You can’t fire your auditors in this country without killing your stock. Unless your auditor is Arthur Andersen, Enron’s now-disgraced bookkeeper. Arthur Andersen is the fastest disappearing act in American corporate history.
Companies can’t fire Andersen fast enough. Except us here at TheStreet.com. Last month, Arthur Andersen fired us before we could fire it. Andersen pleads with virtually every other client to stay, but it jettisoned TheStreet.com because I refused to stop criticizing the company on television. The obvious ironies of the situation made for a few amusing headlines, but the real and totally untold story about Andersen and TheStreet.com is one that captures everything that was wrong and abusive about that company’s method of doing business. The real story has to do with how, no matter what your accounting firm does, no matter how stupid or mickey mouse it is, you are stuck with it no matter what. Put simply: The Big Five accounting firms (or Big Four, if you think, as I do, that history has already spoken) have little public firms like ours by the balls.
Once in, they can, if they want to, have the run of the place, and you can’t do much to stop them. If you choose to switch firms, every financial journalist worth his salt will take aim at you. Every professional short-seller will declare you guilty and pound the bejesus out of your stock. Accounting firms and public companies mate for life, because the consequences of firing are just too horrendous for the client – no matter what kind of knuckleheaded advice the consulting arm of the firm gives you. Until Enron, accounting firms had a license to print money once they were hired for auditing. They could push their consulting arms down your throat, and the hapless client could do nothing about it. In fact, much of the time these firms virtually give away the audit so they can get in the door to earn the big consulting fees. The fact that even after Enron, the Securities and Exchange Commission’s chief, Harvey Pitt, is still not willing to force accountants to separate auditing from consulting shows you he’s either oblivious to the way accounting firms really work, or he’s simply owned by the accountants’ lobby.
There’s just too much opportunity for abuse and no reason for an auditor to find anything wrong, even if it is right in front of him, because such red-flagging will impede the natural consulting flow that makes the relationship profitable to begin with. Don’t I know it; I ran smack into the Andersen consulting machine at TheStreet.com, and I didn’t even know what hit me. Until a few weeks ago, if you went to one of Arthur Andersen’s Websites, www.aametrony.com, you would have seen a glowing case study about TheStreet.com posted by the accountants who took over our shop right before we came public. In it, Andersen talked about how the former chief executive officer of TheStreet.com was smitten with Andersen immediately after the firm made its pitch. “Two hours later we were selected to replace their Big Five adviser,” the site boasted. “That almost never happens. It was that quick of a decision.”
Hmmm. Funny thing is, it never happened at TheStreet.com either. We weren’t using a Big Five adviser, we were using an accountant from Anchin, Block & Anchin. And he was auditing, not “advising.”
The Website went on to say that Andersen suggested a slew of changes as part of its “advising.” Amazingly, every one of these was a disaster for our firm. Andersen pushed us to “go global,” including the “structuring of TheStreet.com.uk,” a business we had to write off after losing tens of millions of dollars. Andersen then “conducted a study that determined the feasibility of a virtual learning product for the financial community.” I personally helped kill this boondoggle because it made no sense and had nothing to do with the mission of our company.
Finally, though, in what will go down as the single dumbest thing anyone could ever have advised us to do, Andersen convinced the chief executive officer to destroy my relationship with CNBC, where I had become a regular co-host of Squawk Box, in order to move to Fox News, where Andersen was doing a ton of business. “It was the perfect opportunity for both clients,” the Website states. “When they met, they clicked instantaneously. Now TheStreet.com has a weekly show on Fox.” Oops! Within a year, our show would be gone, as the relationship with Fox proved completely untenable.
All of these totally knuckleheaded moves, which Andersen still takes glorious credit for, led directly to our sacking TheStreet.com’s chief executive officer, Kevin English. But did we fire the real culprit, Arthur Andersen? Nope, not on your life. Even though both founders, who control more than 25 percent of the stock in the company, were furious about these consulting blunders, we could do nothing. Who would believe us if we fired Andersen for actually doing crummy consulting work? The investment community would simply conclude that we were screwing around with our books and Andersen was trying to keep us honest, so we fired them!
The moment Andersen became vulnerable, though – the moment an Andersen audit became more of a stigma than a blessing – we decided to put the account up for review. It was then that Andersen demanded that the new chief executive officer, Tom Clarke, silence me for my negative comments about Andersen on CNBC’s America Now. When Clarke reminded Andersen that we were a news-and-opinion organization and he wasn’t going to rein me in, Andersen dumped us, saying it couldn’t work with us any longer.
I can’t blame them for wanting to fire us before we fired them, although their Soviet-style handling of the affair is pretty baffling. But the simple truth is that if any other adviser besides our auditor had suggested these stupendously wrong ideas, he or she would have been fired years ago. Andersen got away with it because it knew it could do whatever it wanted without ever risking being fired – that’s how valuable the ironclad auditor connection is.
The real irony, by the way, isn’t that Andersen fired us. It’s that unless the government responds to the current crisis by specifically banning auditors from consulting, we will have lost the best chance we will ever have to reform a ridiculous system where auditing is a foot in the door for incestuous big-fee partnerships rather than a critical check and balance producing honest books for public companies.
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James J. Cramer is co-founder of TheStreet. com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions that he takes may change at any time.