Crossing. This Andersen accounting client is now under investigation by the SEC and the FBI over questionable swap deals approved by the accounting firm.

Has this merely been a string of particularly bad luck for the now vulnerable firm? Hardly. A different umpire might have already sent Andersen back to the bench.

And while there is a great deal of debate over the appropriateness of sending small-time crack dealers away for life, more debate about adopting similar rules for the accounting industry would be desireable.

After all, playing fast and loose with accounting rules seems to have been Andersen’s trade mark and business license. It seems high time to put an end to a culture that smacks of excessive risktaking. If accountants don’t play it safe, who will?